Amid the ongoing state of “no-war, no-peace” that has persisted for the past two years, Yemen faces a new challenge that threatens to further unsettle its fragile stability. The country’s banking sector is experiencing turmoil following a series of controversial decisions made by the breakaway Central Bank in Aden, signaling potentially catastrophic consequences for an economy already devastated by war and territorial division.
After nearly a decade of fighting that has fragmented the nation, the “internationally recognized” government in Aden administers about a third of the population across approximately two-thirds of the territory. The capital, Sana’a, remains under the control of the “de facto government” led by the Ansar Allah movement, or the Houthis, which rules over the inverse: two-thirds of the population across one-third of the territory. Yet across all of Yemen, the war has triggered a severe economic crisis, marked by a 50 percent contraction in GDP, a significant decline in oil and gas export revenues, and an unemployment rate that has soared to nearly 60 percent, particularly among the youth. Reports from the United Nations reveal that about 70 percent of the population is at risk of poverty and requires humanitarian aid.
Gradual Monetary Division
The economic crisis has been accompanied by a gradual deepening of the monetary and banking division between the areas under Aden’s authority and those under Sana’a’s. This division began when the Central Bank administration moved from Sana’a to Aden in late 2016 and printed a large amount of money estimated at around 2.5 trillion Yemeni riyals, adopting reckless policies to finance the Aden-based authority’s expenses. All of this contributed to the deterioration of the riyal’s purchasing power. By the end of 2019, the exchange rate of the Yemeni riyal against the U.S. dollar reached three times its pre-war value, which at the end of 2014 was 215 riyals to the dollar. Despite this, the exchange rate of the riyal remained unified between the regions of Sana’a and Aden until 2020, when the Central Bank in Sana’a decided to ban the circulation of new currency printed by the Central Bank in Aden. This created two different exchange rate systems for the riyal and significantly deepened the monetary division. The exchange rate remained nearly stable in Sana’a’s regions—530 riyals to the dollar—while it escalated in Aden’s regions, reaching 330 percent of the Sana’a rate.
The divisions in Yemen’s banking sector worsened further following the issuance of a law by the Sana’a authorities prohibiting usurious transactions in the areas under their control in March 2023. This law paralyzed the operations of commercial and Islamic banks, as well as microfinance institutions, undermining the confidence of depositors and borrowers in the banking system. Several banks were pushed to the brink of bankruptcy. Matters became more complicated when the Central Bank in Sana’a issued a new 100-riyal coin in March 2024 without consulting or coordinating with the Central Bank in Aden. This move elicited a strong reaction from the Central Bank in Aden, which subsequently issued new decisions reaffirming its legal authority over monetary policy management and banking supervision throughout Yemen.
Directions for Reforming the Monetary and Banking Sector
In response, the Central Bank administration in Aden took a series of decisions last June aimed at unifying the currency and exchange rate, standardizing bank operations, and regulating their relationships with depositors and investors in accordance with existing laws regarding the Central Bank, commercial banks, Islamic banks, microfinance banks, and savings funds. Among the most prominent of these decisions was the cancellation of the pre-2016 currency that remains in use in areas under the Sana’a authority, and the readiness of the bank to exchange that currency for its equivalent in the new currency.
The Central Bank in Aden is hoping that by canceling the legal and purchasing value of the currency circulating in Sana’a-controlled areas, individuals, companies, and money exchangers might be driven to get rid of the old currency and replace it with the new one. Consequently, this will lead to the issuance of a single exchange rate for the new currency, reducing inflation and achieving monetary stability. However, this plan still faces multiple challenges due to the political division between the governments in Aden and Sana’a, with Central Banks only able to exercise authority regarding the old currency in their respective region. Although most of the old currency is damaged and non-circulable, it still constitutes a significant monetary mass and will continue to facilitate transactions, convert to other currencies, and perform recognized functions backed by strong support from the Central Bank in Sana’a.
Essentially, the competing central banks in Yemen have entered a war of their own. But the Central Bank in Aden has a leg up. It controls international financial transfer systems, such as SWIFT and IBAN, and has used this power to compel Yemeni banks to move their headquarters to the temporary capital in Aden. Non-cooperating banks can be prevented from accessing these crucial systems, which would isolate them from global finance and make it difficult to conduct operations.
This decision is not without challenges. Most prominently, can it ensure banks access to their accumulated balances at the Central Bank in exchange for their investments in treasury bills, amounting to approximately 1.7 trillion riyals? This is necessary to provide banks with the appropriate liquidity to perform their financial intermediation functions. That includes meeting their obligations to savers with deposits totaling about 2.5 trillion riyals, and addressing the non-performing loans owed by the government and the private sector to the banks, which amount to around 2.2 trillion riyals.
Combating Money Laundering and Terrorism Financing
The Central Bank in Aden has based its decisions to regulate banking operations on the provisions of the U.S. Anti-Money Laundering and Terrorism Financing Law, which requires financial institutions to take steps to prevent these acts. The Central Bank aims, through these decisions, to ensure the flow of financial information about the movement of foreign transfers to and from Yemen, enabling it to fulfill Yemen’s obligations by complying with the rules and procedures of international agreements related to combating money laundering and terrorism financing. To reinforce this direction, the bank issued a decision regarding the regulation of international remittance activities through international money transfer companies.
The government in Aden, including the central bank, has faced strong pressure to act since the Biden administration re-designated Ansar Allah a terrorist group on its State Department list. The situation became even more pressing after Ansar Allah began preventing maritime trade heading to Israel through the Red Sea and the Gulf of Aden, in support of the people of Gaza.
A report by the International Monetary Fund and World Bank mission, following the recent annual consultations with the leaders of the central bank and the ministry of finance in Aden, emphasized the importance of the central bank continuing to maintain financial sector stability, enhance governance, and improve data collection processes to enhance transparency and accountability. The report also stressed the need to enhance compliance with international standards, including anti-money laundering and terrorism financing standards, and local legislation, which will facilitate trade and international remittances.
Unilateral actions, however, will not capably address Yemen’s economic problems. Only by opening channels of communication and dialogue between the two central banks on their mutual responsibilities can a measure of economic stability return, even if political divisions remain.
A good start would include simultaneous decisions to lift the ban on the use of either the old or new currency in their respective areas. Furthermore, the Sana’a authority should freeze the enforcement of the law prohibiting usurious transactions, which has had disastrous effects on the banking sector in Sana’a-controlled areas. Third, banks must be required to relocate their departments of compliance, systems, and international remittances to their branches in Aden, allowing the Central Bank in Aden to effectively exercise banking supervision, especially concerning anti-money laundering and terrorism financing.
Ultimately, these decisions should pave the way for reaching mutual agreements on unifying the Central Bank institution to enable it to perform its assigned tasks. This depends on the level of trust-building between the conflicting parties and the willingness to consider the current truce as a “transitional phase,” after which a serious dialogue can take place to move towards unifying the country and achieving peace and stability.
