Yemen Socio-Economic Update

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Ministry of Planning Yemen Socio-Economic Update & International Cooperation Issue (20) Nov., 2016 Economic Studies & Forcasting Sector Yemen Economy in Lines Overall Socioeconomic Developments

Introduction First: Macroeconomic situation: Yemen’s economy has been undergoing lean years that weak- 1. Decline in GDP: ened its powers and productive capacities and exhausted its physi- Data of the Central Statistical Organization (CSO) indicates that in 2015, cal, financial and human resources. To monitor the socioeconomic Gross Domestic Product (GDP) declined by about 32.9% for to several and humanitarian developments, the Economic Studies and Fore- reasons, including mainly, the ongoing war that adversely affected most of casting Sector at the Ministry of Planning and International Co- the Yemeni governorates causing damages to infrastructure and public and operation (MoPIC), in collaboration with UNICEF, has been is- private enterprises and disrupted many economic and investment activities. suing monthly Yemen Social and Economic Update since March Other factors include a sharp shortage of fuel, electricity, food, water, trans- 2015 in both English and Arabic. This issue No. (20) highlights a general and brief overview of the current socio-economic and portation, education and health care, suspension of donor development sup- humanitarian developments in Yemen. port, freezing the public investment program and restriction of the foreign trade movement. Currently, the national economy of Yemen is facing a sharp contraction due to the financial and economic crisis and liquid- Figure(1): GDP Growth Rate % ity crunch that have paralyzed the economy and deprived 1.25 10.0 5.1 4.6 million public employees and their families of their main source 3.5 4.0 4.1 3.3 5.0 3.2 of income. Suspension of oil and gas exports and limited donor 2.2 support have resulted in expanded public budget deficit, which 0.0 stood at YR1.59 trillion (equivalent to about US$7 billion) dur- 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ing January 2015-August 2016. Foreign exchange reserves have -5.0 fallen to their lowest levels. Officially, the Yemeni Riyal has lost -10.0 -9.6 more than 30% of its value against foreign currencies by the end -12.8 of 2016, compared to early 2015. This has caused inflation and -15.0 worsened the suffering of Yemenis. -15.1 In parallel, unemployment rate has increased and food insecu- -20.0 rity situation has worsened – today, more than 14 million people -25.0 are food insecure. Yemen is facing an acute humanitarian crisis, where about 18.8 million people are in need of urgent humanitar- -30.0 ian assistance (OCHA, November 2016). Public institutions and -32.9 social services providers, health in particular, in several areas of -35.0 the country are unable to perform their functions. Several public Source: Central Statistical Organization, National Accounts, 2015. institutions work only two days a week and social service facili- MoPIC, Technical Team of Forecasting, 2016. ties lack the minimum operational costs. In 2016, the GDP is expected to decline by -12.8% (MoPIC, Technical To alleviate the humanitarian suffering of millions of Yemenis, Team of Forecasting, 2016) due to the suspension of exports and the ongo- and women and children in particular, we call on the donor com- ing economic and social crises, and especially the liquidity crunch, that has munity to provide the support needed to sustain and recover basic deepened the economic downturn and led to the loss of purchasing power social services and resume their support for social protection pro- and expansion of unemployment and poverty. grams that were suspended from early 2015. As a result of the above, the real GDP per capita decreased from $518 per person in 2014 to about $290 per person in 2016. Without reaching a political Facts and Figures settlement on the conflict, the per capita income will undoubtedly continue to decline, which means that more people are expected to slide below the YER 305 / USD YER 685.1 billion poverty line. The exchange rate in the parallel The public budget deficit (apart from Figure(2): Real and Nominal GDP Per Capita US$ market has been fluctuating around the external funding) during Jan.- YER305/USD during Mid Oct. - Nov. Aug. 2016, compared to YER450.6 bil- 1600 , 2016. lion during the same period in 2015. 1,369 1400 18.8 million 32.9% 1,310 1,280 1,276 1,343 1200 1,091 people in need of humanitarian as- Is the estimated decline in GDP, 1,245 1,278 sistance, including10.3 million who while the inflation rate rose 1,190 1000 1,038 are in acute need.* by over 30% in 2015. 809 939 1.5 million 24.3 million 800 704 714 723 590 beneficiary cases have been await- 90% of the population lack access 600 693 707 721 518 ing the cash assistance of the Social to electricity through the public 595 591 Welfare Fund since early 2015. grid.** 400 290 14.1 million 2.18 million 200 339 51% of the population are food # of IDPs in September 2016.* 0 insecure. 7 million severely food Sources: *HNO, November, 2016. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 insecure.* ** WB, June, 2016. Nominal GDP per Capita US$ Real GDP per Capita US$ public employees are awaiting their salaries Source: Central Statistical Organization, National Accounts, 2015. 1.25 million MoPIC, Technical Team of Forecasting, 2016. Issue (20) Nov., 2016 Page 2 Yemen Socio-Economic Update 2. Expansion of Public Budget Deficit and Liquidity Crisis: The public sector contributes to about 46% of GDP and 52.6% of aggregate demand and provides employment opportunities to around 31% of the employed population. As a result of the ongoing armed conflict in the country, the Public Investment Program, financed from the public budget, was suspended, maintenance and operating expenses of public institutions and basic social services providers were reduced, and the public cash assistance programme of the Social Welfare Fund (SWF) targeted at the poorest and most vulnerable people was stopped. Despite the severe reduction of expenses, the public budget defi- Figure(3): Sources of financing public budget deficit (Billion YER) cit has still expanded, reaching YER1.59 trillion during January 2015-August 2016 due to the tax revenue drought, interruption of oil and gas export revenues and suspension of donor support. Until recently, 80.3% of the budget deficit has been funded through the overdraft from the Central Bank of Yemen (CBY). This has resulted in the depletion of liquidity available at the CBY. Since August 2016, the public budget has been facing difficulty in paying salaries of public 763 employees (1.25 million employees in total). The requirement to pay 515 salaries and interests on domestic debt is estimated at YER115 billion per month, while the monthly public revenues cover only around 615 30% of this requirement. 234 160 354 345 In Yemen, 32% of households that depend on public salary as a 170 source of income are already food insecure. Suspension of public al- 105 105 143 -1 -16 -3 locations and spending deepen the economic downturn and increases Jan.-Aug. unemployment and poverty rates. The liquidity crisis can have di- 2010 2011 2012 2013 2014 2015 2016 sastrous consequences on the economic, institutional and humanitar- Overdraft from the CBY Treasury bills, Islamic sukook, and Gov. bonds ian situation in the country unless it is immediately addressed and resolved. Source: Ministry of Finance, 2016. Liquidity Crisis and the Central Bank of Yemen The main signs of liquidity crisis at the CBY include the late payment of public employees’ salaries and circulation of damaged banknotes that were supposed to be replaced. Liquidity crisis at the CBY is the result of: ● Decrease of the public budget revenues and heavy reliance on liquidity available at the CBY, which totaled to about YER1.28 trillion, to finance the public budget deficit during Jan. 2015-August 2016. Thus, The CBY’s stock of available cash was depleted. ● Interruption in the cash flow cycle because the CBY used to periodically pump the hard-currency revenues of the public budget to the local market in exchange for withdrawing the local currency from the market to use it to finance the budget expenditures. However, this cycle has been broken. ● Decline in the CBY’s total foreign reserves from $4.7 billion in December 2014 to $0.987 billion, including banks’ deposits at the CBY and Saudi Arabia’s deposit, in September 2016 due to the sharp decline in the flow of foreign exchange resources to Yemen, in addition to financing basic import commodities, paying external debt service and easing the exchange rate crisis. ● Having difficulty continuing the policy of new banknotes issuance that amounted to about YER537 billion during January 2015-August 2016 due to the CBY’s inability to issue new banknotes and circulation of the newly issued bank notes remained in circulation outside banks. ● Waning confidence in the banking and economic situation due to the narrow horizon of political resolution and pessimism about the future of development. 3. Exchange Rate Appreciation and Foreign Reserves Depletion: The sharp decline in the CBY’s foreign reserves has weakened creditworthiness of the national economy, thereby shaking customers’ confidence in the national currency. The official exchange rate increased from YER214.9 /US$1 in March 2015 to YER250 /US$1 in early April 2016, i.e. by about 16.3%. At the same time, parallel market exchange rate increased gradually from YER215/US$1 in March 2015 to YER305/ US$1 in November 2016, i.e. by about 42%. The increase in exchange rate in the official and parallel market is expected to continue unless the oil and gas exports are resumed, and donor support or deposits at the CBY are obtained. This will result in higher inflation rates and deterioration of the purchasing power of the national currency and worsening living standards, particularly in light of the heavy reliance on imports to meet the domestic food and non-food needs . It is worth mentioning that import restrictions and liquidity crunch has contributed to curb the escalating pace of US dollar exchange rate. New banknotes are currently being printed in Russia and will be pumped to cover expenses for salaries of public employees and other neces- sary budget items in the beginning of 2017. Unless this new issuance coincides with an increase in the flow of foreign exchange revenues, the value of the national currency is expected to be further depreciated. Figure(4): Total Foreign Exchange Reserve of CBY (Billion USD) Figure(5): Official and Parallel Exchange Rate (YER/USD) 320 305 310 300 9.0 8.2 300 8.0 7.5 7.8 290 6.9 7.0 280 270 6.1 5.9 6.2 270 6.0 5.7 5.3 260 5.0 250 250 5.0 4.4 4.5 4.7 250 245 4.0 3.7 240 2.9 3.0 230 225 2.1 220 214.9 214.9 2.0 1.2 1.5 1.3 1.0 1.0 0.987 210 1.0 200

. . . . r. r. r. r. t. y y p. b. b. g. 0.0 g. Jul Jan. Jan. Ap Ap Oc Jun. Fe Fe Au -Dec Se Ma Ma p. Au Ma Ma Jun. Se 2016 2016 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015 2016 O cial Exchange Rate (YER/USD)Exchange Rate in Parallel Market (YER/USD) Source: CBY, 2016. Issue (20) Nov., 2016 Page 3 Yemen Socio-Economic Update

4. Rise of Inflation Rate: Consumer prices have significantly increased during 2015-2016, compared to the pre-crisis period. As the figures (6,7) indicate, prices varied from time to time, reaching high levels in most ground confrontations-affected areas, such as Taiz governorate, where prices were the highest compared to other governorates. In general, the average consumer price inflation rate is estimated to reach about 30% in 2015 and 7% in 2016. According to information released by the World Food Program (WFP), prices of several commodities, such as wheat flour, oil vegetable and sugar have been relatively stable over the past few months of 2016 due to the liquidity crisis and the sharp decline in the aggregate demand. However, the national average cost of the minimum food basket was still much higher (24.1%) during October 2016 than in the pre-crisis period. Similarly, prices of petrol, diesel and cooking gas were 23%, 26% and 72% higher during October 2016 than those in the pre-crisis period. This is mainly attributed to the import restrictions, absence of electricity through the public grid, appreciation of US dollar exchange rate, expansion of black markets and monopoly, which resulted in higher production, transport and storage costs and prices of goods and services. As a result, the living standards of people, particularly the poor and low-income ones, have dramatically deteriorated. Figure(6): Price Trend of Fuel (YER/Unit) Figure(7): Price Trend of Main Food Commodities (YER/Unit)

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g. Au Ma 2015 2016 2015 2016 Sugar Wheat Flour Cooking GasP Diesel etrol Oil (Vegetable) Onion Red Beans Source: WFP, Yemen Market Watch Report, Issue No. 6, October 2016. 5. Foreign Trade Restrictions and Foreign Exchange Movement: Preliminary actual data indicate that goods and services exports declined by about 80.2%, and imports decreased by about 49.1% in 2015 compared to 2014. This is mainly due to repercussions of the ongoing war, which resulted in the following: ● Exposure of export-geared activities, that depend on imported production inputs, to losses and closure of many services companies operating in ports and airports such as shipping, customs clearance, tourism and travel agencies. ● Vessel entrance and clearance delays and incurring fines applied to ships due to delays. ● Increase in insurance charges on shipments imported to Yemen. ● Scarcity of some imported goods, including medicine, and expansion of monopoly and goods smuggling across borders, thereby resulting in prices upsurge and contributing to escalation of the humanitarian crisis. ● Yemen is ranked the worst country worldwide in the Trading Across Borders indicator (in the World Bank’s Doing Business Report 2016). Despite the lack of available data on foreign trade during Figure(8): Customs value of imported goods Jan.-Sep, 2015-2016 (Million YER) 2016, it can be inferred through the available customs data that there was an increase in the customs value of imported goods Jan.-Sep. 1,252,954 by about 44% during January-September 2016, compared to 2016 the same period in 2015. However, exports are still almost completely suspended. Oil and gas exports constitute over 80% of the total merchandise exports of Yemen but they have not been Jan.-Sep. 867,295 resumed naturally so far, except for exporting oil quantities that 2015 have been stored in Al-Dhaba Port in Hadramout governorate. Source: Preliminary data form Customs Authority, 2016. Table(1):Inflow of Foreign Exchange Resources to Yemen during 2014-2015 External banks` suspension of Description / Year 2014 2015 %Change dealings with Yemeni Difficulty to banks in terms of transfers and opening Goods Exports of which: 7723.7 1438.9 -81.4 transferforeign Suspension of the letters of credit currency public budget`s - Oil and gas of which: 6395.7 979.6 -84.7 accumulated at foreign exchange Yemeni banks to Government share 2429.4 520 -78.6 banks abroad revenues Services Exports of which: 1687.5 428.4 -74.6

Remittances Restriction of 3303.7 3305.7 0.1 Deterioration Suspension the foregin trade External grants to Gov. 1614 45.4 * -97.2 movement and in dealings with of donor halt of exports development Government Loans 545.3 63.3 -88.4 outside world and foreign support investement Oil companies investment 2340.8 270.7 -88.4 * Does not include humanitarian support and support to warring parties. Source: CBY, preliminary data, 2016 Issue (20) Nov., 2016 Page 4 Yemen Socio-Economic Update Second: Social and humanitarian situation: 1. High Unemployment Rates: Findings of the pre-crisis Workforce Survey 2013-2014 indicated that Figure(9):Workers laid off & reduced employees’ pay 44.8% of the young people were neither in education nor at work. The private sector enterprises sustained direct damages in 2015 and were severely affected by the fuel shortage and total absence of public grid power. This $ has had a negative impact on the private sector workforce. A questionnaire + of the Yemen’s Business Climate Survey, conducted by Small & Micro Enterprise Promotion Service (SMEPS) during August-October 2015 in $ Sana’a, Aden, Taiz, Hadramout and Hodeida, indicated that 41% of enterprises laid off 55% of their workforce on average. Additionally, 7% of % 48 % 41 % 7 % 3 those businesses have applied pay cut by about 49% and laid off around 64% of their employees, while 3% of them have reduced employees’ pay of enterprises of enterprises of enterprises of enterprises by half. Although, there are no most recent data available, it is assumed have not reduced laid o 55% have reduced have reduced employees' pay of their work force the employees' the employees' that labour market situation has dramatically worsened. or laid o pay by 49% pay by 50%. Recently, the liquidity crisis has deepened the decline in aggregate their workers and laid o 64% demand and economic activity, thereby worsening the already-high un- of their workers employment problem and escalating poverty and deprivation in the com- concurrently. munity. Source: SMEPS & GIZ, Business Climate Survey, August-October, 2015 2. Exacerbating food insecurity: Figure(10): Prevalence of Food Insecurity % Food insecurity indicators are worsening every day, reaching alarming World triple F-crisis: Prices Repercussions Repercussions levels, where an estimated 14.1 million people are food insecure. This of Food& Fuel, and Financial of 2011 crisis of ongoing war means that at least one in two Yemenis does not have enough food. Ac- crisis in 2007-2008 48.3 cording to the 2016 Global Hunger Index Report issued by the Interna- 44.0 44.5 tional Food Policy Research Institute (IFPRI), Yemen is placed among the 51.0 poorest 6 countries, out of 118 countries worldwide. The most prominent reasons for food insecurity include rising prices for 41.1 food, fuel, water and medicine, accompanied by the loss of job and income 31.5 opportunities and internal displacement of millions of citizens. Moreover, the liquidity crisis has directly affected about 1.25 million public employ- 22.0 ees and their families, thereby reducing not only their food purchasing power, but also their access to basic goods and services. Other reasons include the lack of public social welfare programmes, and overstretching of informal/traditional social protection mechanisms to protect the poorest 2003 2008 2009 2011 Mar.-Apr. June June and most vulnerable people. 2014 2015 2016 As the table (2) indicates, food insecurity is divided into five phases. Source: CFSS, 2014. And FSIS, IPC 2015-2016 Although Yemen has not reached the fifth phase (Famine) yet, pockets of Table(2): Phases of Food Insecurity severe food insecurity are present in some districts of Hodeidah, which can develop into famine. This would further exacerbate the humanitarian situ- Description/Year 2014 June 2015 June 2016 ation and undermine social peace in the country. Million Million Million % % % 3. Limited access to basic social services: people people people The basic social services, including education, health and water, are col- Emergency (Phase 4) 4.8 18.3 6.1 22.7 7.0 25 lapsing in several areas of the country and the humanitarian needs are on Crisis (Phase 3) 5.8 21.9 6.8 25.6 7.1 26 the rise, which puts growing pressure on the humanitarian situation in the country. As of October 2016, 1,604 schools have been damaged or de- Phases 3+4 (Food Insecurity) 10.6 40.1 12.9 48.3 14.1 51 stroyed as a result of the ongoing war. This threatens to deprive 720,000 Stressed and Minimal (Phase 1&2) 15.4 59.2 13.8 51.7 13.3 49 students of their right to education. About 2 million children, including 513,000 IDP children, in Yemen are currently out of school. This repre- Source: Food Security Information Systems Development Program, IPC, 2014-2016. sents 27% of the 7.3 million school-aged children. The liquidity crisis and the non-payment of teachers’ salaries for months have contributed to undermin- ing the educational process in the country. In parallel, the health sector is going through the worst phase: the Health Resources Availability Mapping System (HeRAMS) evaluation indicates that the health system in 16 out of 22 governorates is functioning at less than half capacity. Only 45% of 3,507 health facilities is functioning at full capacity, whereas the rest are partially or totally not operating. Additionally, 6 out of 10 health facilities are unable to provide nutrition and child health services. The health sector is suffering from the lack of sufficient staff, medicine and equipment, in addition to the lack of operational costs for health services and non-payment of health staff salaries for months, which severely affects the continuity of health services. Figure(11):Functional and non-functional Figure(12): Schools Affrcted by Conflict as of 25 Oct. 2016 health facilities (%) 300

Totally damaged %15 %17 250 Completely 1,604 schools 200 Housing IDPs %10 non-functional in 20 governorates Occupied by armed group %2 are either damaged 150 or occupied by IDPs 6 out of 10 facilities %45 or armed groups %73 unable to provide Fully 100 Partially damaged child health and functional nutrition services 50 %38 Partially

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functional wit Ib den aizz Lahj 'ada T A Marib Sana Abya Sa Hajjah Al Jawf Amra Dhamar Al Bayd Shabwa Al Mah Alamanah Al Dhale'e Al-Hodeidah Source: WHO and MoPHP, Preliminary Findings, September 2016. Source: OCHA, Yemen Humanitarian Needs Overview, November 2016. Issue (20) Nov., 2016 Page 5 Yemen Socio-Economic Update Yemen is one of the world’s most water-scarce countries. According to Yemen National Social Protection Monitoring Survey (NSPMS) 2012-2013, only 29% of households had access to water inside the dwelling, while 23% of households had to walk for over 30 minutes to access water. Water provided through the public network is currently almost absent in several areas of the country due to the physical damage of war, inability of local authorities to provide operational and fuel costs and rehabilitate water and sanitation facilities and inability of consumers to pay water bills. This deprives people, particularly the low-income population groups, from their right to water provided through the public grid. Children and women often bear the burden of carrying water to their homes. Suspension of the social welfare programs has exacer- bated the social and humanitarian situation. In January 2015, the Social Welfare Fund suspended its public unconditional cash transfer programmes that targeted 1.5 million beneficiary Credit: Yemen cases, or approximately 8 million direct and indirect beneficia- ries. In addition, there is only limited donor assistance available to support social protection programmes for the poorest and most vulnerable people in Yemen. 4. Growing humanitarian needs: Table(3): Number of people in need of humanitarian assistance by sector (million person) The humanitarian needs update issued by the Office for the Coordina- December November tion of Humanitarian Affairs (OCHA) in November 2016 indicate that Sector % Change 2014 2016 about 18.8 million people in Yemen are in need of some kind of humanitarian assistance, including 10.3 million who are in acute need. An Food Security 10.6 14.1 33.1% estimated 3.8 million of people are on the move, including 2.18 million Health 8.4 14.8 76.4% IDPs as a result of the ongoing war. Most of those IDPs (51%) are in Wash 13.4 14.4 7.7% Hajja, Taiz and Sana’a governorates. IDPs are exposed to the loss of their livelihoods, which exposes them to the risk of food insecurity and Nutrition 1.8 4.5 147.6% malnutrition. Protection NA 11.2 NA On the other hand, as of October 2016, more than 7,000 people have Education 1.1 2.3 108.7% been killed and over 36,000 injured due to the ongoing war in the coun- Shelter, NFI, CCCM 0.55 4.6 738.8% try. The actual numbers of casualties are undoubtedly more than the sta- tistics indicated in figures (13,14) due to the non-functionality of many Refugees & Migrants 0.91 0.37 -59.6% health facilities and lack of a formal and comprehensive database of war Source: -OCHA, Yemen Humanitarian Needs Overview, November 2016. casualties. - OCHA, Yemen Humanitarian Needs Overview 2015, December 2014. Figure(14): Children Killed/Maimed by armed forces and Figure(13): Casualities Reported by Health Facilities (as of 25 October 2016) armed groups (Jan 2015 - Sep 2016)

8,000 1,048 Tot. casualties 7,359 43,888 7,000 3,259 Injured 36,818 Children killed or 6,000 maimed by armed Dead 7,070 5,000 702 forces and armed groups 4,000 Casualties trendline Injured Dead 3,000 445 1,917 374 2,000 313 527 214 163 1,000 Jul Jun. Ma Ap Ma Fe Jan. Oc Sep. Aug. Jul Jun. Ma Ap Ma Dec No Oc Sep. Aug. b.

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Source: OCHA, Yemen Humanitarian Needs Overview, November 2016. In conclusion, In light of the foregoing, Yemen’s economy has lost its resilience, which was clearly reflected in the significant decline in GDP per capita, public budget inability to provide public employee salaries and depletion of foreign exchange reserves. Thus, the Yemeni Rial value kept criti- cal depreciation against foreign currency every month. The traditional economic policies are no longer viable to prevent further risks on the economy and printing banknotes is only a temporary remedy that has serious adverse effects on the national currency value. The best option is to deposit foreign deposits at the Central Bank of Yemen (CBY) and reach an economic settlement, even unwritten, to resume oil and gas exports. Meanwhile, the already fragile social and humanitarian situations are worsening every day, with about 18.5 million people in need of urgent humanitarian assistance. Taking into consideration the fact that basic social services systems are at the verge of collapse, the public social welfare programs are unavailable, and that there is a lack of operational costs, development and humanitarian organizations and donors are urged to allocate more funding for programs in Yemen in order to prevent the exposure of millions of people, and women and children in particular, to further risks of poverty, malnutrition and deprivation.

Contact Person For more detailed information about items in this update please contact: Mr. Abdulmageed Albatuly Email: [email protected] Tel.:+967 771 555 730 www.mpic-yemen.org