Central bank becomes Yemen’s latest battleground

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Olivier Holmey
Published on:

The Central Bank of Yemen has avoided taking sides in the civil war – until September, when the president replaced the governor and moved the bank, infuriating political opponents and setting off alarm bells for some observers.

The civil war that has engulfed Yemen since March 2015 had by late August this year led to nearly 4,000 civilian deaths and forced three million people out of their homes, according to the United Nations. 

However, until recently, the Central Bank of Yemen (CBY) was widely thought to have continued to function, while avoiding taking sides in the conflict; paying out salaries to civil servants wherever they lived and regardless of their political inclinations, and continuing to support the crumbling financial sector.

Abd_Rabbuh_Mansur_Hadi-160x186
President Abd Rabbuh
Mansur Hadi

Now the central bank has become a focal point in the war. On September 18, Abd Rabbuh Mansur Hadi, Yemen’s president since 2012, replaced the CBY governor with his finance minister, and ordered the bank to be moved from the country’s capital, Sana’a, to the port city of Aden in the south. 

Hadi is backed by a Saudi-led coalition of Arab states as well as by the US, UK and France. However, despite the military support of this international coalition, his forces only control part of the country, including Aden, but not Sana’a.

Hadi has accused his opponents, the Iran-allied Houthis, of taking advantage of their control of Sana’a to loot the central bank and fund their war effort. His government has said $4 billion of public reserves have been squandered in this way. 

For that reason, over the summer, Hadi called for international banks to deny the CBY access to the reserves it holds abroad.

The Houthi political council swiftly condemned the decision, saying changes to the central bank board, and plans to move the bank to Aden, were void. 

In an extraordinary television address on September 20, Houthi leader Abdul-Malik al-Houthi called for the population to replenish the CBY’s funds by donating as much as they could – even, he said, if it were as little as 50 Yemeni riyal (20 US cents).

Hadi’s decision to assert more direct control over the central bank has concerned some observers. 

Amal Nasser, a Yemeni economist, tells Euromoney: “The significance of the matter lies now in the uncertainty of the new bank's willingness to serve [pay wages and provide guarantees] all Yemeni, meaning also including those who live in Houthi-held areas. 

"Those areas are highly populated and are already witnessing a severe humanitarian crisis.” 


It is really complicated but in general the CBY remained and remains neutral even after Hadi's decision to move the CBY to Aden. This shows in the bank's governor's silence now 

- Amal Nasser, Yemeni economist

Christine Lagarde, the managing director of the IMF, met with Hadi on September 22, on the sidelines of the UN General Assembly, to discuss the humanitarian and economic fallout from the conflict. 

In a statement, the IMF said they “exchanged views on the current situation and prospects, including preserving the operational capacity of the central bank system so as to improve the financial stability and economic and social outcomes for the Yemeni people” – which some took to mean Lagarde urged Hadi to allow the CBY to keep servicing the Yemeni people, regardless of where they live.

A Sana’a-based employee of the central bank, who spoke on condition of anonymity because of the sensitivity of the matter, says he worries about the CBY’s ability to keep functioning properly from Aden. He says the bank’s Aden branch does not have the Swift infrastructure to connect it to financial institutions abroad, that the building is too old, and that the staff there are less qualified in IT systems and investment work. 

“Everything [is] conducted from Sana'a,” he says of the way things have worked until now. He adds that liquidity would remain a huge challenge, whether the central bank moved to Aden or stayed put.

Ahmed bin Dagher, Hadi’s prime minister, had said earlier in September that procedures for moving Yemen’s CBY “into a neutral area” were being finalized, but the central bank employee said on September 21 that employees had been left in the dark and were still waiting to hear whether they would be able to keep working for the bank, and do so from Sana’a.

Abdul-Malik’s rejection of the move seemed to raise the prospect of two central banks operating in parallel, as is the case in war-torn Libya. So far, Mohamed Awad Bin Humam, the Yemeni central bank governor whom Hadi replaced, has not spoken publicly about the developments. As of September 23, he had not released an internal memo either, according to the central bank employee.


Amal_Nasser-160x186
Amal Nasser,
Yemeni economist

Nasser reads that silence as acceptance of his removal from office, saying: “It is really complicated, but in general the CBY remained and remains neutral even after Hadi's decision to move the CBY to Aden. This shows in the bank's governor's silence now.”


Marwa Alnasaa, the IMF’s representative in Yemen, agrees with Nasser that the CBY had so far remained neutral. When asked to comment on recent developments, he says he is still processing what has happened.

Hard to track

None of Yemen’s banks has published its results since the start of the war, making it hard to track the state of the country’s financial sector. 

A resident of Sana’a who works for one of Yemen’s largest oil companies tells Euromoney that businesses are still dealing with banks for salaries and payments, but that a shortage of cash has meant limitations on daily withdrawals by individuals. “Most ATMs have no cash,” he says.

One benefit from the central bank’s move, according to that same source, is that it may kick-start the Yemeni oil and gas sector. Hadi suspended those exports at the start of the war, to avoid funding the other side. The only exception to that rule is in Hadhramaut, where state-owned oil company PetroMasila recently restarted operations, the source says.

If revenue from oil and gas goes to Aden, Hadi would, in theory, no longer have a reason to maintain that suspension. Because oil and gas represent an overwhelming share of Yemeni exports, and of the government budget, halting that activity has severely damaged the country’s economy, and the central bank’s reserves.

The announcement of the central bank move was timed to coincide with a return to Aden of Hadi’s cabinet, which had been in exile in Saudi Arabia. 

A spokesperson for the UK embassy to Yemen calls the central bank move – and cabinet return – a “very big shift”, part of a broader attempt “to rebuild state institutions” in areas Hadi controls. 

He rejects the notion that Hadi’s focus on Aden indicates the president has lost hope of regaining control of Sana’a any time soon.