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ACAPS Thematic report - Yemen: The key economic incentives of peace, 17 May 2022

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At the beginning of April 2022, the Internationally Recognized Government of Yemen (IRG), the de-facto authority (DFA) in the north of Yemen (also known as the Houthis), and the Saudiled coalition agreed to a two-month truce. While no political solution is likely to find universal approval among conflict actors, this report provides an overview of the economic incentives that can be used to generate consensus among warring parties and other stakeholders and the expected humanitarian gains.

A permanent halt to war hostilities, restored fuel imports through Al Hodeidah and access to Sana’a International Airport, the removal of inland custom duties, and a renewed coordination of economic and monetary policies could generate significant incentives for the parties to accept peace over conflict. These actions are expected to have a positive impact on a multitude of economic activities and consequently on the overall humanitarian situation. The production and export of hydrocarbons, including oil and gas, have suffered from significant setbacks since 2015. The activation of production blocks and the increase of exports could generate additional revenues that, while more limited than before, could be managed between several warring parties and stakeholders. Such a setup could help address the balance of payments and reduce the currently widening financing gap. The report also highlights the window of opportunity currently presented by the high price of liquefied natural gas (LNG) on the international market and the gap created by the desire of some LNG importers to explore alternatives to Russian gas. The economic benefits following the resumption of LNG production and export operations may produce positive impacts on the peace process upon the establishment of a mutually acceptable LNG revenue mechanism. These benefits would then serve as a significant confidence-building measure.

Private sector activity could also benefit from greater access to international financial markets and technical equipment. Reconstruction activities likely to take place after a peace agreement would boost employment, improving people’s access to livelihoods and increasing their ability to provide for their needs. The availability of solar- and fuel-powered water pumps in the market, further improvements in agricultural practices, and improved access to farmland could also increase local food production. The lifting of restrictions would reduce the costs sustained by farmers. At the same time, greater access to international financial markets could help restore confidence in Yemeni banks currently burdened by the de-risking measures of foreign banks. Finally, the dismantling of inland customs checkpoints would likely reduce the price of commodities for the population while generating new economic opportunities and eventually cancelling out the benefits linked to the wartime economy.

There are undoubtedly huge challenges that would need to be overcome in searching for sustained peace and unlocking some of its major economic benefits as outlined in this report. For example, the possibility of potential spoilers undermining peace prospects would remain. These challenges are, however, beyond the scope of this paper. Instead, this report focuses on the positive implications of peace through an economic lens. It highlights a number of points that could incentivise the main warring parties to view peace as a credible, viable, and even attractive option.