Weaponising Yemen's economy

With the military conflict in Yemen at an impasse, a battle has now broken out between the two rival governments for control of the country's Central Bank. The squabble threatens to exacerbate an already dire economic situation because the bank is the source of wages for state employees and also provides credit guarantees for imports – including food.

The Central Bank is one of the few national institutions that has continued functioning throughout the war, paying state employees (including the military) regardless of which side they are on.

The bank is located in the capital, Sanaa, which is under the control of the Houthis and supporters of ex-president Ali Abdullah Saleh. Although the bank's governor, Mohammed Awad bin Humam, seems to have been trying to steer a middle course, the Houthi/Saleh side has benefited disproportionately according to Reuters – partly because they control most of the population centres and have most of the army on their side, but also because the Houthis transferred thousands of their militiamen to the state payroll after seizing the capital.

The rival government headed by Abd Rabbu Mansour Hadi has accused the Houthis of squandering the bank's reserves on their war effort and, earlier this month, it asked international financial institutions to freeze Central Bank assets held in banks outside Yemen. A pro-Hadi official was quoted as saying:

"Out of concern for the funds and belongings of the Yemeni people, and in order to preserve the remaining public funds, ... the Yemeni government has decided to take this step, which includes suspending dealing with Central Bank Governor Mohammed Awad bin Humam."

The Saudi-backed Hadi government is now also retaining state revenues from the areas it controls rather than transferring them to the Central Bank. In an article for Al-Monitor on August 17, Ashraf al-Falahi wrote:

The [Hadi] government controls key petroleum sectors in the governorates of Hadramaut in the east, Shabwah in the southeast and Marib in the northeast. It also receives revenue from customs ports and taxes collected from the areas it still controls. Moreover, it controls the ports of Aden and Mukalla and land crossings such as Wadiah in Hadramaut, which connects Yemen to Saudi Arabia.

Riadh al-Gheeli, a professor at the Arab Academy for Banking and Financial Sciences, said financial revenues from the provinces that the government controls make up more than 80% of the treasury's monetary resources.

"The legitimate government is now controlling all sources of oil and gas in the country, as well as all the main ports except for Al-Hudaydah. Therefore, it can plug the budget gap and finance the war to free the governorates still controlled by the Houthis," Gheeli said in an exclusive interview with Al-Monitor.

The article noted that the Houthis also have some financial resources from the areas they control, "such as customs revenues from al-Hudaydah [the Red Sea port], treasury bonds from the Central Bank in Sanaa and the money they are said to have withdrawn from depositors' accounts in local banks".

Meanwhile, the Hadi government has been seeking to transfer Central Bank operations from Sanaa to the southern city of Aden where they would be beyond the Houthis' control. However, both the International Monetary Fund and the International Bank have rejected this, saying their rules do not allow them to recognise a "central bank" which is not in the political capital of a country.

If the Hadi government continues on this course and the Central Bank ceases to be a national institution the practical effect will be to push Yemen further towards a north-south partition – something which the Hadi government and its Saudi backers have previously opposed.

With the recent collapse of peace talks, and in the absence of progress of the military front, the Hadi government's machinations over the Central Bank look very much like an attempt to force the Houthis into submission by starving them of funds. But "weaponising" the economy in this way can only add to the hardship faced by millions of Yemeni civilians.