Liquidity crisis in Yemeni banks has unfolded over a protracted period, with a series of pivotal events exacerbating pre-existing vulnerabilities and ultimately culminating in a severe liquidity crunch.
1 2015: Escalation of the Civil War
The year 2015 marked a significant turning point for Yemen, as the civil war escalated, plunging the country into heightened political instability, economic disruption, and widespread violence. The conflict, which erupted between Houthi rebels and the internationally recognized government, led to a breakdown of law and order, mass displacement of civilians, and extensive damage to infrastructure. The escalating violence and political turmoil created an environment of profound uncertainty, shaking investor confidence, and disrupting economic activity. As a result, Yemeni banks faced mounting challenges in maintaining liquidity amidst the escalating crisis, with depositor confidence eroding amid heightened uncertainty.1“Yemen civil war: the conflict explained | Yemen | The Guardian.” https://www.theguardian.com/world/2019/jun/20/yemen-civil-war-the-conflict-explained
2 2016: Official Transfer of the Central Bank of Yemen from Sanaa to Aden
In 2016, the Yemeni government officially transferred the Central Bank of Yemen from Sanaa to Aden. This move was aimed at regaining control over the country’s monetary policy and finances, which had been compromised by the ongoing conflict and the Houthi control of Sanaa. The transfer, however, led to significant operational challenges and further destabilized the banking sector. The division of the central bank created a dual banking system, complicating monetary policy implementation and exacerbating liquidity issues for banks operating under different authorities. The transition period was marked by a lack of coordination, inconsistent policies, and a further erosion of depositor confidence, intensifying the liquidity crisis in the banking sector.2Center, S. (2022, April 3). Central bank and currency deterioration in Yemen. South24 Center. https://south24.org/news/newse.php?nid=2600
3 2016-2019: Persistent Conflict and Economic Deterioration
The years following 2015 witnessed the persistence of the conflict in Yemen, exacerbating economic conditions and deepening the country’s humanitarian crisis. Against a backdrop of ongoing violence and instability, Yemeni banks grappled with increasing pressure on liquidity as economic conditions deteriorated and depositor confidence continued to wane. The prolonged conflict hampered economic growth, disrupted trade routes, and undermined investor confidence, leading to a contraction in economic activity and heightened financial uncertainty. As a result, Yemeni banks faced mounting liquidity challenges, with limited access to funding, constrained lending activities, and heightened financial risk.3“After 9 Years of Conflict, Yemen is Still One of the World’s Worst ….” 26 Mar. 2024, https://www.actionagainsthunger.org/story/after-9-years-of-conflict-yemen-is-still-one-of-the-worlds-worst-humanitarian-crises
4 2020: Impact of the COVID-19 Pandemic
The onset of the COVID-19 pandemic in 2020 further exacerbated Yemen’s liquidity challenges, compounding existing economic woes and straining the country’s fragile banking sector. The pandemic-induced economic contraction, coupled with heightened uncertainty, placed additional pressure on Yemeni banks, limiting their ability to meet customer demands and maintain liquidity buffers. The closure of businesses, disruption of supply chains, and widespread job losses further exacerbated economic hardship, contributing to a deepening liquidity crisis in Yemeni banks. Moreover, the pandemic-induced restrictions and economic downturn exacerbated depositor concerns, leading to increased withdrawals and further eroding banks’ liquidity positions.4“The Global Economic Outlook During the COVID-19 Pandemic: A Changed World.” 08 Jun. 2020, https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world.
5 2022: Houthi Attacks on Oil Exporting Ports
To exert pressure on the Yemeni national government, the Houthis imposed an embargo on oil exports by attacking Yemeni ports. This strategy is part of a broader operation aimed at controlling extractive resources in areas not under Houthi control. The attacks have caused severe damage to key oil ports, leading to the cessation of oil exports from those regions. This disruption in oil exports not only diminished a crucial revenue stream for the government but also intensified the economic crisis, further straining the already precarious liquidity situation in Yemeni banks.5“Yemen’s Houthis attack al-Dhabba oil terminal, force ship to leave.” 21 Nov. 2022, https://www.reuters.com/world/middle-east/yemens-houthis-attack-al-dhabba-oil-terminal-force-ship-leave-2022-11-21/.
6 2024: Issuance of a New 100-Yemeni Riyal Coin by the Houthi-Controlled Central Bank in Sanaa
In 2024, the Houthi-controlled Central Bank in Sanaa issued a new 100-Yemeni riyal coin. This move was part of the Houthis’ efforts to assert monetary control and address cash shortages in areas under their control. However, the issuance of the new coin further complicated the financial landscape, as it highlighted the competing authorities of the central banks in Sanaa and Aden. The lack of coordination between the two central banks led to additional confusion and instability in the banking sector. This measure deepened the liquidity crisis, as it increased uncertainty among depositors and businesses regarding the value and acceptability of the currency in different parts of the country, further straining the already fragile banking system.6Center, S. (2024, March 30). Amid ‘counterfeit’ warning, Houthis issue new 100 riyal coin. South24 Center. https://south24.org/news/newse.php?nid=3906
7 2024: Aden-based Central Bank Released an Order, Instructing the Relocation of the Commercial Banks Headquarts from Sanaa to Aden
In response to the Houthi-issued currency, the Aden-based Central Bank released an order on April 2, instructing all commercial and microfinance banks to relocate their main centers from Houthi-controlled Sanaa to Aden within two months. The Aden central bank criticized the Houthis’ control in the northern part of the country for issuing a new currency and replacing short-supply banknotes. They warned of accountability for any irresponsible escalation and potential complications in financial transactions. This directive aimed to consolidate the banking sector under the internationally recognized government’s control but risked creating further operational disruptions and uncertainties. Consequently, the liquidity crisis could worsen as banks scramble to comply with the relocation order amidst ongoing conflict.7“Central Bank of Aden: «60 days to move all bank headquarters».” 03 Apr. 2024, https://south24.org/news/newse.php?nid=3912.
Conclusion, the liquidity crisis in Yemeni banks is a result of prolonged political instability, economic disruption, and institutional fragmentation. Starting with the civil war’s escalation in 2015, depositor confidence was severely undermined, and economic activities were disrupted. The 2016 transfer of the Central Bank from Sanaa to Aden introduced operational challenges and policy inconsistencies, further eroding trust and liquidity.
From 2016 to 2019, persistent conflict deepened economic deterioration and heightened financial risk, straining Yemeni banks’ liquidity. The COVID-19 pandemic in 2020 worsened these challenges, leading to economic contraction and increased withdrawals, weakening the banking sector’s liquidity. In 2022, Houthi attacks on oil exporting ports disrupted crucial revenue streams, intensifying the economic crisis. The issuance of a new 100-Yemeni riyal coin by the Houthi-controlled Central Bank in 2024 further complicated the financial landscape, increasing depositor uncertainty.
The Aden-based Central Bank’s order to relocate commercial bank headquarters from Sanaa to Aden aimed to consolidate control but risked exacerbating operational disruptions and financial uncertainties.
Addressing Yemen’s liquidity crisis requires coordinated policy efforts, enhanced regulatory frameworks, and robust institutional capacity-building. Restoring depositor confidence, ensuring consistent monetary policy, and fostering economic stability are essential for overcoming the current challenges and creating a more resilient financial system in Yemen.
References:
- 1“Yemen civil war: the conflict explained | Yemen | The Guardian.” https://www.theguardian.com/world/2019/jun/20/yemen-civil-war-the-conflict-explained
- 2Center, S. (2022, April 3). Central bank and currency deterioration in Yemen. South24 Center. https://south24.org/news/newse.php?nid=2600
- 3“After 9 Years of Conflict, Yemen is Still One of the World’s Worst ….” 26 Mar. 2024, https://www.actionagainsthunger.org/story/after-9-years-of-conflict-yemen-is-still-one-of-the-worlds-worst-humanitarian-crises
- 4“The Global Economic Outlook During the COVID-19 Pandemic: A Changed World.” 08 Jun. 2020, https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world.
- 5“Yemen’s Houthis attack al-Dhabba oil terminal, force ship to leave.” 21 Nov. 2022, https://www.reuters.com/world/middle-east/yemens-houthis-attack-al-dhabba-oil-terminal-force-ship-leave-2022-11-21/.
- 6Center, S. (2024, March 30). Amid ‘counterfeit’ warning, Houthis issue new 100 riyal coin. South24 Center. https://south24.org/news/newse.php?nid=3906
- 7“Central Bank of Aden: «60 days to move all bank headquarters».” 03 Apr. 2024, https://south24.org/news/newse.php?nid=3912.
