Fresh banknotes spark new economic war in Yemen

The UN-recognized Yemeni government has pumped new banknotes into the country, but the Houthis are banning their circulation in areas under their control, burdening Yemenis and exacerbating problems for the already struggling economy.

al-monitor A money changer holds bundles of Yemeni currency at an exchange shop, Sanaa, June 8, 2016. Photo by REUTERS/Khaled Abdullah.

Jan 13, 2020

Sanaa resident Abdullah Salami had been trying to buy food with the money in his pocket but without much luck. With no shop willing to accept the banknotes, Salami returned to his family's home empty-handed.

In November 2019, freshly printed banknotes arrived in Aden, headquarters of the UN-recognized government of Yemeni President Abed Rabbo Mansour Hadi. From there they were pumped onto the market to gradually begin the process of replacing older notes nationwide. While it is not a problem to use the new notes in government-controlled areas, on Dec. 19, the Sanaa-based Houthi government banned their use and exchange in areas under its control.

This new economic fraying between the Houthis and the government constitutes yet another burden on weary civilians, particularly in Yemen’s north, and exacerbation of their economic plight.

“A couple of days back, I went to the shop to buy some food commodities” Salami told Al-Monitor. “I selected the items and came to the attendant to make the payment, but he said, ‘Sorry, return the items. I cannot accept these new notes,’” Salami told Al-Monitor.

In September 2016, the Yemeni government had decreed the transfer of the Central Bank from Sanaa to Aden. In the wake of the move, the government approved the printing of new banknotes, which have since begun circulating across the country.

The new banknotes were given a new look and colors different from the previous ones to easily distinguish them. People coming into possession of the new notes, however, are finding no way to use them. A restaurant owner in Sanaa who requested anonymity said business owners cannot accept the new notes, for fear of a Houthi crackdown.

“After the Houthi announcement that the new banknotes are illegal, I could not take any more although I know the new notes are not fake, and it is not wrong to accept them,” said the restaurant owner. “If the Houthis know I accept the new notes, it is a risk, and I would not be spared their punishment.”

The Houthi authorities in Sanaa have adopted draconian measures to stop the circulation of the newly printed currency, calling on civilians to turn in the notes they have and be compensated for them. Officials at the Houthi-controlled Central Bank in Sanaa argue that the ban on dealing in the new notes is to benefit the economy and the people.

On Dec. 29, Sami al-Sayaghi, director of the treasury and an acting official for foreign banking operations at the Sanaa-based Central Bank, said in a statement to 26 September News, “What we have done is intended to protect the national economy and capital as well as the purchasing power of citizens. If we accept the illegal currency, we will reach a stage at which income is of no value in line with the devaluation of the national currency against the foreign currency and price hikes.”

Sayaghi said a month-long grace period had been granted for individuals holding the new notes to swap them for older ones through specified banking institutions in Sanaa. Meanwhile, the government in Aden has slammed the Houthi ban, charging that it is worsening living conditions.

Information Minister Moammar al-Eryani tweeted on Dec. 30 that the banknote ban had deprived 40,000 retirees of receiving their pensions in Houthi-dominated areas. “Houthis ban on circulation of currency & cash [withdrawal] from public to buy & speculate on dollar in black market, is evidence of impoverishment & starvation policy against citizens,” Eryani wrote. According to him, the Houthis' actions will exacerbate the humanitarian crisis the country is confronting and in the process also destroy the currency and national economy.

On Jan. 1, a government official said letters had been sent to the World Bank and the International Monetary Fund urging them to pressure the Houthis to rescind their prohibition on the new notes.

Over the last five years of war, Yemen has fragmented on various levels. Political divides have been conspicuous, and the social fabric has largely eroded. The country is run by two governments—the Houthis' in the north and Hadi's in the south. The economic fight over the currency serves to further complicate Yemen’s quagmire.

While the competing governments continue flexing their muscles to showcase their leverage in the country, the currency fight will produce serious economic repercussions and further suffering by civilians.

Jameel Abdulnasser, who works at a currency exchange in Sanaa, told Al-Monitor that a lot of customers are unhappy about the Houthis' action.

“Banning these notes will create a currency black market,” he said. “The exchange service providers will take the new notes and give out the old notes in return for a discount. For example, if you have 10,000 Yemeni rials in the new notes, you will be given 9,000 Yemeni rials in the old notes.”

According to Abdulnasser, another consequence of the ban is the extra charges on money transfers from government-controlled areas to Houthi-controlled areas. “The exchange companies will not incur losses” he said. “Only civilians will be the victims. They will pay higher fees to get their funds sent from one province to another.”

Abdulwahid al-Awbali, an economic analyst, told Al-Monitor that banning the new banknotes will negatively impact the economy and lead to currency speculation and a cash crunch, neither of which is desirable.

“Almost 80% of the old notes are in bad condition, and they need to be replaced gradually,” said Awbali. “Before the war, the old damaged banknotes that reached the Central Bank of Yemen would not be injected into the market again. Instead, new notes used to be pumped into the market.”

With residents in Houthi-controlled areas forced to continue to use the old notes, while banks have to follow the orders of the Sanaa government, people feel like they are living in two different countries at the same time.

“If I want to spend my new banknotes, I have to go to the south or any government-controlled city,” said Salami, the Sanaa resident. “This will make our living conditions harder.”

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