Yemen's government, working through the Central Bank of Yemen (Aden) and the National Economic Committee, has succeeded in raising the value of the Yemeni riyal against hard currencies by offering letters of credit to food traders.
Since the measure was introduced in September, traders and importers of basic commodities have been able to secure hard currency through this mechanism, which has in turn led to a drop in the price of the US dollar in the local market.
A Saudi deposit of $200 million into Yemen's Central Bank on October 3rd supported the measure to shore up the Yemeni riyal against foreign currency.
In January, Saudi Arabia deposited $2 billion into Yemen's Central Bank, which is based in the temporary capital of Aden, to try to shore up the Yemeni riyal.
In early November, the Central Bank used $170 million from the Saudi grant in the form of letters of credit, to cover the import of basic food commodities, according to Yemen's Ministry of Planning and International Co-operation.
On November 19th, the Yemeni government commended the National Economic Committee and the Central Bank for offering bank facilities to traders of basic food commodities and covering their foreign currency needs.
This move was intended to ensure the flow of imported commodities into Yemen, and the buildup of food stockpiles in order to meet essential humanitarian needs and save the economy from collapse.
On November 22nd, the Central Bank set the exchange rate for letters of credit at commercial banks to purchase basic foods at 520 riyals for the US dollar, down from 548 riyals in mid-November and 585 riyals on November 1st.
'A positive sign'
The rise of the Yemeni riyal against the dollar and other hard currencies is a "positive sign reflecting the increased confidence in the measures taken by the Central Bank", said Studies and Economic Media Centre president Mustafa Nasr.
"The Central Bank succeeded in withdrawing liquidity from the market, so any importer who wants to import food commodities for $10 million needs only pay the equivalent in Yemeni riyals at the discounted rate," he told Al-Mashareq.
He pointed to the "simplifying of the procedures for obtaining funding for the import of basic commodities in dollars from the Saudi deposit and requesting [payment] in Yemeni riyals".
This is in addition to the opening of letters of credit, raising the interest rate to 27% and building a cash reserve of $500 billion riyals, Nasr said.
These "are all measures that enhanced the Central Bank's ability to manage the monetary policy and curb speculation", he said, noting that "these measures prompted people to sell the dollar for fear of a continued decline".
Need for funding sources
The steep rise in the price of the dollar had no economic justification, Sanaa University economics professor Taha al-Faseel told Al-Mashareq, noting that the Central Bank's actions contributed to the drop in its price.
Al-Faseel expressed concern however over the Central Bank's continued funding of letters of credit for food commodities traders from the Saudi deposit "without looking for sources of funding in foreign currency for the bank".
Funding sources might include the resumption of the export of oil and gas to pre-war levels to ensure the inflow of hard currency to the state’s treasury, he said.
The Saudi deposit will be depleted, as Yemen is a net importer of food, he cautioned, and "consequently an economic disaster will ensue".
Addressing these concerns in a brief statement, National Economic Committee head Hafez Muayed told Al-Mashareq that "the Central Bank will have a reserve of billions of riyals, and the government is moving to export oil and gas".
Price discrepancies remain
Meanwhile, there have been complaints from the Yemeni street that the drop in the price of the dollar has not brought about a drop in the price of food.
By September, inflation of the price of basic food commodities in 2018 had reached 36%, due to the rise in exchange rates and fuel prices, the Ministry of Planning and International Co-operation said.
The government charged the Ministry of Industry and Trade and market regulatory agencies with controlling the prices of goods, and selling them at prices commensurate with the preferential prices for the US dollar the traders receive from the Central Bank.
A number of major commercial companies announced a reduction in the prices of food items, while others refused to drop their prices, claiming the import process had been completed when the price of the dollar was higher.