Yemen Policy Note 3: Private Sector Readiness to Contribute to Reconstruction & Recovery in Yemen WOLD BANK GROUP 1 B Table of Contents Acronyms 1 Acknowledgements 3 EXECUTIVE SUMMARY 4 INTRODUCTION 5 IMPACT OF THE CONFLICT ON THE PRIVATE SECTOR 6 Physical Damage 6 Impact on the Labor Market 7 Impact on Access to Input Materials and Markets 9 Impact on Access to Finance 10 SECTORAL ANALYSIS AND POLICY RECOMMENDATIONS 10 TRADE SECTOR 10 Institutional Constraints 11 Impact on Trade Flows 12 Trade Infrastructure 13 Road Network and Land Ports 16 Trade Costs and Trade Logistics 17 Trade Financing 18 Sector Recommendations 18 FINANCIAL SECTOR 19 Constraints in the Sector 21 Depletion of Foreign Exchange Reserves 21 Weak Banking Sector Solvency 21 Severe Restrictions in Correspondent Banking Relationships with Yemeni Banks 22 Weak Intermediation Capacity 23 Sector Recommendations 23 i CONSTRUCTION SECTOR 25 Constraints in the Sector 26 Financial institutions and the role of the CBY 28 Sector Recommendations 28 KEY RECOMMENDATIONS FOR ACCELERATING 29 The Role of the Private Sector in Socio-economic Resilience and Recovery 29 Recommendations for the short to medium term (3 to 24 months) 29 REFERENCES 35 List of Tables Table 1: Composition of and impact on employment by sector 8 Table 2: Impact of the Conflict on Yemen’s Critical Commercial Exports 12 Table 3: Impact of the Conflict on Yemen’s Critical Commercial Imports 13 Table 4: Current Status of Yemen Ports 14 Table 5: Assets, Deposits and Equity of Banks in Yemen (2014) 20 Table 6: Financial soundness indicators 22 Table 7: Imports of construction & building materials 27 Table 8: Wartime status of Yemen’s main cement plants 27 List of Figures Figure 1: Incidence of physical damage to businesses 7 Figure 2: Workers laid off by area 9 Figure 3: Logistics Performance Index for Yemen over time 12 Figure 4: Average delays in entering ports in Yemen, October 2016 14 Figure 5: Yemen road access map, December 2nd 2016 16 ANNEX 1: Overview on Damages to Commercial Road Network and Wartime Alternatives 34 ii iii Acronyms AFPPF Agriculture and Fisheries Program Promotion Fund AML/CFT Anti-Money Laundry/ Combating the Financing of Terrorism CAFEF Conflict-Affected and Fragile Economic Facility CBRs Correspondent Banking Relationships CBY Central Bank of Yemen CDD Customer Due Diligence DNA Yemen Damage Needs Assessment EBRD European Bank for Reconstruction and Development EIB European Investment Bank FAO Food and Agriculture Organization FEU Flight Equivalent Unit FSRA Financial Sector Restructuring Agency FX Forex GCC Gulf Cooperation Council GDP Gross Domestic Product GoY Government of Yemen IDPs Internally Displaced Persons IFC International Finance Corporation ILO International Labor Organization IMF International Monetary Fund IPC Integrated Food Security Phase Classification IsDB Islamic Development Bank ITC International Trade Centre LD Liquidated Damages LPI Logistics Performance Index MEGA Multilateral Investment Guarantee Agency MENA Middle East and North Africa MERAP Middle East Reconstruction Advance Purchase MFIs Microfinance Institutions ML/FT Money Laundry/Financing of Terrorism MOPIC Ministry of Planning and International Cooperation MSMEs Micro, Small and Medium Enterprises MT Metric Tone NGOs Non-Government Organizations NPLs Non-Performing Loans PEPs Politically Exposed Persons 1 SFD Social Fund for Development SMEPS Small & Micro Enterprise Promotion Services SMEs Small & Micro Enterprises TEU Twenty-Foot Equivalent Unit  UAE United Arab Emirates UN United Nations UNDP United Nations Development Program UNOCHA UN Office for the Coordination of Humanitarian Affairs UNVIM United Nations Verification and Inspection Mechanism USD United States Dollar WB World Bank WFP World Food Program WITS World Integrated Trade Solution YER Yemeni Riyal 2 Acknowledgements The following World Bank Group Staff contributed to preparation of the Private Sector Policy Note for the Republic of Yemen: Nabila Assaf (Senior Private Sector Specialist, IBRD), Laurent Gonnet (Lead Financial Sector Specialist, IBRD), Saad Sabrah (Senior Country Officer, IFC), Abdulhakim Al-Aghbari (Sr Highway Engineer, IBRD), Bartol Letica (Senior Financial Sector Specialist, IBRD), Clayton Kerswell (Senior Private Sector Specialist , IBRD), Faiza Ahmed (Agricultural Specialist, IBRD), Garry Charlier (Lead Agriculture Specialist, IBRD), Jean Brun (Senior Financial Sector Specialist, IBRD), Kinley Salmon (Young Professional, IBRD), Nadia Piffaretti (Senior Economist, IBRD), Najy Benhassine (Practice Manager, IBRD) Rufiz Chirag-Zade (Senior Agribusiness Spe- cialist, IBRD), Sami Sofan (Analyst, IBRD), Suhair Al-Zubairi (Program Assistant, IBRD), Wilfried Engelke (Senior Economist, IBRD). 3 EXECUTIVE SUMMARY 1. Since 2011, Yemen has suffered a se- exchange. A major food crisis is, in part, ries of crises resulting in the ongoing the result. war which began in March 2015 and which has had major economic con- 3. The Yemeni financial sector faces sequences. In the 21 months, since the problems of liquidity, solvency and for- conflict began, GDP has contracted by a eign exchange access. The CBY has lost record of 38 %, accumulatively. Inflation almost all of its foreign exchange reserves was 40 % in 2015. Though the private despite assistance from the IMF. The sol- sector has been badly affected, it will be vency of the banking system is also in ques- crucial to recovery. tion with NPLs increasing and over expo- A SMEPS survey, conducted in 2015, sure to large related party transactions. found that after six months of war 74 % Microfinance institutions are also under of the firms surveyed reported physical pressure as borrowers are struggling to damage. Labor markets have been signifi- repay. Correspondent Banking Relation- cantly affected with employment declining ships have also reduced, making it difficult by 13 % in Sana’a City, Al-Hodeida, and to access international banking services. Aden whilst participation in the labor mar- ket has declined sharply. Input markets 4. The construction sector is histori- have also been hit with supplies unable cally an important sector in Yemen and to move around the country due to con- should play a major role in recovery. flict and damage to both roads and market However, the sector has suffered from places. contract suspension and cancellation dur- ing the crisis while qualified workers have 2. Trade has been badly affected by the left the market. Construction material costs war. Total imports are estimated to have have spiked during the war whilst imported dropped 54% between 2014 and 2015 with inputs are severely limited. In some areas, total exports dropping 51% in the same however, reconstruction has already be- period. There is significant damage to four gun with construction employment already of Yemen’s seven major ports whilst three increasing in Aden. of them are not currently under Govern- ment of Yemen’s control. The United Na- 5. The Government of Yemen and do- tions conducts inspections on shipments nors should take immediate steps to to non-Government ports, which slows the support the private sector. Priority ac- import process whilst shipping premiums tions include supporting the construction have skyrocketed. Trade financing has be- sector to help retain manufacturing and come a major problem with Western banks reconstruction capacity through financial cutting credit lines to traders shipping food and technical support and restarting trade into Yemen and letters of credit have be- financing by supporting CBY and, if need come very difficult to obtain. The Central be, an emergency facility. Supporting Bank of Yemen (CBY) is no longer able MSMEs through recovery grants should to guarantee trade facilities due to its split also be a short-term priority. Further, lon- along conflict lines and its lack of foreign ger term reconnecting the Yemeni banking 4 sector to the rest of the world and provid- 7. Effective reconstruction and recov- ing investment guarantees to help mobi- ery demands an understanding of the lize private sector capital are required. socio-economic drivers of resilience and recovery in Yemen, including the private sector. The private sector, includ- I. INTRODUCTION ing micro, small, and medium enterprises 6. The year 2011 represented a series of (MSMEs) that are prevalent in Yemen, is political, social, and economic crises, a major source of employment and pro- culminating in the war that started in vider of basic goods and services, mak- March 2015, which continue to rever- ing it an important part of socio-economic berate throughout Yemen today. The resilience and recovery. The capacity of ongoing war has all but halted Yemen’s trade, financial, construction, and agricul- exports, severely limited food and fuel im- tural sectors will be of particular impor- ports, pressured the currency’s exchange tance for recovery and reconstruction. The rate, accelerated inflation, and caused success of any reconstruction and recov- widespread damage to vital economic ery plan will depend on the ability of the infrastructure such as refineries, airports post-conflict government to enable the re- and seaports. By the beginning of 2017, covery of these sectors; it will also require 21 months after the start of the conflict, the commitment of the donor community in Yemen’s gross domestic product (GDP) providing direct support to the private sec- had contracted by a record 38 %, accu- tor to ensure its readiness and ability to mulatively. The inflation rate reached 40 % contribute to reconstruction post conflict. in 2015, and it is estimated to have risen It is therefore of utmost importance to un- further in 2016.1 Public revenues declined derstand the drivers of private enterprises’ by about 50 % in 2015 compared to 2014, behavior, their incentives, the legacies of and by another reportedly 20 % in 2016, conflict, and the constraints and environ- compared to 2015, leaving many expendi- ment under which they operate. ture commitments unmet, including sala- ries. Oil was the biggest driver of this de- 8. This note will discuss both conflict- cline - oil revenues dropped by 77 % while related and key systemic constraints non-oil revenues decreased by 34 %. The on the private sector and priorities for oil and gas industries are not functioning supporting resilience and recovery. due to widespread conflict and damage to It will focus on the private enterprise in critical infrastructure. Major damage has sectors that are key to resilience and re- occurred to oil and gas refining installa- covery: trade, construction, finance, and tions and related export facilities in Aden agriculture. It will present immediate and and the bombed installations of Ra’s Eisa short-term investment and policy recom- of Hodeida. Foreign oil companies have mendations to support the recovery and suspended operations in Yemen. Conse- stabilization needs of private sector opera- quently, the living conditions of the popula- tions during and following the end of the tion have deteriorated markedly, with UN conflict. agencies reporting that at least 19 million out of 28 million Yemenis are in need of humanitarian assistance. 1 MOPIC estimates. 5 II. IMPACT OF THE CONFLICT a number of channels, including direct physical damage, disruption of the labor ON THE PRIVATE SECTOR market, and disruption in access to inputs 9. The current conflict devastated an and markets due to insecurity and disrup- already weak private sector suffering tions in trade and finance operations. The from a number of structural and inter- impact on the crisis also differs by type of related constraints. Prior to the conflict, enterprise. Where possible, this section political instability and insecurity, electric- will aim to distinguish between producers ity shortages, and corruption were consis- and traders. The section will also cover tently cited by private sector firms as top the impact on the private agricultural sec- constraints to business.2 Compared to oth- tor, which is predominantly represented by er MENA economies, Yemen also had the small farmers and traders, to the extent highest share of credit-constrained firms, that information is available. with only one percent of financing being sourced from banks; rather, firms rely on Physical Damage other sources including networks, family, 11. 11. The total damage to private sec- and retained earnings. Yemeni non-oil ex- tor infrastructure is unknown but there ports were limited due to a shallow private are reports of damage and destruction exporting sector – the most recent data to thousands of commercial and man- records an average of only 512 exporting ufacturing establishments, including firms between 2006 and 2009. small businesses, factories, food ware- houses, markets, and gas stations. Ac- 10. The direct impact of the current cording to the findings of SMEPS’ 2015 conflict, internal fighting, and severe survey of the impact of the conflict, in the restrictions on trade by air and sea fur- first six months of the war, 74 % of the en- ther exacerbated the situation and ad- terprises surveyed reported physical dam- versely affected almost every part of age, with reported damage varying widely the economy. The conflict has made busi- by city (see Figure 1). Of businesses that ness transactions more costly and favored closed, 95 % reported physical damage, short-term considerations of actors at the of which 77 % reported complete damage expense of longer-term business develop- and 15.4 % partial damage. A 2016 report ment and investment objectives. Rationed by Human Rights Watch, reported dam- or increasingly failing input markets (en- aged or destroyed businesses, including ergy, labor, intermediate goods, and ser- those that produced, stored, or distributed vices) and deteriorating financial as well goods and services for the civilians such as export markets resulted in additional as food, medicine, and electricity. These production costs. As a result, according to goods and services were in short supply SMEPS ‘Rapid Business Survey’ of 2015, even before the conflict began. The Hu- over a quarter of all businesses closed, man Rights Watch report documented the including 35 % of the service sector, 29 impact of the coalition airstrikes on 13 ci- % of the industrial enterprises, and 20 % vilian economic structures, including fac- of the trading companies. The impact on tories, commercial warehouses, a farm, the private sector can be traced through and two power stations. Collectively, the 13 facilities employed over 2,500 people; 2 What’s holding back the Private Sector in MENA? Lessons from the Enterprise Survey”, EBRD, EIB, and the World Bank, following the attacks, many of the facto- 2016. ries ended their production and hundreds 6 of workers lost their livelihoods. Another struction had severe impact on the private report by the Sana’a Chamber of Com- sector activities and resulted in contrac- merce and Industry documented the dam- tion of both sectors. As a result, the physi- age or destruction of at least 196 business cal obstacles at seaports, airports and establishments. The Sana’a Chamber of warehouses disrupted trade flows, and Commerce building was itself destroyed. damaged roads and power supply lines However, there are still no comprehen- caused production constraints as well as sive, up-to-date assessments or estimates disruption of business activities. Sana’a Chamber of Commerce. Coca-Cola factory in Sana’a on December 12, 2015. © 2015 http://www.almotamar. net/news/127572.htm Mersad News Agency Figure 1: Incidence of physical damage to businesses Source: SMEPS, 2015, Rapid Business Survey, Impact of the Yemen Crisis on Private Sector Activity for the total cost of damage inflicted on the Impact on the Labor Market private sector during the war. 13. The labor market is in turmoil with the conflict having an impact on both 12. Additionally, the conflict in many supply and demand. The conflict, dis- parts of the country resulted in damage placement, and physical destruction were to essential public and private infra- the main factors behind the impact on the structure including airports, seaports, labor market. The scale of internal displace- warehouses, markets, roads, bridges, ment has had a particularly strong effect. power stations, hospitals, schools, and According to the UN Office for the Coordi- residential area. Such infrastructure de- nation of Humanitarian Affairs (UNOCHA), 7 3.3 million Yemenis have been internally activities for safety reasons or to avoid the displaced as of December 2016, resulting military mobilization. In most war-affected in lost livelihoods and jobs. An additional areas, hundreds of thousands of work- report estimated that 182,000 people fled ers have lost their jobs and income due to to Djibouti, Ethiopia, Somalia, Sudan and damages to farms and other private sector other countries. (UNOCHA, Nov. 2016). facilities. This drastic drop in employment will likely have a lasting negative impact 14. Businesses have shed a significant on the labor force in agriculture. number of workers. The 2016 ILO re- port entitled “Yemen Damage Needs As- 16. Construction has actually seen an sessment (DNA)” is based on a detailed increase in employment in the three survey conducted in three governorates: governorates analyzed. This is driven by Sana’a City, Al-Hodeida, and Aden (Table employment growth in Aden where some 1). While not nationally representative, to- reconstruction activity has already started. gether these account for around 22% of the Although construction job losses in other working age population. The report shows governorates may well have been deeper that the total employment in the three than in these three governorates but the governorates declined by 132,000 (13 experience in these three governorates %) between March and December 2015. suggests that once reconstruction begins Although not representative, if this were it can drive employment quickly. replicated nationally that would equate to 600,000 total job losses. Some governor- Table 1: Composition of and impact on employment ates may have had higher or lower job by sector in Sana’a City, Al-Hodeida, and Aden losses, but the scale of job losses indicat- ed by these three governorates is signifi- cant. Given the high dependency rations of households, these job losses are likely to be keenly felt. Alongside the reduction in employment, there was also a decline in labor force participation of 159,000, largely a result of the increase in discouraged and displaced persons, including casualties. 15. The most affected sectors in terms of job losses are those that employed a large number of people, services and agriculture. Although the services sector Source: ILO, 2016, Yemen Damage and Needs As- sessment, Crisis Impact on Employment and Labor is by far the biggest sector, 8% decline in Market. that sector represents 60,000 job losses in those three governorates studied. Prior 17. SMEs were more likely to lay off to conflict, the agricultural sector was the workers and skilled labor became main source of livelihood for two-thirds of scarcer. SMEPS found that 70 % of small the population, but there has been a steep and medium enterprises laid- off half of decline of 49.7% in agricultural employ- their workforce compared to 67 % of large ment in the three governorates studied. In firms releasing 32 % of their staff. As for some rural areas, people stop agricultural micro enterprises, 38 per cent of them 8 shrank in size (Figure 2). The SMEPS were almost depleted. 83 %of businesses survey also reports that skilled labor has said that their core-traded commodities are been a long-term constraint for a quarter not available because of the war (SMEPS, of medium and large businesses, but large 2015). Traders and producers alike have enterprises reporting a shortage of skilled been hit hard by restricted access to in- labor has risen to 58% of the total large puts. For traders in particular, the ability to Figure 2: Workers laid off by area Source: SMEPS, 2015, Rapid Business Survey, Impact of the Yemen Crisis on Private Sector Activity. enterprises. Medium, small, and micro access goods and inputs is a sine qua non enterprises have not reported significant of their business model. changes in the extent of the skilled labor problem. 19. The supply of inputs to the agricul- tural sector and food producers and markets has been particularly affected. Impact on Access to Input Materials The ongoing conflict resulted in a lack of and Markets inputs, a breakdown in markets, and re- 18. The current disruption of internal duced production. Inputs such as seeds, trade resulting from obstacles, check- fertilizers and fuel as well as spare parts points, or damage on key trade routes for machinery are all hard to obtain due to has significantly disrupted business the breakdown of import markets, resulting operations. SMEPS reported that more in reduced local production. High trans- than three quarters of business owners portation and energy costs due to insecu- face difficulties in gaining access to raw rity and damage to transport infrastructure materials, spare parts, goods and compo- have also made it more difficult to get in- nents needed to operate their businesses. puts to where they are needed, whilst also This is driven by both price increases and reducing post-harvest processing. This non-availability. About 80 % of the sur- has also undermined markets by reduc- veyed businesses said that their stocks ing the number of producers who can take 9 goods to market. On the production side, affected by disruptions to the banking the shortage of animal fodder and veteri- sector. Businesses struggle, for example, nary services has led to the decline of live- to maintain inventory, which can be due stock production, which is a main source both to problems of physical access to of income for many rural families. Com- inputs, as described above, and to a lack mercial farms and buildings critical to the of working capital. Evidence from Yemen rural sector (administration, market places, suggests that working capital is a major fish cooperatives and landing sites) have constraint for firms even when goods are also been damaged. The disintegration of nominally available. As the banking sector markets and the curtailing of their effective is facing daunting challenges directly as- reach and breadth led prices of basic food sociated with the ongoing conflict, its own and non-food commodities to rise by over capital base is being consumed while the 40 % compared to pre-crisis levels.3 The risks have multiplied, making normal finan- total conflict-related losses and damages cial services by the banking sector cost- to agriculture, fisheries, and livestock are lier, or simply not available. The SMEPS estimated to amount to about USD 3 bil- 2015 survey found that 73 %of businesses lion (ILO, 2016). could not access credit, although traders had better access to credit than produc- ers did. The number of functioning bank 20. In some areas, roads and local branches has fallen significantly. The sol- weekly markets have been physically vency of Yemen’s banks is also an issue blocked and occupied by armed mili- while the government’s own finance prob- tias. Participating in many of the biggest lems are also consuming the available markets for agricultural products, espe- credit. Non-availability of trade finance is cially in Hajja governorate, is now seen another major constraint for importers as as a high-risk activity. Even in areas with letters of credit are no longer supported less active conflict, some traders have by the Central Bank of Yemen (CBY) and complained of newly imposed restrictions private banks lack either the capital or are by municipality and local authorities. Ad- cut-off from their correspondent banking ditionally, small traders report that the non- network, and as a result from the inter- functioning of the central markets in differ- national financial market. The section on ent governorates has resulted in a number finance below details these challenges of small retail markets appearing on the more extensively. city’s suburbs, leading to higher business costs, higher prices for the consumer, and a reduction in the number of wholesalers. III. SECTORAL ANALYSIS The lack of fuel, insecurity and inaccessi- bility of some governorates led to higher AND POLICY RECOMMEN- transport costs and disruption of trade, DATIONS: making it more difficult to access markets or agricultural supplies. TRADE SECTOR 22. Trade is fundamental to the recov- Impact on Access to Finance ery and reconstruction of Yemen but 21. Business operations have also been relatively little is known about the cur- 3 Food and Agriculture Organization of the United Nations, rent status of the trade infrastructure, FAO, Integrated Food Security Phase Classification, 2016, institution, and services. Since the start IPC analysis - Summary of Findings 10 of the conflict, trade activities were report- However, both food and medicine remain edly affedted by destruction of trade infra- in critically short supply inside Yemen. Ye- structure, trade restrictions from parties men imports 90–95 % of its staple foods, involved in the conflict, lack of security, including 85 % of cereals, while local pro- and the absence of functioning regulatory duction accounts for around 20–25 % of institutions. overall food availability. As a result, prices have increased rapidly for imported staple 23. The trade sector’s contribution to foods and for local produce. About 14.4 GDP in 2014 was 15 % according to pre- million Yemenis are severely food inse- liminary estimates from a report com- cure. According to WFP, Yemen is ranked missioned by the Bank on the state of as the 11th most food insecure globally7. trade in Yemen. The trade deficit reached USD 10.4 billion in 20144. China, Thailand, Saudi Arabia, and UAE were the most im- Institutional Constraints portant destinations for Yemen’s merchan- 25. Even before the current conflict, the dise exports including oil in 2014, account- performance of Yemen in trade facilita- ing for over 70 %of the total exports. China, tion indicators was below the average India, Turkey and Saudi Arabia were the for the region and underperforming main sources of imports, accounting for in relation to Yemen’s income level in about one third of total imports5. Agricul- 2014. The Customs Authority had been as- ture products represented around 34 % sessed as a target for assistance through a of merchandise imports while oil and gas World Bank program although reform was represented 90 % of exports. Most of the also needed for a wider set of institutions commercial trade flows were centered on engaged in trade support and regulation. four major seaports (Aden, Al-Hodeida, The adoption of contemporary risk-based Saleef, and Mukhallah) and one land port, regulatory compliance practices was one Haradh-Altuwal Yemen-Saudi land cross- step already identified to facilitate trade ing. and improve export competitiveness. Ac- cess to and use of information technology 24. Since the start of the conflict, trade to automate transaction processing was activity has dropped sharply. A report limited. The World Bank Logistics Per- commissioned by the Bank estimates that formance Index (LPI), which measures by 2015 when the conflict erupted the total countries’ trade logistics efficiency, ranked imports had shrunk by 55 % compared to Yemen 151st out of 160 countries in 2014 2014, whilst the total exports had dropped (Figure 3). Even before the conflict, the by 51 %. According to recent estimates, main obstacle to trade facilitation was the the demand for non-essential products and country’s customs and infrastructure, most services dropped by more than 50 %. The of which are operated by the state and af- main remaining imports are food (about fected by institutional and governance 50 % of the total imports), medicine (over shortcomings. Similarly, in the 2014 World 20 % of the total imports), and building Economic Forum Global Enabling Trade materials (over 10 % of the total imports).6 Report, Yemen was ranked 131 out of 148 4 Information in this section is based on data collection and countries in terms of the quality of its trade interviews undertaken to study the impacts of the conflict on infrastructure. Therefore, there is an ur- key sectors in Yemen by Apex Consulting. In process. gent need to revive and reform the sector. 5 World Integrated Trade Solution (WITS) 6 This is according to the Logistics Cluster at http://www. tions. logcluster.org/ which monitors logistics in humanitarian situa- 7 https://www.wfp.org/countries/yemen/overview. 11 Figure 3: Logistics Performance Index stitutional capacity and application of for Yemen over time global standards and practices. Outside of a handful of senior managers within the Customs Authority and Ministry of Fi- nance, there was very limited managerial and technical capacity. Corruption within the institution became ‘institutionalized’ and was given some form of official man- date, in part to help smooth day to day pro- cesses. )Source: World Bank, Logistics Performance Index (LPI Impact on Trade Flows 28. The conflict brought oil exports to a halt 26. Conflict has only worsened this al- and has halved the export of other commodi- ready challenging trading environment. ties. (Table 2) Hydrocarbon exports contin- The trade regulatory bodies at most air and ued their sharp decline in 2015, furthering seas ports, with the exception of Aden’s the drop that started in the year preceding airport and seaport, are now largely inef- the war. Hydrocarbon exports were totally fective. They serve only to collect service suspended as early as April 2015 due to the fees but fail to carry out their administrative departure of all foreign oil companies from functions and on balance are likely to be a Yemen. The closure of the land border with drag on trade. The conflict has allowed a Saudi Arabia devastated local farmers and range of questionable practices developed fishermen involved in the export and produc- to fill the gaps in trade regulation and poli- tion for export of commodities such as fish, cy. Many of these practices may be difficult onions, bananas, and mangos. More broadly, to replace when the conflict ends. it has affected local production by preventing access to essential agricultural production in- 27. The country was already working puts, such as fertilizers, pesticides, vaccines, from a very low base in regard to in- enhanced seeds, and machinery. Table 2: Impact of the Conflict on Yemen’s Critical Commercial Exports )Quantity (tonnes/metric tons )Value (USD Commodity )HS Code( YoY % YoY % 2014 2015 2014 2015 Change Change )Crude Oil (2709 t 1,563,307 t 0.062 -100% $1,271,479,238 $3521 -100% )LNG (2711 t 106,416 t 0.1 -100% $68,772,799 $3,3852 -100% )Fish (0302 ― t 26,101 ― $114,077,136 $64,434,008 -43.5% )Molluscs (0307 t 9,115 t 9,015 -1.1% $38,020,561 $20,604,330 -45.8% )Vehicles (8703 t 667 t 342 -48.7% $215,933,490 $57,518,608 -73.4% Total Exports3 ― t 35,458 ― $1,708,283,224 $142,560,683 91.7% Source: UN Comtrade. 12 29. For imports, according to prelimi- which has resulted in temporary and per- nary estimates in 2015, about a quarter manent closures, damages to equipment of the country’s much-needed imports and facilities, extended delays in loading could not be sourced. The undersupply and unloading vessels, extended power of essential commodities is shown in Table outages, personnel shortages, and secu- 3. This decline in the flow of commodities rity and safety threats. Aden and Mukalla Critical Commercial Imports )Quantity (tonnes/metric tons )Value (USD Commodity )HS Code( 2014 2015 YoY % Change 2014 2015 YoY % Change )Wheat (1001 t 3,327,732 t 2,817,211 -15.3% $1,060,312,372 $811,336,425 -23.5% )Sugar (1701 t 1,229,787 t 509,573 -58.6% $583,802,429 $202,789,081 -65.3% )Rice (1006 t 432,826 t 443,348 +2.4% $384,408,901 $313,329,632 -18.5% )Milk (0402 t 62,614 t 46,185 -26.2% $285,967,991 $164,981,356 -42.3% )Palm Oil (1511 t 316,801 t 206,582 -34.8% $296,011,387 $189,875,403 -35.9% Total Imports4 5,369,760 4,022,899 -25% $2,610,503,080 $1,682,311,897 -36% Source: UN Comtrade. into Yemen has affected the livelihood of sea ports remain operational but other vi- all Yemenis, in both urban and rural areas tal ports, such as Al-Hodeida, Saleef, and who rely on imports to assist with food Mokha sea ports suffered significant phys- production, retail business and for basic ical damage reducing their capacity by an needs, like fuel. The data for 2016 is ex- estimated 25 to 50 % (Table 4). The most pected to show a more dramatic decline. severely impacted ports by the war were the Port of Al-Hodeida, and the Haradh- Trade Infrastructure Altuwal Saudi border crossing, which are 30. The functionality of sea and air trade major points of entry. According to the Cus- infrastructure at sea and air is much re- toms Authority 2013 annual report, these duced. Traded goods and commodities two ports altogether accounted for more in Yemen move through several seaports, than half of the prewar revenue collected container terminals, oil terminals, and by Yemeni customs. land border crossings, with most trade his- torically being channeled through Aden, Al-Hodeida, Saleef, and Mukhallah ports and the Haradh-Altuwal Yemen-Saudi land crossing. Since the beginning of the war, Yemen’s primary ports have suffered substantial disruption to normal opera- tion due to airstrikes and ground combat, 13 Table 4: Current Status of Yemen Ports Under GoY Port Location Purpose Status Damage control Al-Hodeida Al-Hodeida Gov- Commercial and Operational No Yes ernorate Oil Terminals Aden City of Aden Commercial and Operational Yes No Oil Terminals Mokha Taiz Governorate Commercial and Closed No Yes Oil Terminals Saleef Hodiadah Gover- Commercial and Operational No Yes norate Oil Terminals Mukalla Hadramout Gov- Commercial and Operational Yes No ernorate Oil Terminals Ras Isa Hodaidah Gover- Oil Terminal Closed No Yes norate Belhaf Shabwah Gover- Oil Terminal Closed Yes No norate Source: Government of Yemen. Figure 4: Average delays in entering ports in Yemen, October 2016 Source: http://www.logcluster.org/sites/default/files/logistics_cluster_yemen_snapshot_october_2016_0.pdf berth an average of 53 days (see Figure 31. There are significant delays at an- 4, above). Delays at the port can be attrib- chorage in the ports of Aden, Al-Hodei- uted to the very limited infrastructure with da and Saleef.8 In October 2016, the lon- a two-berth capacity only, which impede gest reported delays at anchorage were rapid offloading times. at Saleef port, with vessels waiting for 8 The number of days corresponds to the average time that 32. The port of Al-Hodeida has been se- vessels spend at anchorage, waiting for berth permit. verely damaged. The port has been the 14 main entry point of most imported com- pared to 800 in 2012. modities in the country including food and 33. Other ports have suffered damage fuel imports. It is heavily used by com- during the war, including the oil termi- mercial traders and humanitarian agen- nal and the refinery in Al-Buraiqah in cies to import essential food commodi- Aden. Port of Al-Saleef has also suffered ties into the country. However, due to the damage and has become dependent on Al-Hodeida Port on August 17, 2015. © 2015 Mersad News Agency damage inflicted on the port infrastructure forklifts and trucks to offload cargo, which by airstrikes, the functionality of the port are not readily available. Al-Saleef Port in has been weakened. Delays in the port Al Hodeida is now running at only 50% of reached 24 days for vessels waiting to its capacity. berth and another 4-5 business days to unload containers from and onto vessels Additionally, the country’s’ main airports of Sana’a, Aden, Al-Hodeida, Mukalla, Sayuon, compared to 24 hours before the port was and Taiz were also impacted by the conflict. damaged. Phone interviews with the Logis- Sana’a international airport, the country’s tics Cluster9 in Yemen reported that the main international airport, suffered severe port capacity utilization have decreased to damage to its runway and infrastructure. The 75% compared to 2012 operations. The airport operations were suspended a num- current import volume of Al-Hodeida port ber of times as a result of the control of Ye- totals 2.9 million MT of bulk food commod- meni airspace by the Saudi led coalition and ities (compared to 3.8 in 2012) and berths restrictions on flights operations. The airport of vessels were 500 vessels in 2016 com- remains closed since August 2016, and only UN operated flights are allowed at the airport. 9 The Logistics Cluster is a coordination mechanism respon- sible for coordination, information management, and, where Sana’a airport was the main airport used by necessary, logistics service provision to ensure an effective the country’s financial institutions to trans- and efficient logistics response takes place in humanitarian port foreign currency abroad, and was the emergency missions. The UN World Food Program is the lead agency for the Logistics Cluster. Where there are critical main airport used by the private sector for air gaps in a humanitarian response, WFP, as the lead agency, cargo shipments. Similarly, Al-Hodieda, Taiz acts as a ‘provider of last resort’ by offering common logistics and Mukalla airports remain closed, and only services. 15 Aden and Sayoun airports have resumed op- has been permanently closed since about erations with international routes limited to May 2015, except for a few limited irregu- Cairo and Amman. lar movements reported by some traders. Traders now have to take a distant alterna- tive road to move Yemeni exports across Road Network and Land Ports Yemen-Saudi border through Al-Wadia’ah/ 34. Domestic trade routes changed sig- Sharurah border crossing, which is 565 nificantly during the war due to road clo- km away from Sana’a (i.e., about 7-8 sures, blockades, damages, mines, or hours’ drive on a regular passenger car), detours, most notably the Haradh-Altu- compared to Haradh-Altuwal, which is 288 wal Yemen-Saudi land border crossing km away from Sana’a (i.e., about 5 hours’ in Hajja governorate. It is still possible to drive on a regular passenger car). The reach all governorates of Yemen via alter- Yemen-Oman border crossing, Shahn, is native roads, albeit at a much higher cost, even further east. Moreover, movement of time, and risk. This summarizes the chang- goods through these open border cross- es to the domestic road network. The Ha- ings has declined due to the complicated radh-Altuwal area has witnessed ground procedures required. (See Figure 4) combat between the two sides throughout the war, so the Haradh-Altuwal crossing Figure 5: Yemen Road Access Map December 2nd 2016 Red = Road closed Yellow = Road difficult to access Green = Road Open Source: http://www.logcluster.org/sites/default/files/logistics_cluster_yemen_snapshot_october_2016_0.pdf 16 Trade Costs and Trade Logistics bers of the Logistics Cluster to the inadequacy of inspection equipment (such as scanners) 35. Trading goods and commodities in and resources available to the UNVIM, as well Yemen has become very costly. Several as the limited staffing and communication with traders have reported that shipments that shipping liners and commercial traders in the used to arrive within a month now take country. three to four months, increasing the cost of 37. Shipping insurance premiums have sea freight to local importers. Traders attri- also risen steeply. According to interviews bute the increase of cost of imports to sig- with sector actors (insurance), charter par- nificant delays in handling and discharging ties often include specific provisions relat- of cargo at Yemeni ports, the introduction ing to the outbreak of conflict. These agree- of United Nations Verification and Inspec- ments have special provisions known as tion Mechanism (UNVIM), procedures for war risk clauses. These charge additional shipments going to certain ports in Yemen, insurance premiums of $500 per Twenty- and the soaring costs of insurance premi- Foot Equivalent Unit (TEU)and $1,000 per ums for shipments to Yemen. Flight Equivalent Unit (FEU) —in the con- text of Yemen—but which have not been 36. On May 2, 2016, the responsibility renegotiated for shipments bound to the for cargo inspection on all Yemeni sea- Port of Aden even though Aden has been ports was shifted to the UNVIM based declared a safe zone and is no longer un- in Djibouti. Consequently, all vessels car- der the scope of UNVIM. The cost of air rying bulk and containerized commercial shipping has also increased. Insurance cargo to any of Yemen’s seaports that are companies now impose a 200 % insur- not controlled by the Yemeni government ance fee on Yemen airways. These inter- (i.e., Port of Al-Hodeida, Port of Mokha, views suggest that this premium is likely and Port of Al-Saleef, and their associ- to come down steeply once peace returns ated terminals), must notify UNVIM upon and the risk of direct damage to shipments departure from the port of origin of their falls. cargo. UNVIM then decides if a cargo in- spection is required and reroutes vessels 38. The cost of local transport to most to a mutually agreed meeting point within governorates has also increased by as international waters for an inspection. If much as 100% compared to pre-conflict UNVIM decides that further inspection is levels. This is attributed to the lack of secu- required, vessels are rerouted to Djibouti rity and some damage to roads. Addition- where their entire cargo gets offloaded ally, drivers are reportedly required to pay and screened. All related costs that result royalties at checkpoints to militias. Longer from these measures are borne by the trade routes, necessary to avoid conflict shipping company in charge of the ship- areas, are also a factor in increased local ment. These procedures do not apply to transportation costs. Most shipments now Aden and Mukhallah seaports, which are arrive at Aden’s container terminal and then considered under the control of the Yeme- have to travel along route to reach Sana’a ni government. and other northern cities. In Aden, where the port is fully operational, the monopo- The private sector has raised concerns ly of the local transportation of goods by over the costs and delays of processing in- the Union Committee for Drivers of Heavy spections by the UNVIM. The costs and de- Transport Trucks, which is imposed on all lays are attributed by the importers and mem- 17 traders, has led to an increase in the costs tember 2016, the Central Bank of Yemen of local transportation to the point that it suspended its underwriting of trade credit can exceed the cost of the ocean freight arrangements, essentially a foreign ex- service. For example, the cost of trans- change swap facility, due to the interrup- ferring goods within city limits, from Aden tion of the central bank’s access to foreign Container Terminal to Al-Tawahi, a district exchange. within Aden city itself, is YER 90,000 (i.e., USD 360). The cost of transporting goods Additionally, even importers of staple from Aden to other governorates in Yemen commodities like rice wheat and sugar reaches up to YER 700,000 (i.e., USD have reported difficulty in obtaining 2,800), whereas transporting goods from trade finance to continue importing. Aden to Taiz used to cost YER 150,000 The CBY has not been able to fulfill its fa- (i.e., USD 600). In comparison, goods are cilitating role as a guarantor for trade fa- transported from the Port of Al-Mukallah to cilities since September 2016, when the other places within Hadhramaut for up to CBY’s managerial and operational func- YER 40,000 (i.e., USD 160) and to other tions were split between Sanaa and Aden destinations outside of the governorate along conflict lines. There are indications for up to YER 150,000 (i.e., USD 600). that international banks have already cut At the Port of Al-Hodeida, goods can be letters of credit to their Yemeni correspon- transported to places like Hajjah for YER dent banks for traders shipping food to 135,000 (i.e., 540), an increase of almost Yemen as they consider associated risks 100 per cent from the prewar rates, yet it to be too high. Since the war started, the is still cheaper than the rates charged for banks have been increasingly unwilling to similar distances by about USD 2,260. offer letters of credit, which guarantee sell- ers will be paid on time. As a result, the 39. Overall, it appears that the increased four main food importers have informed cost of importing has affected wholesal- Yemeni officials and the international com- ers and distributors less than retailers. munity that due to their growing difficulties Wholesalers and distributors have been with the provision of trade finance, none able to recover their costs by increasing of them will be able to import food into Ye- the prices, leaving retailers with little room men if the trade finance issues are not re- to adjust prices. solved. 41. These trade finance problems have Trade Financing had very real, dire consequences. In 40. The lack of trade finance is not only fact, in December 2016, the four main im- a major constraint to businesses in Ye- porters of staple food items (wheat, rice, men, it also poses a threat to food se- and sugar), warned that as of January curity for the country as a whole. West- 2017 they would no longer be able to im- ern banks have cut credit lines for traders port any more shipments due to the trade shipping food to Yemen, fearing they would finance constraints. not be repaid due to the security problems and fragile financial system. Since the war started, they were increasingly unwilling Sector Recommendations to offer letters of credit, which guarantee 42. The trade sector has been heavily af- sellers will be paid on time. Since Sep- fected by the conflict, and has a direct impact on the Yemen’s socio-economic 18 resilience and its ability to recover. A • Adopting a “triage” approach to the number of short, intermediate, and medi- reconstruction of trade infrastructure um-term measures will need to be taken, and re-establishment of trade facilita- including: tion to revive trade activities and ad- dress the deteriorating level of food security. Even while the conflict is on- • In the short term and as a high pri- going, wherever and whenever it is ority, there is a need to facilitate trade possible, rebuilding critical trade infra- financing for importers of basic food structure will be a priority for food se- commodities to buy food from abroad. curity and provision of medicine to the This will require both the provision of population. In the immediate post-con- funds and restoring the CBY’s ability to flict phase, rebuilding a broader set of finance trade. In the immediate term, trade infrastructure should be a priority and to mitigate the risk of famine, the for all parties. The key priorities, based government should consider a trade on historical trade activity and the cur- finance facility managed by a profes- rent situation, will be to restore trade sional entity to relieve the immediate infrastructure at Al-Hodeida seaport need for trade financing for basic food and restore trade facilitation and op- importers. Such a facility could be put erations at the Yemeni-Saudi Haradh- in place by the international community Altuwal land crossing as soon as the and managed by a third party, such as political and security situation allows. a commercial bank or trade finance facility operating in the region. Once • In the medium term, undertaking a the conflict ends, an immediate prior- comprehensive diagnostic assessment ity should be to restore CBY’s ability to of development needs of trade by con- provide trade financing so that a wider cerned regulatory agencies and pro- array of businesses can easily import. ducing a comprehensive road map to guide reforms. For the World Bank and • Reestablishing a customs regime and other donors, investing in trade infra- restoring the minimum operations of structure and facilitation projects would the regulatory bodies to carry out their be an obvious step in both the interme- international responsibilities with re- diate and longer term. gard to cargo security. In the post-con- flict period, it will take some time before the government is in any position to do this. Therefore, during the conflict, the UNVIM is expected to remain in place. FINANCIAL SECTOR In the short term, it is important to ex- 43. The Yemeni financial sector is small amine this system for opportunities to reduce delays and costs, with a view to by overall volume but enjoys a solid knowing how this system could handle breadth. The banking industry compris- higher influx of trade in an immediate es seventeen banks, distributed between post-conflict period. The UNVIM could nine domestic privately owned banks (51 make use of a pre-inspection system at % of the total assets), four State Owned export ports to Yemen, or could even- Banks10 (29 % of the total assets), and tually be replaced by such a system. In four foreign banks’ branches (17% of the the intermediate term, and post the lift- ing of the UNVIM regime, a third party total assets) – see Table 5. Conventional support for establishing the customs banking represents 69 % of the total as- regime and conducting inspections sets versus 31 % for Islamic banking. could be provided to ensure efficiency There are four Islamic banks, all domesti- and security. 10 Two fully owned by the State and three majority owned by the State. 19 cally owned11. Despite the large number of placed in correspondent banks. Access to banks, the market remains concentrated finance was also an important constraint with four banks holding 60 % of the total for MSMEs, which accounts for the largest assets. The Yemen banking sector also share of Yemen’s enterprises (99 %). Ye- has a nascent microfinance industry ben- men has one of the lowest levels of house- efiting from a conducive legal and regu- hold financial inclusion in the MENA: 6 % latory environment. There are a dozen of Yemeni adults have an account at a microfinance service providers, including bank12, which is both below the MENA av- several NGOs or programs, one non-profit erage (18 %) and income group average company (Al-Awael), and two active spe- (28 %). Only 1 % of Yemenis saved at a cialized banks. Their collective outreach formal financial institution. exceeded 100,000 active borrowers and 280,000 savers; they witnessed strong 45. Total estimated assets in the finan- growth between 2011 and 2014. cial sector were around 50 % of the GDP Table 5: Assets, Deposits and Equity of Banks in Yemen (2014) E q u i t y Assets (mil- A s s e t Customer Deposits Category (million )lion YR Share )(million YR )YR Private domestic banks 54% 950,499 108,696 1,197,073 Including Islamic banks 690,480 31% 533,502 73,605 Microfinance banks 30,080 1% 11,530 9,336 State owned 632,647 29% 540,783 46,633 Foreign banks 373,190 17% 313,753 38,779 Banking System (Million 2,202,911 1,802,034 194,109 )YR )Banking System (Million USD 10,246 8,382 903 Source: Central Bank of Yemen. at end-2014, with banks representing 44. Before the war, the financial sector three-quarters of the total assets in the in Yemen had challenges to efficiently sector (followed by the pension sector. mobilize capital toward private sector This is one of the lowest asset-to-GDP development. The banking sector was ratios in the MENA region. The assets of characterized by very low levels of inter- pension funds were estimated at 5 % of mediation with bank deposits representing the GDP, whereas those of the insurance 27 % of the GDP (a share significantly be- sector amount to only 0.2 % of the GDP.13 low the MENA average of 76 %) and pri- There is no capital market and the money vate credit amounting to only 6 % of the market comprises only Treasury bill auc- GDP (the private credit to total loans ra- tions and limited repo (repurchasing) op- tio has dropped from 46 to 28 % between erations. Interbank money or foreign ex- 2009 and 2014, respectively). A significant change markets have not developed. fraction of the banking sector resources was invested in government bonds and 12 Findex 2014. 13 Compared to 0.7% in Egypt, 2.11% in Jordan, and 11 The State has a minority stake in these Islamic banks. 0.86% in Saudi Arabia. 20 Constraints in the Sector policy, the management of the exchange rate, the protection of depositors (through Depletion of Foreign Exchange Reserves banking supervision, lender of last resort 46. Yemen faces an unprecedented li- and crisis resolution) and the continuity quidity crisis. The CBY has lost almost of core payment system functions (clear- all its foreign exchange (FX) reserves. The ing and settlement; liquidity management; loss of reserves led to a devaluation of the oversight). Riyal since March 2016, currently at around 320 YER per USD 1. While the official rate Weak Banking Sector Solvency remained at 250 YER. The fast depletion 49. The actual solvency of the banking is of hard currency reserves, the degradation likely to be severely affected by a grow- of trust between the public and the banking ing number of rising threats. During the sector and the economic contraction have summer of 2016, the World Bank, the IsDB led to a severe liquidity crunch. The short- and the AMF approached the CBY to get age started affecting the physical stock of access to banking sector data in order to banknotes, which prompted the CBY to run basic stress test exercises to simulate reintroduce damaged banknotes, with lim- the actual solvency ratios of the banks. ited results though14, since these notes are Given the current crisis, this technical as- rejected by most merchants. sistance could not be put in place. How- ever, in the absence of data, the following 47. Despite a large grant from the IMF elements should be taken into account to (USD 0.5 billion in July 2014) as well as assess the current solvency situation: a large credit from Saudi Arabia (USD • Adjustment of a key solvency 1 billion in 2013), foreign reserves had parameter. Although the banking sec- sunk from USD 5.4 billion at the end of tor solvency seemed high by interna- 2013 to USD 0.5 billion by end-Decem- tional comparison before the war, it ber 2016 (i.e. less than a month of im- was largely artificial to the extent that ports). In December, the Riyal was traded the (growing) assets in government on the black market at 320 YER to the US securities continued to benefit from a dollar, a 25 % differential from the new 0% risk weighting in the calculation of CBY’s official rate. Lack of access to for- solvency ratios. This weighting has be- eign currencies has constrained import ac- come clearly inadequate given the cur- tivity and has a direct effect on availability rent country risks (Yemen is rated CCC of basic commodities and inputs. according to Dagon, a Chinese rat- ing agency). A minimum of 100 % risk Impaired ability of the central bank to perform weighting on government bonds would core functions correspond to the current situation. 48. The conflict has led to a de-facto • NPLs’ increases. Reported NPL partition of the country into two territo- ratios have markedly increased from ries with separate authorities. This led to 14 % (already a high level by region- the emergence of separate central banks, al comparison) to 25% between 2009 which significantly undermined core func- and 2014 (see table 5). This increase is tions including: the conduct of monetary mainly due to i) a base effect (credit to private sector is declining in real terms), 14 Some logistic issues have also severely impacted the de- ii) a frozen recovery process (which is livery of new notes from Russia (where the provider of bank often the case in times of crisis), and notes is located). 21 iii) the emergence of new NPLs due to the political and security context. It 50. The combination of those three ele- is expected that the NPL ratios, which ments allows thinking that most banks are likely to be underestimated (if not in Yemen have a solvency ratio below misreported), will continue increasing 8%, which is the internationally recog- in 2016, reflecting these issues: i) the nized minimum capital adequacy ratio. Table 6: Financial soundness indicators )% in( 2009 2010 2011 2012 2013 2014 :Capital Adequacy Capital Base to Risk weighted assets       14.6 20.2 24.3 29.6 26.4 24.3 :Asset Quality Nonperforming Loans to Total Loans       13.9 17.7 21.2 25.5 21.7 24.7 Loan Provisions to Nonperforming       70.3 57 70.6 76.2 71.4 72.4 Loans :Earnings Return on Average Assets       0.9 1.3 1.5 1.2 1.5 1.3 Return on Average Equity       9.6 14.1 14.2 13.6 18.9 15 Source: Central Bank of Yemen. continuation of destruction or damage Some banks may already be insolvent of assets, ii) frequent business cycle (negative capital). disruptions linked to the shortage of Severe Restrictions in Correspondent Bank- Riyal and hard currencies and iii) the ing Relationships with Yemeni Banks Riyal devaluation. • Over-exposure to large related 51. CBRs correspond to the provi- party transactions. Given the con- sion of banking services by one bank centration of the industrial and to another. The restriction of CBRs is a business fabric in the hands of a global trend. In the case of Yemen, this few large business groups and the trend, which started before the war, took limited diversification of sources of a more problematic spin given the level external funding, there are close of perceived money laundering/financing ownership ties between domesti- of terrorism (ML/FT) risk by a number of cally owned banks and large trad- foreign correspondent banks. Despite the ing, construction, and manufactur- issuance of some anti-money laundering/ ing firms. This translates into three countering the financing of terrorism laws potential issues: i) the risk of abuse in 2010 and 2012, this risk was rapidly of depositors’ money, ii) the risk of deemed unmanageable and most foreign artificial capitalization15, and iii) the banks terminated their CBRs. The termina- fact that these loans represent a tion of CBRs severely affects the delivery significant share of the regulatory of key products and services (international capital. wire transfers, trade finance operations, and remittances) identified as being criti- 15 For example, a bank can lend to a related third party who can then cal for the functioning of an economy. participate in the capital increase of the bank. 22 Microfinance Institutions impacted by high a multitude of constraints restricting their NPLs ability to finance the needs of the economy. They will have to i) deal with a large num- 52. The conflict has also put all MFIs un- ber of non-performing loans, ii) increase der severe pressure. Borrowers’ repay- their capital, and iii) and rebuild minimum ments have been seriously affected (es- liquidity buffers. On the credit demand pecially in conflict areas) due to various side, many firms and individuals will have reasons including displacement of popu- lost their assets (including tangible ones lation (3.1 million people were displaced such as real estate, which is by far the pre- since the beginning of the conflict), basic ferred form of collateral in the banking sec- commodities high prices, and severe dis- tor in Yemen). In addition to these cyclical ruption in income generating activities. effects, financial institutions will remain se- Physical branches have been destroyed, verely constrained by a series of structural paralyzed and in certain cases closed. A roadblocks concerning the financial sector study conducted in early 2015 by the So- infrastructure, chief among these are the cial Fund for Development (SFD) reveals poor bankruptcy and collateral regimes that MFIs managed to keep a satisfactory and the absence of credit information sys- level of performing loans (the Portfolio at tems and deposit insurance schemes. Risk was even reduced from 2.1% in 2014 to 1.6% in February 2015). MFIs have Sector Recommendations certainly become more selective since the number of active borrowers was un- 54. Before the war ends: address trade changed (approximately 120,000 between financing to ensure imports of essen- 2014 and 2015) while the number of active tial food commodities. The four main savers continued growing (from 622,000 staple food importers in Yemen have re- to 660,000). However, MFIs portfolio quali- cently informed Yemeni authorities and ty deteriorated during the crises. The PAR16 the international community that they are reached 11% of the outstanding gross loan no longer able to import food as of March portfolio of 2011 – 2012 affected by the un- 2017 due to the inability of the CBY to ful- rest that swept Yemen in 2011. In the fol- fill its role on the provision of foreign ex- lowing years (2013 – 2014) the PAR was change for trade financing. In line with the enhanced and dropped to 2.2% due to the recommendation in the trade section, the partially stable situation in the country. In CBY urgently needs to be supported to re- 2015, the PAR has increased to the high- turn to its trade financing role. If this is not est level 29% out of the outstanding gross possible in the immediate term, a trade fi- loans portfolio in August 2015. nance facility could be considered to help importers get the letters of credit required to bring in vital imports such as food. Once Weak Intermediation Capacity the conflict ends, an immediate priority 53. The intermediation capacity of fi- should be to rebuild local capacity to pro- nancial institutions (banks and MFIs) vide trade financing so that a wider array is expected to be significantly lower at of businesses can easily import. the end of the conflict. Banks and non- banking financial institutions will be facing 55. Short term measure #1: Restore the financial system’s core institutional 16 Portfolio at risk. It corresponds to the proportion of an framework should be considered as MFI›s total gross outstanding loan portfolio that is at default risk (usually past due 30 days). a top priority as it lays the foundation 23 for Yemen’s economic and financial re- stitutions should be restructured, merged covery. This would include providing advi- or liquidated (with the secondary objective sory/capacity building services to support to facilitate the emergence of 3-4 lead- the resumption of the following core cen- ing financial institutions and address the tral bank functions: liquidity and cash man- issue of the excessive fractioning of the agement; foreign exchange reserves man- supply-side) and to select financial institu- agement; payment systems; sovereign tions which could benefit from exceptional debt management; banking regulation and liquidity support the the Central Bank in its supervision (including resolution and AML/ quality of lender of last resort. CFT monitoring and enforcement). Re- storing those basic functions would also 57. Short term measure #3: Depending help to restore domestic and international on the severity of the shock, a public- confidence in the financial system, contain private Financial Sector Restructuring inflation and preserve national currency Agency (FSRA) could be created to exchange rate. The support should be support the authorities in their effort prioritized as follows: i) design and imple- to restructure the banking sector. The ment solutions to increase financial sys- mandate of this institution would include tem liquidity, and ii) resume cash, foreign the following: exchange and sovereign debt manage- • Inject capital in financial institu- ment. These functions are sine qua non tions (banks and microfinance insti- conditions to resume vital financial flows tutions) that are deemed viable with including payments of salaries of civil ser- a view of restoring their solvency vants across Yemen, collection of taxes and accelerating their recovery pro- and payment of interest on sovereign debt. cess; • Create a Deposit Insurance 56. Short term measure #2: Conduct a Scheme to help the CBY to restore Rapid Financial Sector Stability As- public trust in financial institutions; sessment. It is expected that the lack of • Provide technical support to frag- confidence of the depositors in the bank- ile financial institutions to facilitate ing sector would remain an issue, if banks’ their restructuring. This could also solvency is not quickly restored after the involve technical assistance to the war. Without the return of deposits, banks CBY to facilitate complex opera- would remain unable to deliver basic ser- tions such as mergers, liquidations, vices such as salary payments, transfers or creation of bad banks; and credits. Since there is no accurate as- • Provide wholesale facilities (in- sessment of the actual weaknesses of the cluding guarantees) to eligible fi- Yemeni banking and MFI sectors, it will be nancial intermediaries (banks, critical to conduct, soon after the war ends, microfinance institutions, venture a rapid evaluation of their solvency.17 The capital) in order to inject liquid- priority should be given to i) the conduct of ity and facilitate the resumption of a Quality Assessment Review and ii) the credit and equity finance toward the assessment of the shareholders’ capacity private sector. Current SFD finan- to quickly mobilize fresh capital. The ob- cial intermediation activities should jectives of these assessment would be to be then transferred from the FSRA help the CBY to decide which financial in- (which would at the same time clar- 17 Similar missions were carried out in the region: Palestine ify the role of SFD, which currently in 2008, Libya in 2012, and Iraq in 2012. 24 cumulates many potentially con- 60. Long term measure: design and flicting development roles); and implement a comprehensive Financial • Provide technical assistance to Sector Development Plan. With the sup- financial institutions to perform port of the International Financial Institu- sound NPLs restructuring. tions, the Government of Yemen will have to design a financial sector development 58. Medium term measure #1: Reverse road map providing the main transforma- the de-risking trend to reconnect the tions to be implemented over the medium Yemeni banking system to the rest of to long term toward a more efficient bank- the world. Since the resumption of CBRs, ing sector and MFI industry. linked operations (international wire trans- fers, trade finance operations, and remit- tances) would be essential in the context of a post-war reconstruction program, a Construction Sector particular emphasis should be put on the 61. The Yemeni construction sector measures aiming at reversing the “de-risk- plays an important role in Yemen’s ing” trend. To do so, Yemen will need to economy, in terms of contribution to demonstrate a high-level political commit- growth as well as for employment. The ment to reconnect Yemeni banking to the quick recovery of the construction sector rest of the world and show the effective- will be critical for Yemen’s overall recovery. ness and technical compliance of its AML/ The industry is the fourth largest employer CFT system with the updated international in the country, accounting for 9-19 % of the standards. With regard to effectiveness, total labor force and employs around half which was considered poor before the a million semi-skilled, skilled and technical war, Yemen must conduct a National Risk professionals in housing18, roads, water & Assessment, developing domestic inter- sanitation and public work projects. The agency coordination, and ensuring that fi- sector is estimated to include 800 to 1000 nancial information will be effectively used private firms with the vast majority being in the investigation, prosecution and ad- small contractors. The construction sector judication of ML/FT cases. With regard to contributed 6 % on average to real GDP the compliance, specifically for preventive from 2011 to 2014, amounting to 22 billion measures, Yemeni authorities will need to Yemeni riyals in 2014. ensure that banks and financial institutions as well as banking supervisors and desig- 62. The sector quadrupled during the nated professions (lawyers, notaries, etc.) 1990s and 2000s, but it has been shrink- implement a risk approach for customer ing significantly since the onset of this due diligence (CDD), politically exposed decade; by 2014, in just four years, the persons (PEPs), identify beneficial own- sector’s size had shrunk by over 40%. ers of bank accounts and businesses. Public expenditure has contributed sig- nificantly to the sector’s real growth, es- 59. Medium term measure #2: Strength- pecially during the 2000s. Beyond public en/sustain CBY banking supervision, lend- investment, the sector is supported by pri- er of last resort function, ability to design/ vate economic activities: especially by (1) implement debt resolution mechanisms trade, (2) transport and storage, (3) manu- and bank recovery/resolution plans. According to the 2016 ILO Yemen Damage and Needs 18 .Assessment 25 facturing, (4) real estate and business ser- major problem in the sector. This is in spite vices, and (5) financial institutions. These of the fact that Yemen produces about 300 five sectors altogether provide essential new graduate engineers every year. The support services, such as the import of problem of poor human resources is com- construction and building materials, ma- pounded by the fact that Yemen has not chinery, and equipment; the local trans- been able to develop and implement stan- portation and storage of construction and dards for design, construction and supervi- building materials; the local production of sion of sustainable construction projects in cement and brick; the allocation and de- line with international industry standards. velopment of land to meet local demand for affordable housing and commercial 65. The engineering consulting indus- buildings; and offering credit facilities to try is also weak with limited access to construction projects. training and skill development. Due to incomplete institutional sector governance 63. Pre-crisis, infrastructure constitut- (see above), it also suffers from limited ed the largest demand element for the opportunities for joint ventures or other construction sector in Yemen. In the in- collaborations with international consult- frastructure sector, the main focus was on ing firms, which could help to overcome road construction (particularly rural roads), technical and financial obstacles. The lo- road rehabilitation, water supply and sani- cal consulting enterprises do not have the tation, public works projects (mainly on requisite engineering and technical ca- the health and education sectors), urban pacity for construction supervision, mainly transportation and power supply projects. because of shortages of qualified and ex- Highly specialized and technology-inten- perienced technical personnel. The role of sive industrial projects are limited to the oil local consulting firms is largely limited to and gas sector and development projects pre-feasibility studies, field surveys, and in Hadramout, Marib and Shabwah gov- data collection. ernorates. In the real estate sector, there were also growing construction activities, 66. Since the start of current crisis in mostly for residential housing projects, Yemen in March 2015, many contracts some of them drove also infrastructure de- were suspended or cancelled citing velopment. force majeure, security risks and un- availability of building material. With the exception of Aden, construction activi- Constraints in the Sector ties have been almost entirely suspended, 64. The construction industry in Yemen except for private housing construction. has been facing severe technical, insti- Public expenditure on infrastructure and tutional, legal and financial challenges construction projects has been entirely prior to this current conflict. While the suspended, except for very limited urgent sector growth in the 1990s and 2000s has renovation public works. Very high public been solid, it lacked sector modernization, deficit, and poor management of public fi- vision, and proper regulatory companion- nances have led to a situation where the ship setting and defending adequate tech- government became entirely unable to nical or market norms. The shortage of pay its arrears to contractors. Additionally, experienced engineers, supervisors and the donor community supporting Yemen’s skilled workers has traditionally been a development plans has either reduced 26 their support, suspended their operations, arrears, by suppliers as much as by con- or completely stopped financing develop- tractors. However, in some governorates, ment projects and operations in Yemen. such as Al-Hodeida, Sana’a and Aden, the sector has actually seen an increase 67. Many qualified workers have left the in employment. This is driven by employ- market with companies that went out ment growth in Aden where some recon- of business. Overall employment on the struction activity has already started. sector is reported to have been negatively impacted. Many contractors were forced 68. Prices of construction and building to shut down and reduce their labor force materials have spiked during the war, due to complete stoppage of work activi- due largely to the increase in domestic ties, non-payment of work delivered, and transportation cost and added contrac- consequently accumulating increasingly tual uncertainty as well as risks. For Table 7: Imports of construction & building materials Com- )Quantity (tonnes/metric tons )Value (USD modity HS( YoY % YoY % 2014 2015 2014 2015 )Code Change Change Cement t 1,356,711 t 887,472 -34.6% $83,935,467 $61,065,843 -27.2% )(2523 Iron & Steel ― ― ― $813,608,447 $272,695,193 -66.5% )(72 Source: UN Comtrade. Table 8: Wartime status of Yemen’s main cement plants Production Capacity Current Sta- Cement Factory Governorate Sector Damage tonnes per an�) tus )num Amran Cement t/a 1,000,000 Amran Public Closed Yes Plant Bajel Cement t/a 750,000 Al-Hodeida Public Closed Yes Plant Al-Barh Cement t/a 1,500,000 Taiz Public Closed Yes Plant Al-Wataniah Resumed t/a 1,500,000 Lahj Private Yes Plant production Arabian Yemen Cement Com- t/a 1,500,000 Hadramout Private Running No pany Batais Cement t/a 1,600,000 Abyan Private Closed No Plant Al-Wahda Ce- Resumed t/a 1,100,000 Abyan Private No ment Plant production Souce: Original data collection undertaken for this note by Apex Consulting. 27 example, the average prewar price of one payment and performance guarantees, bag of cement (i.e., 50 kg) was YER 1,300, has stopped. Commercial banks in Ye- whereas its average price today is YER men are unable to provide working capi- 2,200, an increase of about 70 per cent. tal, bid bonds, and guarantees required by Similarly, the average of prewar prices of contractors, who generally depend on pri- one ton of iron was YER 140,000, where- vate resources to finance their business. as its average price today is YER 220,000, Arrears owed to contractors and suppliers an increase of 57 %. Prices of wood in- by the government contracts represented creased by over 80 % during the war, from by the CBY had been an issue for many YER 60,000 per ton to YER 110,000. In years. Arrears were estimated to exceed several cases, key informants have report- 300 million USD in 2012, most of which are ed that the increase in prices was much owed to the construction sector, and pay- larger, reaching 100 % or more, such as in ment against those arrears was minimal the case of gypsum, which has increased during the 2012-2014 period and came from YER 600 to YER 1,500. Construction to a complete halt since the start of the companies located in governorates where conflict. Access to cash and credit lines conflict is most severe (such as Taiz) have from commercial banks is very limited and also reported theft and damages to their costly. machinery and equipment. 69. Imports and local production of con- struction and building materials have Sector Recommendations been limited due to the impediments 71. Support the construction sector to to trade, suspension of public sector help it to retain current manufacturing investment, donor financed construc- capacity and employment, speed up tion activity, and damage to local pro- reconstruction efforts, and to help con- duction facilities. Trade data show a de- trol inflation in building materials when crease of 27 % in imports of cement and a reconstruction begins. It is common 67 % decrease in imports of iron and steel for destructive conflicts to be followed by from 2014 to 2015. Local cement produc- large construction booms. A construction tion has dropped significantly during the boom often results in a spike in the cost of war due to targeting of such production fa- construction. In most countries that have cilities, and local steel plants have halted undergone major reconstructions, con- production. Other sub-sectors of the small struction costs have increased by 40 to 60 manufacturing industry supporting the sec- %. The increase of costs are usually de- tor have also been impacted (see Tables 7 rived from labor cost increases, construc- & 8). In addition to the substantial drop in tion material cost increases (mainly from demand for products such as bricks and non-tradable goods) or increases of fuel aluminum works, these industries were and transposition rates. In Yemen there is also affected by the local fuel crisis and a risk of similar inflation in the construction loss of electricity. market once reconstruction begins apace. The Government and donors should ex- Financial institutions and the role of the CBY plore ways to ensure early preparation for 70. The financing of contractors through reconstruction. This could involve look- commercial banks, by obtaining bid ing at how to encourage firms to produce bond and bank guarantees for advance construction materials in preparation for reconstruction rather being caught short 28 once high demand hits and efforts to re- struction that has begun in Aden gover- build the productive and financial capac- norate has already resulted in increased ity of construction materials producers and employment in the private construction construction service companies. Initial sector, demonstrating the potential for rap- analytical work to assess demand for re- id impact. More broadly, as a primary pro- construction would support efforts to build viders of goods, services, and jobs in Ye- understanding and confidence in the sec- men, a quick recovery in the private sector tor’s recovery. This could then feed into a could help to put hundreds of thousands donor reconstruction fund to fast-track re- of people back to work across the country. construction, possibly even before conflict has ended in all areas. 74. Yemeni communities’ ability to re- cover from the effects of the war, to an 72. For post-conflict situation in Ye- extent, can be gauged by the vibrancy men, make use of country systems to of its local businesses that provide promote fast-track procurement of ser- goods, services and jobs to the com- vices and materials. Create a mecha- munity – from the bakery or internet café nism for processing and expedite public down the street to the local workshops and procurement and tendering in order to banks. But these enterprises, particularly facilitate the reconstruction efforts. Such the smaller ones, have limited means to mechanism should i) minimize contrac- cope with the effects of conflict, and con- tual risks, and delays in payments; ii) sequently many reduce or even cease enforce provision of liquidated damages their business activities outright. They and (LD), where appropriate and cancel non- their workers then may join the ranks of performing contracts; and iii) Promote job the unemployed and discontented. Jobs, creation through the use of labor-intensive goods, and services are lost to the com- construction technologies, especially in ru- munity, further contributing to fragility and ral infrastructure development projects. In insecurity. Conversely, a robust recovery, addition, donors should support efforts to which generates equitable growth and job improve capacity of local contractors and creation, is an important factor in achieving other construction sector actors and stan- a durable peace. Key initiatives to support dards in the construction sector. the role of the private sector in resilience and recovery are outlined below, including those of particular importance today, even IV. Key Recommendations For as the conflict is ongoing, and in the early Accelerating Reconstruction & post-conflict phase. Private Sector Recovery Recommendations The Role of the Private Sector in Socio- Short term (3 -6 months) economic Resilience and Recovery 1. Support the CBY to restart trade fi- 73. The Yemeni private sector repre- nancing and, if need be, in the interim sents a prime opportunity and an indis- and on an emergency basis, directly pensable channel for the support of the provide trade financing to importers of recovery, socio-economic resilience, essential food commodities to buy new and rebuilding of Yemen. The recon- food stocks from abroad. Every effort should be made to help the CBY to restart 29 trade financing. However, if this cannot be taries, etc.) implement a risk approach for achieved in the short term, a trade finance customer due diligence (CDD), politically facility is urgently needed to help import- exposed persons (PEPs) and identify ben- ers to get the letters of credit required to eficial owners of bank accounts and busi- bring in vital imports such as food as well nesses. as reconstruction and the resumption of businesses more broadly. This will require 3. Support development of efficient both the provision of funds and a well-de- third-party verification and inspection signed facility managed by a professional regime to facilitate trade during the and competent entity and should begin as conflict in the immediate post-conflict soon as possible, even before the conflict period. Alongside trade infrastructure in- is over. Such a fund could be managed by vestment, Yemen will also likely need sup- an international organization, or a com- port in reestablishing its customs regime mercial third party. Once the conflict ends, and in particular with carrying out its in- focus should again return to re-forming the ternational responsibilities with regard to CBY and rebuilding its capacity to provide cargo security. In the immediate term, a trade financing so that a wider array of third party support for establishing the cus- businesses can easily import. toms regime and conducting inspections, including possible improvements to the 2. Reverse the de-risking trend to re- UNVIM system, could be provided to en- connect the Yemeni banking system to sure efficiency and security. the rest of the world. The resumption of operations that rely on the Central Bank 4. Support the construction sector to (international wire transfers, trade finance help to retain current manufacturing operations, and remittances) will be es- capacity and employment in the con- sential in the context of a post-war recon- struction sector and to help to avoid in- struction program, a particular emphasis flation in construction materials when should be put on the measures aiming at reconstruction begins. There are a vari- reversing the “de-risking” trend. To do so, ety of ways through which the Govern- Yemen will need to demonstrate a high- ment and donors can achieve the fol- level political commitment and show the lowing s: effectiveness and technical compliance • Support productive and financial of its AML/CFT system with the updated recovery and capacity building of international standards. With regard to ef- existing Yemeni construction firms fectiveness, which was considered poor to prepare now for a role in recon- before the war, Yemen must conduct a Na- struction, for example, through ad- tional Risk Assessment, develop domes- dressing financial constraints cre- tic inter-agency coordination, and ensure ated by non-payment of arrears. that financial information will be effectively • Assess approaches for bringing used in the investigation, prosecution and forward manufacturing jobs asso- adjudication of ML/FT cases. With regard ciated with selected construction to the compliance, specifically for preven- inputs (e.g. create manufacturing tive measures, Yemeni authorities will jobs now for standard construction need to ensure that banks and financial materials). institutions as well as banking supervisors • Create a donor- funded financ- and designated professions (lawyers, no- ing facility to finance reconstruction 30 once peace returns to build confi- nated with IDP resettlement programs to dence in the construction sector. ensure the right mix of incentives and se- • Establish a skills training facility to quencing to support the recovery of com- respond to private sector demands munities hardest hit by the conflict. IDPs in both manufacturing and con- are more likely to return as part of a com- struction. A skills gap analysis fo- munity, rather than as households or indi- cused on future construction sector viduals and a grants program could create needs in Yemen informed by likely a clear incentive at the community level for compositional changes in its post- return. This in turn should reduce the risk war workforce could identify critical to individual households from return and skill bottlenecks that could be filled help foster recovery. Specialized techni- by training IDPs in advance of their cal and financial assistance would also be return home. This would support a provided for young entrepreneurs under faster reconstruction process and this program. For the agricultural sector, faster rate of return for IDPs as a the program would focus on assistance consequence. to affected small-scale farmers, fishers, or livestock producers whose activities 5. Support Micro, Small and Medium En- were disrupted or affected by the conflict terprises (MSMEs) and Entrepreneurs, through a support program to support the including farm and non-farm activities, return of farming and fishing households through recovery grants. MSMEs are a to their productive activities. This should critical part of the Yemeni economy both be launched in close coordination with in terms of provision of services and basic IDP support and resettlement programs, goods and in terms of employment. In rec- since the incentives must be balanced to ognition of this, the World Bank, as a part promote the safe and sustainable return of of ongoing emergency support to Yemen, households to their farms/ fisheries. This has launched a program of small grants should include a farm restoration support for MSMEs in sectors related to food se- package (inputs such as seeds, seed- curity such as agriculture and fisheries. lings, and fertilizers, assistance to restore Given the importance of the MSME sec- land and irrigation systems, and cash as- tor, expanding such a grant program to a sistance to sustain the household until wider range of MSMEs, and in particular cultivation is restored). Farming and non- those that provide basic services and utili- farming MSMEs should be linked through ties, is a logical next step. A recovery grant supply chain based approaches that sup- program would help MSMEs to generate port small-scale goods or service provid- employment opportunities, rebuild their in- ers or post-harvest processing enterprises ventory, equipment, and upgrade skills. In related to the agriculture / fishery / livestock particular, providing grants to MSMEs to sectors. It should also include community- rapidly reconstitute their working capital is based assistance to restore local markets likely to be critical, since too long delays and access to markets beyond the local may force these firms to close. Expanding community. There may also be a case for the grants program in this way could begin expanding this form of recovery grants to whilst the conflict is still ongoing and ac- MSMEs that have already been forced to celerate in the post-conflict period. These close and wish to re-open or even to en- grants could be in the form of cash or in- trepreneurs who wish to start a business. kind grants and would need to be coordi- This would also allow for a more explicit 31 and easier targeting of businesses run by generating some scenarios for recovery of women through this grant program, which trade, labor mobility, and remittances in in is likely to be particularly important given peace time could be an important contri- the tendency for construction businesses bution to peace talks. High quality analysis to be male run. could help all parties to come to a mutually beneficial agreement on such questions. 6. Provide the analytical economic un- derpinnings for peace. A final recom- Short - Medium Term (6- 24 months) mendation in the immediate term is to con- duct analytical work even before the end 7. Provide investment guarantees to of the conflict with the aim of contributing help to mobilize private sector capital an economic perspective to the peace pro- for infrastructure, service delivery proj- cess. This is particularly relevant because ects, and other transactions that would the sustainability of peaceful settlement not proceed unless investors and lend- will be in part dependent on the sustain- ers are protected against specific risks. ability of the economic settlement under- The post conflict government will not have pinning it. Economic analysis provided by the resources needed to finance the in- the World Bank made important contribu- frastructure needs of the country after the tions to the Dayton Accords as well as to conflict ends. At the same time, attracting the negotiations and coordination on trade private investment into conflict affected during the Israeli withdrawal from Gaza. countries, or even recently post-conflict In the case of Yemen, this analytical work countries, is both challenging and critical should cover two themes. First, to highlight to financing recovery and reconstruction. in economic terms the cost of war in terms The political uncertainty inherent in post- of lost private sector activity, destroyed conflict contexts and the risk of further in- capital, weak investment, and disrupted stability dampens both foreign, local, and trade. This could take a similar form to diaspora investor interest. MIGA operates the Economic and Social Impact Assess- a Conflict-Affected and Fragile Economies ments which were conducted in Lebanon Facility (CAFEF) that provides an initial among other countries. Related to this, the loss layer to insure investments in conflict potential ‘dividends’ from peace could also affected countries such as Yemen. It is be calculated to further build the case for recommended to make CAFEF or a similar peace. Second, any peace agreement will Yemen-specific guarantee fund available necessarily include elements of a new or in Yemen for both larger scale infrastruc- revised economic order. Yemen’s future ture projects, in particular in the energy trade relations with its neighbors are likely sector, and smaller private investments or to have a significant impact on its ability other transactions (such as service deliv- to recover and maintain stability. An initial ery contracts which involve use of assets road map for trade relations should be in- in-country or other risk exposures). Ide- cluded as a part of a sustainable peace ally, it would ideally support investors of all plan. Similarly, the question of labor mobil- kinds – foreign, diaspora, and local. The ity for Yemenis to work in GCC countries is Gulf Cooperation Council (GCC) countries likely to be a critical element for Yemen’s may be a potential source of finance for socio-economic recovery. Analytic work to such a fund. highlight the importance of trade and labor mobility to the Yemeni economy as well as 32 8. Finance the reconstruction of trade Scheme to help the CBY to restore infrastructure to revive trade activities public trust in financial institutions; and address the deteriorating food in- • Provide technical support to frag- security. In the short term while conflict is ile financial institutions to facilitate ongoing, rebuilding critical trade infrastruc- their restructuring. This could also ture is important to food security and provi- involve technical assistance to the sion of medicine to the population. In the CBY to facilitate complex opera- immediate post-conflict phase, rebuilding tions such as mergers, liquidations, a broader set of trade infrastructure should or creation of bad banks; be a central priority for all parties. For the • Provide wholesale facilities (in- World Bank and other donors, investing in cluding guarantees) to eligible fi- infrastructure projects is an obvious step in nancial intermediaries (banks, both the immediate and longer term. microfinance institutions, venture capital) in order to inject liquid- 9. Create a public-private Financial ity and facilitate the resumption of Sector Restructuring Agency (FSRA) credit and equity finance toward the to support the authorities in their effort private sector. Current SFD finan- to restructure the banking sector. The cial intermediation activities should mandate of this institution would include be then transferred from the FSRA the following: (which would at the same time clar- • Inject capital in financial institu- ify the role of SFD, which currently tions (banks and microfinance insti- cumulates many potentially con- tutions) that are deemed viable with flicting development roles); and a view of restoring their solvency • Provide technical assistance to and accelerating their recovery pro- financial institutions to perform cess; sound NPLs restructuring. • Create a Deposit Insurance 33 ANNEX 1 Overview on Damages to Commercial Road Network and Wartime Alternatives Route Status Alternative Routes Sana’a – Mareb Mines road and is completely out of Sana’a – Al-Jawf – Mareb (via service Arhab or Harf Sufian), which is also used as the road to Al-Wadia’ah, and then returning viaMareb – Al-Baydha – Sana’a (via Hareeb, Shabwa, Al-Baydha, Rada’a, Dhamar, and Sana’a), where the overall travel time increased more than four folds All routes that used to Closed due to ground battles in Nehm Mareb – Al-Baydha – Sana’a (via connect Sana’a with and the closure of the road from Sana’a Hareeb, Shabwa, Al-Baydha, eastern governorates to Mareb Rada’a, Dhamar, and Sana’a), or via Mareb; namely, Aden – Taiz – Sana’a, which is a Al-Mahrah, Hadhram- very long detour )aut, and Shabwa Al-Hodeida – Sana’a Closed because all bridges and connec- Al-Hodeida – Anis (Dhamar) – tions on the road were hit by airstrikes; Sana’a, which is used to bypass temporary roadbeds are made, but they the regular road from Sana’a to go away with rainfalls Al-Hodeida via Manakah; however, this alternative route is long and not safe and dangerous bandits are often encountered Aden – Taiz (via Bridges and connections were hit by Aden – Hayjat Al-Abd – Haifan – )Karesh, Al-Rahidah airstrikes, including Akan bridge; although Taiz, or continuing to Al-Turbah and temporary roadbeds were made during then entering Taiz through Al-Ho- 2015, large trucks could not pass through ban, which was used an alternative and small trucks were used instead to road connecting Aden with the re- transport goods to the other side of the maining governorates, but recently damaged bridge. Since the beginning of it has become a battle ground and it 2016, this road became entirely closed gets closed often due to continuous battles and mines on the road Aden – Taiz – Sana’a Closed as bridges were hit by airstrikes )Via Hayjat Al-Abd (Hayfan Haradh – Al-Hodeida Closed Via Hajjah – Sana’a Sana’a – Sa’adah The road from Khamer to Sa’adah is The road from Kahmer to Sa’adah closed was substituted by Al-Mallaheedh, but it has now become impossible to pass through due the ongoing war in that area. Presently, it is pos- sible to reach Sa’adah via Amran, but at the risk of getting hit by air- strikes, especially when transporting .goods All roads to Taiz, Reaching Taiz is very difficult and dan- especially Taiz city gerous, and often impossible especially when transporting goods 34 REFERENCES 1. Apex Consulting. (November 20, April 2016: Ministry of Planning and In- 2016). 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