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YEMEN: An Economic Strategy to Ease the Humanitarian Crisis

June 15, 2018

Destroyed house in the south of Sanaa, 2015. CREDIT: Ibrahem Qasim ( CC)

As of June 13, 2018, the Saudi-led coalition attack on the Iranian-backed, Houthi-controlled Hudaydah port along the Red Sea coast of Yemen is underway. When the battle deepens, the conflict in Yemen will take a new and unpredictable turn in a war which has already created the world's greatest humanitarian crisis.

The Human Toll is Staggering

Make no mistake: the human toll of this war is staggering. More than 22 million people are in need of humanitarian assistance, including nearly 18 million who are food insecure. Last year, Yemen faced the world's largest cholera epidemic in recorded history—1 million people suffered from an outbreak driven by the deterioration of the wastewater management systems as a result of the war, primarily in Houthi-controlled territory. This suffering is not the result of a "drought famine." Food and basic commodities are in the markets but they are priced out of reach of practically the entire population. With the splintering of the Central Bank of Yemen nearly two years ago, the economy de-leveraged as the formal central banking system collapsed, the Yemeni riyal dropped precipitously in value, and a war economy emerged which incentivized further conflict.

The War(s)

Yemen is a complicated war—or rather wars. By my count there are five. The Houthis are an Islamic religious-political armed movement of the Zaidi sect, and are predominantly Shia-led, though the movement reportedly also includes Sunnis. They control 20 percent of the land and 70 percent of the population and are in a civil war with the internationally recognized Yemen government, headed by President Abdu Rabbu Mansour Hadi. Meanwhile, the Saudi-led coalition, consisting primarily of Saudi and Emirati forces with symbolic support from other Sunni states, are engaged in a proxy fight with Iran which supplies the Houthis with arms, cash, and strategic intelligence. In the south, Yemeni secession forces seek to re-establish an independent state, the so-called nation of South Arabia and are fighting both the Hadi government and at times any other tribal or political actors that stand in their way. The United Arab Emirates (UAE) is also engaged in a battle against Muslim Brotherhood affiliates, ISIS, and al-Qaeda in the Arab Peninsula (AQAP) in an effort to pacify Southern Yemen and open up commercial access with the strategic goal of being a regional trading power. Meanwhile both AQAP and ISIS treat the south, east, and central parts of Yemen as their playground—where they can take the fight to all apostates be it UAE, Saudi, the Hadi Government, the Houthis, Iran, the U.S., and others. In this mix, the U.S. and UK assist the Saudis in their air war against the Houthis as well as the Emirati fight primarily in the south and increasingly along the Red Sea Coast. 

Not surprisingly, the Yemen war is not limited to Yemen. The Houthi militias have taken and control some border areas and hills on the Saudi side of the Yemen Northern border. More concerning is that the Houthis have fired ballistic missiles, mortars, and artillery into Saudi territory, including roughly 150 Iranian configured missiles which have struck major Saudi towns including Riyadh and most recently Jizan. In response to a ballistic missile attack in early November, the Saudi-led coalition closed down the Hudaydah port for several weeks. 

The Peace Process: Where Art Thou?

The mantra heard from UN circles, Western diplomats, and foreign policy think-tankers is that there is no military solution. The only way forward is a peace process that produces a political accommodation among the warring factions, they say. Given the complexity of the war(s), the overlapping and confusing interests, and the inexhaustible supply of funds and materiel into the battle space, a political solution seems like a reasonable idea—get the parties to talk and chart out a political accommodation which helps create a more peaceful and prosperous Yemen. And with that, the relatively new Special Envoy Martin Griffiths marches into the cauldron to negotiate a solution. While there may be no immediate military solution—which is obvious given Yemen's history of six civil wars in the last three decades—there also does not appear to be a political one on the horizon either as evidenced by the attack on Hudaydah. The research demonstrates that civil wars with outside backers drag on much, much longer than civil wars without external intervention. Yemen is in year four. It is time to be realistic about the future of Yemen. The best hope is a negotiated settlement to turn control of Hudaydah port over to a partnership of a neutral third party such as the UN and Yemen technocrats—i.e. non-partisan, professional managers.

The Humanitarians Intervene, but the Crisis Worsens

Given the suffering of millions of innocent civilians, the UN—mainly through World Food Programme (WFP), World Health Organization (WHO), and UNICEF—have waged a huge, costly, and uphill battle against the humanitarian crisis in Yemen. In early April 2018 in Geneva, a High-Level Pledging Event for the Humanitarian Crisis in Yemen, convened by the UN and the governments of Sweden and Switzerland, raised over $2 billion—interestingly, the largest donors by far were the Saudis and the Emiratis, contributing half of the total received. The U.S. pledged nearly $87 million, in addition to its contribution of more than $854 million for Yemen humanitarian assistance since October 1, 2016. Despite the vast and expensive response and recognizing that the UN is saving lives of the most vulnerable, the humanitarian tide is not turning. In fact, the trajectory suggests the situation is getting worse, not better. It's impossible to predict the impact on an attack on Hudaydah but the international humanitarian community strongly contends that there is a likelihood of a sharp deterioration in living conditions, particularly in the short term, due to an interruption in flow of basic commodities and fuel.

An Economic Way Forward?

With no military solution, remote prospects for an effective peace process, an ongoing battle for a major port, and an expensive humanitarian response which shows no signs of solving the situation, realistically, what can be done to ease the suffering of the Yemeni people and initiate a virtuous cycle which fosters political and economic windows for stability and eventually peace? The realistic short-term next steps must be to increase the purchasing power at the household level by: (i) increasing supply and lowering costs of basic commodities, fuel, and medicines; (ii) stabilizing the currency and increasing household income. This two-prong approach requires that the international humanitarian community recognize that commercial trade, a stable currency, and improved household incomes are the key drivers to mitigating the humanitarian crises. While assistance does help save lives of the most vulnerable, it does not change the economic and political calculus of the combatants.

Increase Supply and Lower Costs of Basic Commodities by Opening the Ports and the Crossings

The first prong of an economic strategy which reduces humanitarian risk requires that the Saudi-led coalition in concert with the Hadi government open all land and air crossings as well as all ports as expansively and efficiently as practicable. No complex crises should rest on one major access point—as is the case for Hudaydah port. First, it is important to recognize that Salef and Hudaydah ports are separate ports of entry; they are approximately 60 kilometers apart. Additionally, the UN and the Saudi-led coalition should work to keep both open, even in the event of expanded conflict in Hudaydah and around the port itself. The UN should use best efforts to negotiate continued predictability and access, particularly for Hudaydah, through third party management, a more robust UN Verification and Inspection Mechanism, and real-time coordination with the Saudi Evacuation and Humanitarian Operation Cell (EHOC) using better technology and communication mechanisms. Responsibility for averting a humanitarian catastrophe ultimately rests with the Houthi militia authorities who control the port and the nearby urban centers. They can negotiate a return of the port to third party monitors, if they choose to maintain a continued and predictable flow of food, medicine, and fuel into their areas of control.

There has been an increase in imports through Aden in 2018—in part to deny the Houthis port revenue from the Red Coast ports and presumably in anticipation of a battle for Hudaydah. Specifically, the Hadi government can facilitate the ease of movement and imports by breaking oligarchical and monopolistic interests in Aden port, including opening up competitive import markets, reducing licensing requirements, and allowing and facilitating berthing, unloading, and transit from the port.

Additionally, the Hadi government partnering with the Saudi-led coalition and possibly private sector investors should expand the port of Mocha to provide access to Taiz and the north and broaden Mukallah port. Regarding land-border crossings, the Saudis can open border crossings at al Tuwwal and al Khadra for commercial traders to access the port of Jizan in southern Saudi Arabia. Further, there is room for increased hours, more lanes, and better efficiency through the Wadiyah crossing. While remote, land crossings via Oman should be available and can help to broaden the competitive marketplace. Finally, for humanitarian purposes—as opposed to sustainable commercial trade—it is possible to expand service to Sanaa airport and other smaller airports throughout Yemen. Obviously, many of these solutions require time; but some do not and during a humanitarian emergency it is critical to expand options to channel basic commodities from all channels.

… and by Facilitating Private Sector Trade

Private sector traders provide nearly all of the basic commodities in Yemen; humanitarian assistance constitutes less than 5 percent of total basic commodities. To that end, the Hadi government through the Ministry of Finance and the commercial banking sector can establish trade facilitation letters of credit for a broad and inclusive range of traders to import basic commodities and medicines by drawing down on the $2 billion deposited in Riyadh earlier this year. Access to international banking would allow global suppliers to assess less risk to Yemen trade, thereby lowering the costs to end use buyers.

Similarly, relatively simple systems can be established in Aden (and eventually the other ports) to initiate automated and transparent customs systems, electronic payments, and audited accounts at Aden port to mitigate the risk of corruption, create import efficiencies, and lower the costs of transportation. One idea is to consolidate Yemeni and Saudi customs on the Saudi-side of Wadiya crossing so there is only one verifiable control point—which allows for a faster and cheaper flow of goods. Finally, a direct way to lower costs and increase trade is for the Hadi government to simply eliminate all customs and duties on all basic commodities, given the emergency nature of the humanitarian crises. Presumably this savings would not be passed on to people in Houthi-controlled territory, however.

These steps—if taken together—would increase the volume of basic commodities imported into Yemen and drive down market prices. Collectively, however, this is only one half of the solution to improve household purchasing power for millions of Yemeni people.

Stabilize the Currency and Increase Household Income

The second prong of this approach is for the Hadi government to stabilize the currency and reduce other non-trade barriers which affect the ability of families to purchase basic commodities.

The Central Bank

The Central Bank of Yemen (Central Bank or CBY)—with a governor who may be the most important person on the most important issue—has to take bold steps to stabilize the currency. First, the CBY must closely partner with the International Monetary Fund to complete its diagnostic assessment and bring the Central Bank back into the international banking system. Second, the CBY should institutionalize the use of electronic payments and/or checks flowing through the banking system to lower corruption risk and to allow for financial flows through correspondent banking relationships. Third, in addition to a trade facilitation credit system, the Central Bank can re-establish the viability of letter of credits in the private sector more broadly, so that even small traders are able to buy and sell to stimulate local economies. 

The Hadi Government

The Hadi government must have a budget and accounting system so there is clarity regarding use of oil revenue and to stem the flow of unaccounted leakages fueling the war economy. Clarity  and better use of government revenue—particularly to help pay the salaries of health care workers and teachers—will go a long way to blunt the humanitarian crisis. Transparent and credible budgets and accounting systems would be a confidence boost to the UN and donors to help subsidize these salary payments through the Ministry of Finance and the Central Bank. A failure to perform basic budgeting and accounting may result in the UN setting up a parallel finance system—which will only serve to erode confidence in Yemeni national institutions. 

The United Nations

The humanitarian community, led by the UN and encouraged by donors, must purchase as many local goods and services from the Yemeni markets as practicable. This includes locally milled and fortified flour, high-caloric date bars for school lunches, and locally sourced services. The UN can also do more to establish the systems and use the appropriate technology to minimize leakages and ensure that assistance is getting to the most vulnerable on the basis of need. 

The Private Sector

The private sector has a substantial role to play in mitigating the humanitarian crises. First, the big private sector players should encourage a market economy that is open to small- and medium-sized businesses—and help create a responsible market system that is not simply extractive, oligarchical, and corrupt. In other conflicts, senior private sector leaders have played a positive role in mitigating conflict and charting a more hopeful course for a nation at war or on the brink of war. The Yemen business community has the opportunity and obligation to do the same in this case. More specifically, innovators and entrepreneurs have business opportunities in the renewable energy space and in providing support services including data analytics to the donors and UN agencies. Finally, the CBY can approve and support mobile banking systems—as has been done in Kenyan refugee camps, Thailand, and other locations, where the unbanked can confidently go through the banking system with confidence and more efficiently. The cost of wiring money from abroad to Yemen is so expensive that disrupting the wire transfer costs alone would save families and communities enormous sums and unlock diaspora remittances more effectively.

Conclusion

Blunting the humanitarian crises in Yemen is a security, political, economic, and moral imperative. Aside from ending the war through a negotiated political settlement, the most efficient approach is to improve household purchasing power. To do so requires a greater market supply of basic commodities, lower commodity prices, a stable currency, and improved household income. This economic strategic approach is not impossible to achieve, even in the midst of an ongoing war. These steps could help the Yemeni people re-engage in their economy and ultimately create an environment where political accommodation is more likely to succeed.

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