Wed - 12 Sep 2018 - 10:32 PM ،،،

 The people continue to be crushed by the legitimate governments’ failure to operate in the liberated governorates. The evidence of this is clear in the deteriorating economic situation, which threats to cause disastrous consequences mainly the complete downfall of the country's economic system due to the constant collapse of the local currency against the foreign currencies and the alarmingly high prices of food products.

This was the incentive which shaped the start of the so-called ‘The Hunger Revolution’ which began a few days ago when all the people of Aden went out to the streets in a peaceful demonstration denouncing the recklessness of the legitimate government, its exploitation and rampant corruption.

"Aden Press" had to clarify some purely economic concepts to inform the people about the current economic situation and the consequences of the continuation of this deterioration.

We conducted this dialogue with one of the most prominent bankers in Aden, Mr Mohammed Najib.

Q: Can you please explain to the people the current economic situation?

A: At the moment we are experiencing a difficult, awkward and disturbing economic crisis. The outcomes of this have been translated into an unprecedented decline and regression at the economic level in general and in the quality of life in particular. Briefly, Yemen's economy is one of the world's smallest, with the GDP estimated at about $30 billion in 2010.

According to the International Monetary Fund (Christine Lagard), Yemen's economy has shrunk by 30 per cent in 2015 alone, and the state economy has shrunk by about 50 per cent since the beginning of the "Youth revolution" in the start of 2011. The population count is an estimated 25 million as the United Nations has classified Yemen among the least developed countries, the economy suffers from scarce resources and is a small producer and exporter of crude oil and gas. Despite the small amount of income from that sector ($1.5 billion annually), it provides the country’s budget with around 80 per cent of the foreign currency.

The banking sector, which consists of 16 commercial, Islamic and specialized banks, is the smallest in the Arab world with a total asset of about $12 billion by the end of 2014.  Due to the war that erupted in March 2015, it is estimated that the size of the banking sector shrank by about 50 to 60 per cent. As a result, the activities of this sector have been paralyzed and caused the drying up of cash, the interruption of finance/credit operations and the loss of trust from depositors and customers.

Adding the Financial and Monetary Authority was dispersed between the central bank of Yemen in Aden and the central bank of Yemen in Sana'a.

The political instability in the country since the beginning of 2011 and the current war have strongly affected the state’s economy as well as the decline of the resources and channels of state revenues such as oil and gas revenues, which have ceased altogether had a major impact on it. The total cessation of taxes of all types (mainly customs), and some Arab and friendly countries froze subsidies and financial donations, which used to cover part of the chronic public finances’ deficiencies. A high proportion of local public debt both in the Yemeni Rail and the foreign currency which has exceeded 120 per cent of GDP, which is very serious and far from the 60 per cent, which most economists consider to be "safe".

Another indicator of the weak position of the state economy was the rapid and almost total depletion of the foreign currency reserves by the Houthis, which was estimated at about 6 billion US dollars. They have captured most of the proceeds of the national currency revenues in their areas of control (the largest economically), and this has resulted in the cessation of the payment of civil and military salaries of the state officials for long periods. In the face of this dilemma,, the legitimate  government has printed billions of riyals without a "cash cap" to meet and pay its financial obligations in the national currency, specifically the salaries and wages of a huge and alarming number of civil and military personnel of the State, whose number has increased in recent years.

Finally, Yemen imports 90-95 per cent of its basic needs, in addition to importing a long list of luxuries, medicines and non-commodities, even as some of its economic sectors (industrial and service) their raw materials are imported from abroad in total, the size of the import sector is now estimated to be about 10 times the size of the export sector which causes imbalances in the country's "Trade balance".

Q: What about the concept of the deterioration of the local currency and what are the main reasons that may lead to the total collapse of the currency and its reflection on the economy in Yemen? What does the cash reserve have to do with high or low exchange rates?

A: First, we have to know that the currency is a monetary system for public use in a country, for example, we say the currency of use in Egypt is the Egyptian pound Saudi currency is Saudi Riyal and in the UAE it is the Dirham.   

Money has three main functions and is a tool for the exchange of transactions between individuals/peoples/States and a tool for measuring value; For example, a house valued at the US $1 million is a tool for storing value (against inflation factors and  safe havens in times of war or strikes and political/economic problems etc.)  and the value of a currency is determined for a country against a state currency as opposed to the currency of another state through the "exchange rate" which is the "value" of a currency in order to convert it to another currency.

Therefore, the currency (money) is a commodity like the rest of the goods traded (sold and bought) in the commodity markets, valued (exchange rate) for currency or other currencies, approximately 5-6 trillion US dollars a day are globally exchanged in the Foreign Exchange Markets.

Let us make it clear that in economic law known as "supply and demand", if there is a large (Buy) request on US dollar by the British, to pay obligations/benefits to US companies that export goods and others and that the same scenario occurs in several countries/markets around the world any orders to  (buy) for the US dollar versus  the currencies of these countries or markets, the total global demand on the US dollar will give the dollar the "exchange rate" in return for the "exchange rate" of the currencies compared to the "exchange rate" before the above-mentioned purchase orders. On the other hand, if there are large orders (purchases) of different global currencies for us importers against the US dollar, the supply of these amounts of dollars in the foreign exchange markets will push down the US dollar against other currencies compared to the orders of the importers. There are many other cases in which the definition of "currency exchange rates" is controlled, but they all involve the "supply and demand" equation.

Since we have known what the currency exchange rate is, the term "currency degradation" is one of the stages of "exchange rate" slippage, The downward trend in the exchange rate of a currency in exchange for another currency follows the "landing" process.

The route begins with the following stages: Exchange rate depreciation, exchange rate decline, exchange rate deterioration, exchange rate collapse and currency collapse.

Each of the above stages has its own causes and methods of treatment, and perhaps the first three stages refer to breaches and omissions in macroeconomic management structures and procedures (balance of payments, trade balance, etc.) and can be focused, worked on and corrected and can be recovered on track, but ignoring and not working on the causes of the first three stages deepens the economic damage and leads it to negatively impact the components of the micro economic (economic, financial and monetary policies, etc.). It is then difficult to find solutions that address the exchange rate levels and return them to their previous levels and/or lift them from their dark stages.

Many states have entered the spiral of currencies decline, but few have managed to get out and the majority are trapped in the vicious circle of exchange problems, which has negatively impacted on their economy and thus on the standard of living and the lives of its people. There are examples of countries which have managed and succeeded in solving their currency problems, including the Asian tigers, whose currency exchange rates collapsed in 1997.

On the Arab countries level, we find the Arab Republic of Egypt, which made a courageous decision to "float" the Egyptian pound, but the countries which their currencies collapsed and can no longer do anything about it are Venezuela, Iran and soon Yemen will follow suit. The decline of the currency exchange rate in the market of buying and selling of currencies means weak "purchasing power".

As long as we import more than 90 per cent of our basic needs and in hard currency 8-10 times what we export in hard currency, the exchange rate of the Yemeni Rial (its purchasing power) against the US dollar will continue to regress to previously unreported levels. This situation will lead to inflation (continuous increase ) in the prices of food and basic goods and services which the people will not be able to catch up with, in other words ‘A disaster’.

With regard to the relationship between the exchange rate and the foreign exchange reserves of any state, its primarily exists to finance the deficits in the state budget and public finances, and is used for strategic projects to activate the economy in times of economic slowdown or contraction, but the cash reserve is seen as the "protector " of the national currency and amount of the cash reserve reflects the ability of the State to import strategic and basic goods for its people for a specific period of time in times of adversity and crisis (wars, famines, disasters).

The greater the amount and volume of the cash reserve are, the greater the confidence of investors and global financial institutions will be in return the State will be able to fulfill its obligations if it decides to resort and borrow to carry out its economic and development plans. Saudi Arabia is the best example, it is the fourth country Globally in terms of foreign exchange reserves. Any wasting or lack of foreign exchange reserves loses the ability of the state to defend its currency (its exchange rate) against any economic, political or security setback. The currency is subjected to tremors and shocks that destabilize the economic foundations of the State, which in turn casts a negative shadow over the livelihood and life of its people.

Q: All over the world, states take preventive measures to stop the deterioration of its currency against foreign exchange, in your view what are the most important measures that the government could have taken to curb the deterioration of the local currency over the past period?

A: The state of war still exists, in the face of this situation and the inability of the government to activate and operate its institutions, especially the private, and the absence of its sovereign coffers of foreign exchange, as well as many other reasons known to all , has paralyzed the government and prevented it from setting any vision or provide any preventive policy to deal with those financial problems ,especially at the start when signs of the problem began to appear. This shortcoming has led to a lack of ownership and the  rise of the "invisible economy"

Q: Political conflicts lead to fears and turmoil, causing many large traders and even smaller ones not to invest in several areas. We have witnessed it in Aden over the past weeks, what is your comment on this issue?

A: The absence of law and order in the State affects its legislative, executive and judicial institutions; the latter in particular is considered to be the largest and most comprehensive "repellent" of any investment initiative in any field, whether national or external, small or large. Another "repellent" reason for investments is the paralysis of the banking sector, its weak financial position and scarce resources in particular cash flow. All the mentioned reasons have led to the inability of this vital and important sector which is considered the "artery of the economy" in any state to perform a service cycle for citizens in general and the investors in particular. The deteriorating currency exchange rate (lost purchasing power of the currency) and its inflation effects in a steady rise in the price level of goods in general, is one of the most important impediments to investment and even disappearance of existing investments.

The inefficiency of the infrastructure (basic and superstructure) of electricity and water, communications, roads, services, many outlets, the lack of technology and technical staff are all taken into account by all investors, not forgetting the fatal activities and operations of the "invisible economy" such  smuggling and double-dealing , business ,enterprises and  commercial enterprise.

Q: Last but not least, there is a package of decisions taken by the President of the Republic, including stopping the import of luxuries, closing unlicensed exchange shops, preventing foreign currency departing from being transferred abroad. A slight increase of 30% in employees’ salaries. In your opinion are these steps really going to be effective?

A: Even if we consider all of these decisions to be true its consequences will not be automatic nor immediate. No one has the magic wand to do it, the exchange rate of the dollar from 610 riyals to 590-600 riyals is not a result. Addressing the situation needs a long-term sustainable economic vision,  unfortunately, this is not the case at present because we are still in a state of war and situations change by the day.