Rial reaches all-time low in southern governorates, compounding threats to food security, before rallying by the year-end
In October and November 2020, the value of the Yemeni rial declined sharply in southern governorates reaching an all-time low of YER920/ US$ on 9 December. The value of the rial began to recover in mid-December following the formation of a new government in the south under the framework of the Riyadh Agreement, regaining 40 per cent of its value. Following approval by the Kingdom of Saudi Arabia (KSA) of a $94.7 million withdrawal from the Central Bank of Yemen (CBY) on 21 December, the rial appreciated further and was exchanging at YER625/US$ by 28 December. However, the rial’s recovery remains fragile, subject to economic and political shocks and fluctuations. The value of the rial slid to YER695/US$ following the attack on Aden airport on 30 December as members of the new government were arriving in Aden.
All four main sources of foreign currency in Yemen shrank in 2020, affecting the exchange rate, inflation, and the price of food and other commodities. Foreign currency is vital to the Yemeni economy as the country imports around 90 per cent of food and fuel requirements. COVID-19 led to a fall in remittances from Yemenis working abroad, the largest source of foreign currency, especially from Gulf states. Data collected by the Cash Consortium of Yemen (CCY) indicates that while remittances may have recovered modestly in recent months, they are still significantly below pre-COVID levels; 65 per cent of exchange shops surveyed by CCY in November 2020 reported that remittances had not returned to pre-COVID levels. The situation was compounded by a drop in the global demand for fuel derivatives caused by the pandemic, which led to a sharp fall in Yemeni fuel exports, eroding the internationally recognized government’s (IRG) foreign currency reserves. Withdrawals from the $2.2 billion Saudi cash deposit to the CBY in Aden, which has since March 2018 helped importers buy staple commodities at subsidized exchange rates, were put on hold between April and August, and again between August and December. The KSA approved the withdrawal of $94.7 million from the deposit on 21 December, which helped stabilize the exchange rate. However, the Saudi cash deposit is almost exhausted, which means that the CBY cannot cover funds for imports of basic commodities in foreign currency without a new cash deposit from KSA or other international donors. Finally, there was a huge drop in foreign aid to Yemen in 2020 – from $4.06 billion in 2019 to $1.92 billion in 2021— a decrease of 54 per cent. The depreciation of the rial and inflation were key factors in driving up food prices in 2020, especially in southern governorates. The price of food doubled between 2015 and 2019 and prices continued to rise throughout 2020. The national average price of sugar in November 2020 was 46 per cent higher than in November 2019, while the cost of wheat grains was 28 per cent higher, wheat flour was 25 per cent higher and cooking oil was 23 per cent higher. Other factors have contributed to increased food prices. These include competition between the parties to control import financing; the conflict has increased transport and logistics costs at each stage of the food supply chain, and COVID-19 has also affected global supply chains and prices. The rising price of fuel and fuel shortages – caused by the inability of the IRG to pay international energy suppliers due to diminishing foreign exchange reserves – have disrupted the provision of public services, including electricity and water, and driven up the price of food and other commodities in southern governorates.
In November, the national monthly average cost of the Minimum/Survival Food Basket (MFB) had increased by 2 per cent compared with October, and by 16.2 per cent compared with January 2020. However, the cost of the MFB in southern governorates was 35 per cent higher than in northern governorates and the cost of the MFB in Socotra, where the highest increase was recorded in the south, was almost double that in Sana’a in the north, YER63,250 compared with YER32,050.