Saudi Arabia is considering stopping financial support to Yemen, a move that could tip the country further towards economic collapse, Yemeni, Saudi and Western officials have said.

Since rebels from the Houthi movement took hold of the capital Sana’a in September, Saudi Arabia, which has provided an estimated US$4 billion to keep the Yemeni economy afloat since early 2012, has been reviewing its economic support for its southern neighbor. Among the key disbursements put on hold is $700 million in military aid.

The deliberation comes at a time when fears of an impending economic collapse have risen, with UN envoy to Yemen Jamal Benomar warning it was unclear “whether [Yemen] would be able to continue to pay its civil servants after the end of the year”.

The ghost of 2011

Yemen’s economy, already fragile before the country’s 2011 uprising, was decimated by the unrest and elite infighting of that year. The transitional administration of President Abd Rabbu Mansour Hadi has struggled to restore growth or provide basic services, and the poverty rate has remained stubbornly above 50 percent since early 2012.

The only reason the government has been able to stay afloat since 2012, officials and analysts say, is the largesse of Saudi Arabia, Yemen’s northern neighbor. While the donations have never been made official, in 2012 Riyadh is believed to have deposited $1 billion at the Central Bank of Yemen and given the country a further $2 billion in oil and fuel products to help shore up its finances. In July 2014, Riyadh again bailed Sana’a out, providing $1.2 billion in cash to help pay for fuel and another $435 million to help the government make welfare payments.

Part of the issue has been the failure to trim fuel subsidies. Yemen heavily subsidizes fuel in the local market, costing the government more than $3.3 billion – about a quarter of all spending – in 2013.

In August, the government cut subsidies, leading to a price increase of up to 95 percent for fuel at the pump. It partly reversed the decision less than two months later, decreasing fuel prices by 25 percent after the takeover of Sana’a by rebels from the northern Houthi movement, a Shia group with whom the Saudis have fought in the past.

Since the Houthi takeover no new Saudi funds have been disbursed, including $700m in military aid agreed as part of the bailout package in July. A number of diplomatic and government sources told IRIN that although there is unlikely to be a formal announcement that funding is being frozen, Riyadh will at the very least take a “go-slow” approach to transferring further funds to Sana’a until it is clear that the money will not financially benefit the Houthis.

“In conversation with [Yemeni] officials, they have been saying that they are not going to bring money to Yemen just to reinforce the Houthis,” said a senior Yemeni official, part of whose responsibilities is to report on government spending and finances. “And whatever Saudi Arabia does, you know the other GCC [Gulf Cooperation Council] countries will do.”

Two other Yemeni government and Western diplomatic officials confirmed that the $700 million had been expected but had not as yet been delivered.

This has exacerbated other trends towards financial collapse. Attacks on an important oil pipeline and electricity infrastructure in restive Mareb Province have cut off revenues and forced the government to import expensive fuel from abroad.

Thus the government is running short on dollars. Foreign currency reserves fell from $4.4 billion to $3.8 billion between September 2013 and September 2014, pushing the country towards a currency crisis. With the remaining reserves the bank can only afford to cover 4.8 months of imports, a record low.

Estimates of when the government would run out of money vary from the end of 2014 until early March 2015, but government officials and advisers make it clear that fiscal collapse is imminent. “If there is no intervention, it is not a question of if, it is a question of when,” said the Yemeni official.

In line with other GCC officials, a senior Saudi diplomat said no formal decision had been made to halt aid or funding to Sana’a, but added that Riyadh is reviewing the situation in Yemen. “We will see how the new government [formed in early November] does,” he said. “If they can act independently [of the Houthis], then maybe we can work with them.”

Saudi officials are also said to be frustrated that the $435 million they gave Sana’a in July has not been distributed to the Social Welfare Fund (SWF), the state body tasked with overseeing welfare payments to 1.5 million of Yemen’s poorest people. According to people familiar with talks that took place earlier in the year, the funds had been touted as the first in a series of payments to be used to underwrite the Fund’s costs.

A source at SWF told IRIN the government did not disburse the funds needed to make the first quarterly payment of 2014 – which had been due in January – until August. The second tranche followed in September, but SWF is yet to receive payments for the third or fourth quarters, both of which should have been made by this point in the year. “In the past, we paid at fixed times,” the source said. “Now we don’t know if or when we will be able to pay.”

Humanitarian crisis

The economic crisis is having an impact on the humanitarian suffering and any further collapse could be disastrous. More than 15.9 million people – 60 percent of the population – require some form of humanitarian assistance.

“Yemen remains one of the major humanitarian crises in the world and the outlook for 2015 shows that the humanitarian crisis in the country has gotten worse,” said Johannes van der Klaauw, Yemen Humanitarian Coordinator for the UN Office for the Coordination of Humanitarian Affairs (OCHA).

“A large number of poor people in Yemen rely on welfare payments. Late [payments] make it difficult for them to meet their obligations including basic expenditure like buying food for their families… There are expenditures that a human being cannot postpone like buying food or medicine for a sick child.”

“Yemen is experiencing new waves of increased conflict, while the risk of an economic meltdown cannot be ruled out,” he added.

Hanalia Ferhan, country director at international NGO ACTED, said there would be a significant impact if the government were unable to pay salaries. “The financial and economic situation has affected the country across the board,” she said, highlighting the high prices of food imports and severe fuel shortages as key concerns for poor Yemenis.

“The communities we work with are in the most rural, hard-to-reach parts of the country. They were already in a dire situation a year ago… and the situation has not improved.”

Abdulfatteh, a 47-year-old bus driver who would only give his first name, pointed to a mounting queue of trucks and cars at a petrol station on the outskirts of Sana’a’s Old City. “It’s very bad now,” he said. “No electricity, no [petrol], no diesel… There is no work and there is no security. I think it will only get worse.”

IRIN