The Central Bank of Yemen is taking action to ensure funding is available for imports to prevent the collapse of the country's financial sector and potential food scarcity amid the country's ongoing war.
In May, the Central Bank approved the transfer of about $200 million in foreign currencies abroad to facilitate the import of food and other products.
The bank recently announced it was close to approving a second outbound transfer of foreign currencies of the same amount from cash holdings of commercial banks.
This will allow the bank to open lines of credit for the private sector under the prevailing circumstances in the country.
The move comes as part of the continued co-operation among the Central Bank, the Sanaa chambers of commerce and industry , the Federation of Yemen Chambers of Commerce and Industry , the Yemeni Money Changers Association and commercial banks, Central Bank Governor Mohammed bin Hammam said.
It aims to reinforce the stability of the national currency and inject liquidity into the national banks, he said, following a July 20th meeting.
During the meeting, he reassured traders, money changers and national banks "that relief is coming with regard to the issue of outbound foreign fund transfers and shoring up the national banks’ balances abroad".
Yemeni riyal liquidity crisis
Commercial banks are experiencing a national currency (Yemeni riyal) liquidity crisis due to the dearth of deposits by traders and money changers.
"Local banks used to be the ideal means for opening letters of credit to finance import operations," Co-operative and Agricultural Credit Bank (CAC Bank) deputy chief operating officer Fares al-Jaadabi told Al-Mashareq.
"The [national] banks’ balances in foreign banks are no longer sufficient to cover the import bill because [local banks] are not allowed to transfer foreign currency to foreign banks," he said.
This led traders in various sectors to use the services of money changers and transfer funds abroad through them, as has been the case in recent months.
Al-Jaadabi said a large portion of the local liquidity has gone to the money changers and petroleum product traders, while foreign currency remains stockpiled at local banks, which has created a liquidity crisis in the country.
All this led to "higher anxiety level and lack of trust between citizens, traders and money changers on one side and the banking sector on the other", he said.
He explained that citizens, traders and money changers "opted to hold on to their liquidity, withdraw it from banks and refrain from depositing it".
Government pledges to help banks
"The first phase in May that involved the outbound foreign fund transfer of about $200 million was one of the key and necessary solutions to the crisis experienced by the banks, despite the small number of difficulties and delays that accompanied the process," al-Jaadabi said.
Some local banks prefer to wait before transferring money abroad in light of the war and resulting financial crisis, he added, until they can see the outcome of the outbound foreign fund transfer process more clearly.
Local banks are anxious about this situation "because of their stockpiling foreign currency, their inability to invest locally due to the security situation or transfer funds outside the country as they did before the war", he said.
Minister of Finance Munser al-Quaiti has reassured the Yemen Bank Association and local banks that the "government is committed to helping the banks in the matter of outbound foreign fund transfers and to resolving their problems".
Association of Yemeni Money Exchangers executive director Ahmed al-Awdi highlighted the role of money changers in supporting the process of importing food and other items.
"Money changing shops and companies use expatriate remittances to support import operations by the commercial sector, particularly food imports," he told Al-Mashareq.
"The money changing market is focusing more on expatriate remittances, which have become the only source of hard currency due to the war and difficult circumstances the country is going through," al-Awdi said.
War has hurt banking sector
The reliance on money changers to obtain hard currency to finance import operations has weakened the role of the banks in this regard, said Marzouq Abdel-Wadood, director of Yemen’s Economic and Social Development Centre.
Other factors also have weakened the role of the Central Bank, he told Al-Mashareq, noting that state revenues, including income from the sale of oil produced in Marib, are not being deposited in the state’s general account.
The same applies to revenues from customs and income producing institutions such as the ports in Aden and Hadramaut, he said.
The Central Bank’s branches in those three provinces have declared they are no longer subordinate to the Central Bank’s branch in Sanaa, he said, because of the ban imposed by the local authorities on the transfer of revenue to the Central Bank in Sanaa on account of the divisions in state institutions.
All these factors have contributed to "reducing the Central Bank's ability to fund the traders’ import of oil derivatives and stopping the flow of foreign currency to the bank", he added.
"A prolongation of the war will lead to more economic decline and further drops in the value of the national currency against hard currencies, which would exacerbate the citizens’ economic suffering," Abdel-Wadood said.