Impact of currency depreciation on the Yemen market situation and implications for the use of Cash transfers as a part of the humanitarian response.

About the report

This report has been created by Thomas Byrnes, who was based in Yemen from May 2017 to February 2018 as a CashCap adviser to the humanitarian country team. CashCap has supported its creation as a response to a request by several actors for an analysis of the impact of the currency depreciation on the Yemeni market situation and the implications for the use of Cash transfers as a humanitarian transfer mechanism. This report is shared freely based on his understanding of the situation and does not reflect the views of any agencies or actors.

Summary.

The recent drop in the value of the Yemeni Reil has led to a catastrophic loss of purchasing power for the average person in Yemen. With 75% of Yemeni’s (22 million) population in need of humanitarian assistance of which 18 million are food insecure any loss of purchasing power is expected to have a catastrophic impact, leading to ever more people adding to the estimated 8 million people in Yemen who are no longer able survive without urgent and ongoing support. Cash transfers by humanitarian and development actors are already in use at scale in Yemen; this analysis will assess the likely impact of the currency drop on prices in the market and the suitability of using Cash as a response option and make recommendations as is relevant.

Status of the Yemeni Reil.

The Yemeni Reil has since 2016 had no central bank backing it, i.e. a bank willing to offer USD for YER at a fixed rate, with its market rate being determined by currency traders working without a central exchange to agree on rates. This system has supported a gradual decline in the value of the currency as traders, jostle to ensure that they are not trading YER at better rates than their competitors. However, in the last few months this decline has accelerated. The Yemeni Reil (YER) has decreased in value against the USD by 57% in the last twelve months, from a rate of 410 YER/USD to 700 YER/USD. 42% of this decline has taken place in the last three months with an average decline of 16% in August and September with an 11% drop so far in October.

There are two main rates of YER in Yemen, the rate offered in the country and the price to access electronic USD that can be used outside of the country. This second rate is often much higher than the Yemen rate as importers to Yemen are required to access large amounts of clean electronic USD, to pay the full price of an import in advance before a ship sails to a Yemeni Port. For example, the rate in Sana’a city for 1 USD in August 2017 was 340 YER but a fuel trader reported that they were paying over 500 YER to purchase 1 electronic USD. As such the rate in Sana’a city does not reflect the cost of YER/USD used to import goods.

Since mid-October 2018 the Internationally Recognized Government (IRG) has designated four banks that operate across the country to issue Letter of Credit to traders and importers in both in the north and south for importing supplies. The implementation of this has started, and there are reported cases in which traders in the North have used Letters of Credit available with these banks to import supplies.

As the Yemen YER/USD rate is largely driven by trader confidence in the economic system and normally drops when there are events that impact on the market or indicate the war is getting worse or is going to extend/intensify, this measure could work to stabilise the value of the currency. However, as the volume of imports into Yemen are in the hundreds of millions of USD per month, much will depend on the liquidity offered by this mechanism and how freely traders in the north and south of the country will be able to access it. The impact of this mechanism will need to be closely monitored moving forward but has the potential to play a critical role in stabilising the economy.

Facilitation of the credit needed for importers/traders in the country has recently identified by a small technical group composed of the Cash and Market Working Group (CMWG), OCHA, FAO , WFP and UNDP as a key advocacy point to be advocated by the Humanitarian Country Team with all parties to minimize the impacts of sharp devaluation of YER on import of basic commodities essential for food security in the country

Yemeni currency devaluation and impact on inflation.

 This rate drop drives inflation as the Yemeni economy for business to business (B2B) activities is largely dollarized. This means that most stocks in the country are held on the books in USD, with trades done from trader at the governorate capital to district trader transacting in USD. (Mostly this is done electronically via the banks as physical hard currency is hard to come by.)

However, almost all trade to consumers are made in YER, not USD, as it is rare for the average Yemeni to have access to USD or a bank account. As result traders who sell to consumers (B2C) regularly adjust their prices based on the rates that they can get with their local bank/hawala as they are converting their cash flow back in USD as a matter of course.

It is estimated that over 90% of essential food and non-food items in Yemen are imported, with locally produced good playing a minor role in most markets even at village levels. As such a loss of value in the YER in Yemen, rapidly leads to price increases in the markets regardless of the stock levels of the traders.

In the last ten months there has been a 67% increase in the price of wheat in Yemen in YER, but once the 48% devaluation of the currency is added to the 12.3% increase in global wheat prices, there is only a 6.7% price increase that cannot be accounted. It is noticeable that when looking at the basket of good that makes up the survival minimum expenditure basket (SMEB) over the last ten months, the cost in USD to purchase the basket of has steadily declined.

This trend was suggested last year by traders last year, to be a result of them cutting their margins as much as possible to prevent a loss of demand as households are priced out of the market.

This however does not help the average Yemeni, as side from remittances received from overseas, all incomes in the Yemeni public and private sectors are paid in YER and monitoring of the labour market shows that rates have remained flat due to the widespread unemployment. As such the change in the YER basic of goods can be taken as a lose proxy for a loss of purchasing power. As 18 million Yemeni’s were already surviving at the limits of their capacities, struggling to cover the 50 cents per person per day required to cover their food needs, this loss of purchasing power is likely to be pushing increasing numbers of households into crisis. 

Impact on Humanitarian Cash programming.

There is a question of inflation being driven by the lack of supplies in the market, and that aid should be provided in kind as giving more aid shipments as cash would only further increase inflation.

I would argue against that understanding of the situation as during the past three years where Cash transfer programs have been undertaken there has so far not been any evidence of cash programs leading to inflation, both in programming monitoring or in the feedback from the government authorities. The large-scale Cash feasibility study undertaken last year concluded that for essential items the market systems across the country were resilient and cash was a reliable response option. A recent large scale anylisis by CaLP on risks in Yemen also did not indicate that this was seen as significant risk by actors.

Additionally, the fact that the USD cost of the SMEB basket of goods has not increased implies that the price rises being recorded are not being driven by shortages in the market and so strongly suggests that the system assessed by the 2017 study and its recommendations are still relevant.

The need for longer-term planning.

One element that would be good for humanitarian actors to consider as agencies look to scale up their responses is the fact that the majority of households who are being driven into a lifesaving situation by the increase in food prices will not have been affected directly by the conflict. Only 2.3 million of the 22 million people in need in Yemen have been displaced. Most people in crisis are still in their homes and as such unless there is an increase in either their livelihoods or the value of the Yemeni Reil, with will suport their purchasing power, there is unlikely going to be any short-term exit strategy for any intervention.

As such agencies undertaking Cash programs could be advised to start considering the support given through the lenses of a social protection transfer, in which programs need to be designed with the assumption of multi-round or even multi-year activities, rather than the lens of short-term emergency support.

The need for scale up and coordination.

All efforts should be made to scale up cash transfers using the existing systems in place as the scale of need likely will require the use of all cash pipelines that have been set up.

However due to limited funding more focus should be made to ensure that Cash transfers systems are being coordinated to prevent overlap and ensure as many households as possible are covered. Coordination of Cash is currently a key weakness in the Yemen response as indicated by the recent CaLP study which highlighted that it is not currently possible to identify the current volume of cash transfers, with the last mapping of locations being done in 2018.

Additionally, it is recommended that the humanitarian community builds up its internal capacity to analyze the market and economic situation as current analysis are not able to forecast how the situation may develop, what could be the breaking point of the market system and what are the factors currency traders are taking into consideration when setting the rate.

Conclusions.

·       The current currency decline is causing a cost of living crisis in Yemen, in which households have seen a dramatic loss of their purchasing power.

·       This crisis is pushing increasing numbers of households into a life-threatening a crisis.

·       The multiple systems of cash transfers developed by the humanitarian community are likely still appropriate and could be scaled up to mitigate this loss of purchasing power.

·       This loss of purchasing power is a separate crisis from that impacting the displaced and conflict-affected households and may require additional funding from donors.

·       It is worth all actors to look at this issue strategically as any systems put in place now will likely be required for multiple years, (even if there is an end to the current conflict.)

·       To ensure that limited resources are being used effectively, support should be given to tracking the use of cash and the coordination of the different cash delivery systems should be strengthened.

·       The capacity of the humanitarian community to assess the market system, forecast trends and support advocacy should be strengthened.