The International Monetary Fund (IMF) has warned of negative effects on Yemen due to escalation in the Red Sea, also affirming that the halt in oil exports since the Houthi attack on oil facilities in October 2022 have deprived the government of half of its revenues.

The Fund said growth in Yemen is estimated to have contracted by 2 percent in 2023 while inflation remained high, despite declining global food prices.

The findings were released after an IMF team held this week its annual consultative meetings with the Yemeni government in the Jordanian capital, Amman.
At the meetings, the government was represented by Central Bank Governor Ahmed Ghaleb and Finance Minister Salem bin Buraik, while the IMF team was led by Joyce Wong.

Discussions covered recent economic developments in Yemen, the economic outlook, and progress on key policy reforms.

At the end of the mission, Wong said the loss of oil exports, which represented more than half of the government’s revenues (4 percent of GDP), is estimated to have widened the fiscal deficit to 4.5 percent of GDP in 2023, adding to pressures on reserves and the exchange rate.

Challenging Humanitarian Situation

Also, the IMF mission said the humanitarian situation in Yemen remains difficult with 17 million people facing food insecurity. Disbursements of the GCC support package and stable remittances have been mitigating factors, it noted.

“An escalation of the Red Sea tensions could adversely affect economic activity through trade and financial channels, and lower external support including humanitarian assistance,” the Missions’ statement said.

Despite the challenging situation, the IMF said the authorities remain steadfastly committed to reforms, including further aligning multiple exchange rates for government transactions and refining the FX auction system.

“Cash management has been strengthened with better expenditure control and prioritization. These measures have contributed to limiting the budget deficit, recourse to monetary financing, and associated inflationary pressures,” it added.

Acceleration of Fiscal Reforms

Also, the IMF mission found that “amid high uncertainty, the mission urged the further acceleration of fiscal reforms, including improving revenue administration while enhancing expenditure reprioritization and control.”

It said ensuring consistency and predictability in FX auctions will help the central bank preserve hard-won credibility amidst constrained FX resources. Strengthening central bank governance while improving data collection will enhance transparency and accountability, it added.

The mission also stressed the importance of continuing to preserve stability in the financial sector and further strengthen compliance in line with international frameworks, including AML/CFT, and national standards. It said this will further facilitate trade and remittances, which are key lifelines for the Yemeni population.

Meanwhile, external financial support remains critical to help ease fiscal pressures, limit monetary financing, and preserve price stability, the mission affirmed.

“To this end, active engagement with donors to address outstanding needs, together with improving the availability and consistency of financing will be crucial,” it said.

And while the IMF pledged to continue to provide comprehensive technical assistance to Yemen to further enhance institutional capacities, it said it held discussions with partners and key stakeholders to enhance synergies and improve coordination of external assistance.

The mission team then expressed deep appreciation to the Yemeni authorities, technical staff, and all counterparts for their excellent cooperation and candid discussions and looks forward to continued close engagement.