Home Finance Could Saudi-Iran Détente Prove Decisive in Bolstering Yemen’s Fragile Economic Prospects?

Could Saudi-Iran Détente Prove Decisive in Bolstering Yemen’s Fragile Economic Prospects?

by internationalbanker

By Nicholas Larsen, International Banker


As part of the historic China-brokered peace deal announced on March 10 that saw Saudi Arabia and Iran restore diplomatic relations, Iran agreed to halt covert weapons shipments to the Houthi rebel group in Yemen. The news is a welcome milestone toward ending long-running hostilities in the war-ravaged country. And should Iran hold to its commitments, the rejuvenation process for Yemen’s thoroughly debilitated economy could commence soon.

Yemen has been the victim of arguably the world’s worst humanitarian and economic disasters in recent times. Eight years of conflict between Yemen’s government, supported by a Saudi-led military coalition, and the Houthi rebels, supported by Iran, have inflicted untold suffering on its people. The strife began in 2014, when Yemen’s government under President Abd-Rabbu Mansour Hadi was overthrown by the Houthis, prompting a military intervention by Riyadh in March 2015 and leading to tens of thousands of civilians being killed and millions more going hungry in a country now almost wholly reliant on international aid.

And although the United Nations (UN) engineered a six-month truce between the warring sides in April 2022, its lack of renewal in October has kept the country on edge ever since, with little sign of economic improvement. The Houthis continue to control the capital city, Sanaa, and large swathes of the country’s northern regions and have stepped up their attacks on oil infrastructure in areas under the control of the internationally recognised Yemeni government in recent months. Based in the country’s south, this government has experienced a dramatic deterioration of its public finances as the attacks have severely limited oil exports.

As such, the government has hailed the Saudi-Iran détente as “the start of a new era in regional relationships” and hopes the new peace can “put an end to Iran’s interference in Yemeni affairs”, while Mohamed Abdul-Salam, spokesman for the Houthis, said of the deal that “the region has long needed a return to normal relations”. But all the work to restore Yemen’s economy to at least some semblance of normalcy now lies ahead, with more than half of the country’s population still acutely food insecure and a massive ramp-up of international support needed more urgently than ever.

“Yemen’s public services and infrastructure have been severely impacted by the conflict, deteriorating economy and recurrent natural hazards,” the UN Office for the Coordination of Humanitarian Affairs (OCHA) reported in December, noting at the time that a massive 21.6 million people will need humanitarian assistance and protection services in 2023, slightly fewer than the 23.4 million in 2022. The OCHA also observed that more than 80 percent of the country’s population struggle to access food, safe drinking water and adequate health services, while nearly 90 percent have no access to publicly-supplied electricity. And it cited key economic factors, including the marked depreciation of the Yemeni rial (YER), macroeconomic instability, de facto separation of economic institutions, issuance of competing monetary policies, decreasing household purchasing power and considerable reliance on imported food and goods as exacerbating Yemen’s economic fragility throughout last year, making the country “extremely vulnerable” to fluctuations in global prices at a time of unusually high inflation.

And while the six-month period up until the truce’s expiry on October 2 offered some hope, with civilian casualties and displacement numbers falling, steady flows of fuel imports being received through the Al-Hudaydah port and commercial flights resuming at Sanaa International Airport (SAH), the OCHA added, localised clashes have continued in some areas, including Ta’iz and Ad Dhale, and landmines and explosive remnants of war (ERW) have posed “heightened risks”, especially in the context of increased civilian movement.

The United Nations’ Food and Agriculture Organization (FAO), meanwhile, stated in March that the country’s insecurity, drought and subsequent flooding have been particularly problematic challenges recently that have compromised food production and disrupted livelihoods amidst an environment of sharply rising food prices. “For years, more than half of the population has been unable to access sufficient food, and millions of women and children are suffering from acute malnutrition,” the FAO explained in a March 16 report on its Humanitarian Response Plan 2023. “While the majority of Yemen’s food needs are supplied by imports, agriculture remains a vital source of food and income, especially for rural communities.”

Indeed, with millions of Yemenis remaining displaced today, the economic outlook continues to be fragile for the war-torn country. According to an assessment by the International Monetary Fund (IMF) following its team’s virtual and in-person mission in Amman, Jordan, with Yemeni authorities from September 27 to October 6, economic output was expected to “broadly stabilise” with modest economic growth of around 2 percent in 2022 and 3.2 percent in 2023. “Consolidating these gains requires further economic reforms together with continued progress in conflict resolution,” the IMF reported, emphasising the need for the international community to step up financial support as a “critical lifeline” for Yemen. “In particular, additional external assistance is needed to finance essential food imports, help meet urgent social spending needs, and address pressing infrastructure gaps. Such financing would also reinforce macroeconomic stability and the reform momentum.”

Clearly, the “conflict resolution” aspect has been given a potent shot in the arm by the Saudi-Iran peace deal, which could ultimately bring a decisive close to the fighting. “Intense diplomatic efforts are ongoing at different levels to bring the conflict in Yemen to an end,” the United Nations special envoy for Yemen, Hans Grundberg, told the 15-member Security Council on March 15, shortly after his visit to Tehran. “We are currently witnessing renewed regional diplomatic momentum, as well as a step change in the scope and depth of the discussions. The parties must seize the opportunity presented by this regional and international momentum to take decisive steps towards a more peaceful future.”

And Joyce Msuya, assistant secretary-general for humanitarian affairs and deputy emergency relief coordinator, told Security Council delegates that the two-million drop in the number of hungry people in Yemen marks another major improvement for the country. That said, humanitarian agencies still lack sufficient resources, while access and security remain major challenges, funding is in short supply, and economic problems are pushing even more people into destitution. “Economic decline is among the top drivers of humanitarian needs, and aid agencies want to do much more to help Yemenis move beyond the immediate crisis,” Msuya said. “One priority is to clean up the awful landmines and other explosives that are killing and maiming so many, as well as choking off economic life. Beyond mine action, the UN is working with donors and partners on a revised economic framework that will help address broader economic drivers of humanitarian needs in Yemen. This year offers an important opportunity to make progress on these economic drivers while we still have the benefit of a massive aid operation in the country.”

Indeed, the significant expansion of international support remains fundamental to brightening Yemen’s economic outlook, Msuya stressed, particularly via donor investment and policy measures to promote economic growth. “The Government of Yemen and the Coalition are already taking steps in this regard, including more support for the Central Bank in Aden and easing regulations on imports bound for Red Sea ports,” she added. “However, the loss of Government revenue following Houthi attacks on oil export infrastructure last October remains a serious challenge—particularly for efforts to pay salaries and fund basic services.”

Saudi Arabia has also recently signed an agreement to deposit $1 billion in Yemen’s Aden-based central bank, according to the state-run Saudi Press Agency (SPA), which it reported on February 21 as being reflective of the Kingdom’s firm commitment to the government and people of Yemen by supporting the Yemeni government in carrying out its duties to restore security and stability in the country.

And to solve Yemen’s hunger crisis, the FAO recommends the provision of time-critical production inputs and the means to repair agricultural infrastructure for farming, fishing and herding families to restore food production in the short and long terms. “For example, cash for work provides lifesaving cash transfers to households during the lean season (USD 120 per month for a minimum of three months), while repairing irrigation infrastructure that increases a family’s farmable land by 0.74 ha,” the UN’s key food security organisation added, whilst noting that such programmes “address immediate needs, improve food availability within communities and build their resilience against future shocks”.


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