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Central Bank Crisis Risks Famine in Yemen
Central Bank Crisis Risks Famine in Yemen
Houthi militants stand in the house of Houthi leader Yahya Aiydh, after Saudi-led air strikes destroyed it in Yemen's capital Sanaa, 8 September 2015. REUTERS/Khaled Abdullah
Report 167 / Middle East & North Africa

Yemen: Is Peace Possible?

Yemen's outlook is bleak. It is crucial that the opposing blocs and their regional allies commit to a political process to resolve the conflict, but there is no end in sight. The immediate priority should be an agreement on humanitarian aid and commercial goods for areas where civilians are under siege.

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Executive Summary

Nearly a year on, there is no end in sight to Yemen’s war. The conflict pits Ansar Allah (Huthi) rebels and military units allied with ex-President Ali Abdullah Saleh against a diverse mix of opponents, including what remains of the government of President Abed-Rabbo Mansour Hadi, backed by a Saudi-led coalition supported by the U.S., the UK and France. Ending the war requires negotiations leading to an interim settlement that must include security arrangements providing for militia withdrawal from cities, a return to the political process pursuant to UN Security Council Resolution 2216 and agreement on a transitional leadership. While these are matters for Yemeni parties to decide during UN-sponsored negotiations, Saudi Arabia’s buy-in will be essential, spooked as the kingdom is by what it perceives as an Iranian hand behind the Huthis and their attacks on Saudi territory. Reaching agreement will take time, a luxury Yemenis do not have. The immediate priority thus should be to secure agreement on delivering humanitarian aid and commercial goods to war-torn, besieged areas.

The descent into civil war has its roots in a post-2011 political transition that was overtaken by old-regime elite infighting, high-level corruption and inability of the National Dialogue Conference (a cornerstone of the 2011 transition roadmap) to produce consensus on power sharing and state structure, especially the status of south Yemen, where desire for independence is strong. The Huthis, a Zaydi (Shia) revivalist movement turned militia, thrived by framing itself as an uncorrupted outsider. They struck an opportunistic alliance with their old enemy, Saleh, against common domestic foes, including the Sunni Islamist party, Islah, the powerful Ahmar family and General Ali Mohsen al-Ahmar (no relation to the family), all of whom had turned against Saleh during the 2011 uprising. When the Huthis captured Sanaa, on a wave of popular resentment against the Hadi government in September 2014, a majority of Yemenis were already disillusioned with the transition. Yet, the Huthis overstretched: trying to forcibly expand their writ over the entire country, they alienated new supporters and confirmed critics’ worst fears.

In March 2015, the internal power struggle was eclipsed and reshaped by a Saudi-led military intervention. Saudi Arabia views the Huthis as part of an expanding Iranian threat in the region. Under the leadership of King Salman and his son Mohammed bin Salman, the defence minister and deputy crown prince, it decided to attempt to reverse Iran’s perceived gains by pushing back the Huthis and reinstating the Hadi government. It rallied a coalition of nine mostly Sunni Arab states, the United Arab Emirates (UAE) prime among these. The U.S., UK and France have lent support to the war effort, even as they harbour reservations regarding the conflict’s necessity and are concerned about its possible duration and unintended consequences, particularly the near-catastrophic humanitarian crisis (bordering on famine) and uncontrolled spread of violent jihadi groups such as the Yemeni franchises of al-Qaeda and the Islamic State (IS).

The intervention has layered a multidimensional, thus more intractable, regional conflict between Saudi Arabia and Iran onto an already complex civil war, significantly complicating prospects for peace. It has also solidified opposing domestic fronts that have little in common save for their position on the Saudi-led military campaign. On one side, the Huthis and Saleh have wrought a tactical alliance, despite their mutual distrust, against what they view as an existential threat. On the other, the anti-Huthi bloc is even more diverse, bringing together a range of Sunni Islamists, (mostly secular) southern separatists and tribally/regionally based fighters who reject Huthi/Saleh dominance but have radically different visions for the future of Yemen.

After nearly a year of combat, no side is close to a decisive military victory. Huthi/Saleh fighters are ensconced in the Zaydi northern highlands, while the Saudi-led coalition and its Yemeni allies are strongest in Shafei (Sunni) areas in the south and east. As the latter have pushed the Huthi/Saleh front out of southern territories, where they were largely viewed as northern invaders, a range of armed groups, including al-Qaeda in the Arabian Peninsula (AQAP) and southern separatists, have moved in to take their place. If the Saudi-led coalition succeeds in capturing additional territory in the north, which it appears determined to do, the result is likely to be a protracted, bloody battle producing additional chaos and fragmentation. For its part, the Huthi/Saleh bloc is significantly complicating peace prospects by increasing cross-border attacks into Saudi Arabia, a move that makes it more difficult for the kingdom to halt the conflict when it cannot boast a clear military victory.

Each side’s commitment to UN-led peace talks is lukewarm. Neither is defeated or exhausted; both believe they can make additional military gains; and neither has been willing to make the compromises required to end the violence. The structure of talks, too, is problematic, with Saudi Arabia, a core belligerent, conspicuously absent. Prospects for a ceasefire and productive Yemeni talks would be helped by direct high-level consultations between the Huthi/Saleh bloc and Saudi Arabia over sensitive issues such as the border and the Huthis’ relationship with Iran. Moreover, to succeed, UN-led negotiations must be made more inclusive, expanding as soon as possible beyond the Yemeni government and Huthi/Saleh delegations to incorporate other Yemeni stakeholders.

The immediate future looks bleak. The war has devastated an already weak infrastructure, opened vast opportunities for AQAP and IS to expand and widened intra-Yemeni political, regional and confessional divides. The UN estimates that at least 6,000 people have been killed, including over 2,800 civilians, the majority by Saudi-led airstrikes. Even if the UN can broker an agreement to end major combat, the road to lasting peace will be long and difficult. The country is broken to a degree that requires significant time, resources and new political agreements to overcome. Without a breakthrough, it will continue descent into state disintegration, territorial fragmentation and sectarian violence. That trajectory would have calamitous consequences for Yemen’s population and severely undermine Gulf security, particularly Saudi Arabia’s, by fomenting a new refugee crisis and feeding radicalisation in the region to the benefit of violent jihadi groups.


To achieve a general ceasefire and return to a Yemeni political process

To all belligerents: 

  1. Abide by the law of war, refrain from media campaigns that label opponents in sectarian terms or as agents of foreign states and express support for and actively work toward a ceasefire and negotiations leading to a durable settlement. 

To Saudi Arabia, the Huthis and former President Ali Abdullah Saleh’s General People’s Congress Party (GPC):

  1. Open immediate high-level consultations on priority issues, such as de-escalating tensions on the border and the Huthis’ relationship with Iran, that could facilitate a UN-brokered ceasefire and meaningful intra-Yemeni talks. 

To the government of Yemen, the Huthis and Saleh’s GPC:

  1. Participate without delay or preconditions in the next round of UN-brokered negotiations on an agenda specified by the UN special envoy.

To the Saudi-led coalition, particularly Saudi Arabia and the United Arab Emirates (UAE):

  1. Encourage government support for the UN special envoy’s negotiating agenda, including implementation of UN Security Council Resolution 2216 and compromises needed to implement it and revive the Yemeni political process.

To the UN Security Council permanent members, especially the U.S., UK and France:

  1. Back the UN special envoy, including by supporting a follow-up Council resolution calling for an immediate ceasefire by all sides and an inclusive political compromise. 
  2. Condition the supply of weapon systems and ammunition to Saudi-led coalition members on their support for an immediate ceasefire and inclusive political negotiations. 
  3. Encourage high-level, direct consultations between Saudi Arabia and the Huthi/Saleh bloc.

To improve the chances of a durable political settlement

To the UN special envoy:

  1. Improve the negotiating framework by:
    1. Integrating regional security concerns and economic reconstruction into negotiations by supporting high-level official consultations and unofficial Track II discussions between Saudi Arabia and Yemeni stakeholders, particularly the Huthis and Saleh’s GPC, that are separate from but inform the intra-Yemeni negotiations. 
    2. Expanding negotiations to include, as soon as possible, additional Yemeni stakeholders, among them the Sunni Islamist party Islah, Salafi groups and the Southern Resistance, so as to ensure a durable ceasefire; to be followed by inclusion of civil-society groups, political parties and women’s organisations, to help resolve outstanding political challenges; and
    3. Prioritising three political challenges: i) agreement on a broadly acceptable executive leadership and more inclusive government until elections; ii) a mechanism for resolving the future status of the south and other regions seeking greater devolution; and iii) accountability and national reconciliation.

To Ansar Allah (the Huthis): 

  1. De-escalate the conflict and build confidence by: releasing political prisoners; allowing unhindered humanitarian and commercial access to civilians in Taiz; and suspending hostilities on the Saudi border for a specified period to show capacity to do so and goodwill ahead of UN talks. 

To Saleh and the GPC: 

  1. Work with Saudi Arabia, the UAE and Yemeni stakeholders to agree on the former president’s departure from Yemen for a set period of time as part of the larger political settlement, ideally along with General Ali Mohsen and President Abed-Rabbo Mansour Hadi. 

To President Hadi and the Yemeni government:

  1. De-escalate the conflict and support compromise by: refraining from calling for the military “liberation” of Sanaa and other cities; facilitating unhindered humanitarian and commercial access to all parts of Yemen, including Huthi-controlled areas; and recognising publicly the need for political reconciliation and a revived Yemeni political process. 

To Yemeni parties and organisations currently left out of the UN negotiating framework, except groups that reject politics:

  1. Lobby for inclusion in the negotiations and accept an invitation, if offered, to participate in them, as well as in Track II discussions, without preconditions.
  2. Select representatives for negotiations and prepare proposals for elements of a political settlement, especially on sensitive issues such as state structure, national power sharing and militia disarmament, demobilisation and reintegration (DDR). 

To the kingdom of Saudi Arabia:

  1. Communicate specific security requirements and political concerns, especially regarding the border, disarmament issues, and the Huthis’ relationship with Iran, directly to all Yemeni stakeholders involved in negotiations and the UN special envoy.
  2. Participate, if requested by the UN special envoy, in official consultations and unofficial Track II discussions supporting Yemeni negotiations; make specific proposals for reconstruction, including in the north, and work toward incorporating Yemen into the Gulf Cooperation Council.
  3. Suspend military action in the capital, Sanaa, for a specified period of time to show goodwill ahead of UN negotiations.

To the UAE:

  1. Assist in political resolution of the southern issue by helping the Southern Resistance select its representation for future talks.

To the Islamic Republic of Iran:

  1. Approach the Yemen crisis as a low-cost, high-value opportunity to reduce tensions with Saudi Arabia by: 
    1. Ending inflammatory rhetoric that stokes fears of Iranian intent to use Yemen to threaten the security of Saudi Arabia;
    2. Encouraging the Huthis to participate constructively in both UN negotiations and direct discussions with Saudi Arabia on resolving the conflict; and
    3. Discussing directly with Saudi Arabia ways of de-escalating tensions in the region, including through actions in Yemen that could start with ending any existing military support to the Huthis.

Brussels, 9 February 2016

A boy pulls containers of water amid an acute shortage of clean drinking water in Sanaa, on 20 April 2015. REUTERS/Mohamed al-Sayaghi

Central Bank Crisis Risks Famine in Yemen

Efforts to move Yemen’s Central Bank will likely add to risks of insolvency and starvation, while complicating and deepening civil war divisions. Regional and international powers should rally round this critical institution and help revive UN-brokered peace talks.

The collapse of UN-mediated peace talks in August is sending Yemen’s war into a new phase, potentially with even more devastating consequences. During eighteen months of fighting between a Saudi-led coalition backing the internationally- recognised government of President Abed-Rabbo Mansour Hadi and Huthi (Zaydi/Shiite) rebels aligned with forces under the previous president, Ali Abdullah Saleh, the population has been the primary victim, sustaining air bombardments, rocket attacks, and economic blockades. Over 10,000 people, approximately 4,000 of them civilians, have been killed, the majority in Saudi-led coalition airstrikes. Both sides stand accused of repeated violations of international humanitarian law, actions that make the conflict increasingly difficult to resolve. Over 3.2 million Yemenis are internally displaced. Fourteen of 26 million are food insecure, and 370,000 children under age five risk severe, acute malnutrition. Now the situation is about to get worse.

On 19 September, President Hadi fired the Central Bank governor and announced he would move the bank from the Huthi/Saleh-controlled capital, Sanaa, to the government’s temporary base in the port city of Aden. The decree could mark a turn toward economic warfare aimed at strangling the Huthi/Saleh alliance financially in its northern strongholds. Yet, ordinary Yemenis would suffer the most.

War in Yemen

April Longley Alley, Crisis Group Senior Analyst for the Arabian Peninsula, explains in this video how Yemen reached this destructive impasse. CRISIS GROUP

The move appears to have no well-thought-out implementation plan and opens a host of uncertainties, including a breakdown of the banking system and continued inability to pay salaries that would accelerate economic collapse and could tip large parts of the country into famine. It will also vastly complicate prospects for a negotiated settlement and almost certainly encourage the Huthi/Saleh forces to escalate, including attacks inside Saudi territory. Not least, it will deepen the north-south political divide, making more difficult future efforts to negotiate a peaceful solution to the troubled relationship between these areas.

The economy has long been a weapon in the war. Huthi/Saleh forces enforce, with occasional loosening, a crippling blockade on the second largest city, Taiz, which has been fought over for more than a year, with disastrous humanitarian consequences. The Saudi-led coalition imposed a tight air/sea blockade on Huthi/Saleh-controlled areas early in the war, ostensibly to prevent Iranian weapons from entering. While that situation has gradually improved since May under a UN verification mechanism, the cumulative humanitarian impact has been calamitous.

There had been a tacit agreement between the sides to allow the Central Bank, run by veteran technocrat Mohammed Awad bin Humam, to perform its functions relatively free of interference. Diplomats and international economists agree that, under increasingly adverse circumstances, the bank has remained largely impartial, guaranteeing import of basic commodities, protecting the riyal’s value and paying public-sector salaries nationally. Without revenue from interrupted hydrocarbon exports, formerly approximately 70 per cent of the government’s budget, or donor support, however, the bank is rapidly approaching insolvency. Acute riyal shortages are interfering with its ability to pay salaries, and the Hadi government has blocked bin Humam from printing additional currency through a Russian company.

The bank’s looming insolvency coincides with a military stalemate and the breakdown of peace talks. In three months of negotiations in Kuwait, the parties came closer to a negotiated settlement than ever before. Both realised they were mired in a costly war of attrition, in which the Saudi-led coalition failed repeatedly to dislodge Huthi/Saleh forces from their northern positions, and the latter defended their area at great human cost without making headway in Taiz and further south. They sensibly entered into discussions on force withdrawals, general disarmament and formation of a national unity government, though the Huthis were unwilling to go into details on withdrawals. The talks faltered on sequencing security and political steps, however, and both sides have redoubled efforts to make decisive battlefield gains.

The bank’s looming insolvency coincides with a military stalemate and the breakdown of peace talks.

Even before peace talks ended, the Huthi/Saleh alliance had begun to entrench its political control of the north, highlighting the Hadi’s government’s lack of influence there, by forming a high political council as a first step toward a rival government. It also escalated attacks inside Saudi Arabia and is attempting to hold territory there. The Saudi-led coalition has pummelled Huthi/Saleh-controlled areas with airstrikes, and its Yemeni allies have tried, and again failed, to enter Sanaa from the north east. Possibly seeing it has limited military options in the northern highlands, Saudi Arabia and its main partner, the United Arab Emirates (UAE), now appear to be shifting the fight to the economic front, where they have significant leverage.

During the Kuwait talks, the Hadi government and its Gulf Cooperation Council backers turned increasingly critical of the Central Bank, accusing its governor of allowing the Huthi/Saleh forces to pilfer state coffers to fund their war effort. The heart of the issue is the monthly disbursal of 25 billion riyals (approximately $100 million) to the Huthi-controlled defence ministry. This notoriously opaque line item in the 2014 budget, which bin Humam has continued to implement absent a new budget, benefits the Huthis disproportionately, as they, like every group in Yemen before them, have likely stacked the ministry payroll with their loyalists.

Though Saudi Arabia intervened in the past to prop up the economy (and still has a $1 billion Central Bank deposit), it is no longer prepared to put cash into a bank it reasonably views as being used to finance a war against it and seems less concerned the bank’s demise in Sanaa could precipitate a total economic collapse that arguably would not be in its long-term interest. The Huthi/Saleh alliance has been unwilling to negotiate guarantees to address Saudi concerns, while Hadi and his supporters expect Saudi Arabia and the UAE to replenish the bank’s cash once it is in Aden. Faced with the prospect of a collapsing bank in Sanaa and a move to Aden that could inject much-needed liquidity even as it raises the possibility of economic warfare, the U.S., UK, UN and other international players have not opposed the move.

Yemen has become a failed and divided state and soon could also be a starving one.

Paradoxically, Hadi issued his decree on the heels of a push by his international backers to revive the peace talks. On 25 August, U.S. Secretary of State John Kerry announced that the “quad” (U.S., UK, Saudi Arabia, UAE) had agreed with the UN special envoy, Ismail Ould Cheikh Ahmed, to renew negotiations for a comprehensive settlement that would move simultaneously on political and security tracks to achieve a Huthi/Saleh withdrawal from Sanaa, their handing over of heavy weapons to a third party and formation of a unity government. The plan brings together many elements the UN envoy proposed in Kuwait, while meeting the Huthi/Saleh demand that political and security compromises be signed as part of a package. It also closely sequences those compromises in a way that would give wins – and the perception of these – to both parties.

The proposal might force the Huthis, in particular, to show their cards, requiring them to either accept a plan that accommodates their demands or reject it, thus indicating unwillingness to make concessions to which they had previously committed in principle. But the promising initiative could be stillborn. None of its supposed backers, save Kerry, has strongly championed it. The UN has yet to officially submit a revised roadmap to the sides incorporating its ideas. And now the bank announcement undermines and complicates diplomatic prospects.

Yemen cannot bear the demise of yet another opportunity to end the war. It has become a failed and divided state and soon could also be a starving one. One of its last functioning, technocratically-run institutions, the Central Bank, is in peril. Pulling back from what threatens to be even more severe fragmentation and suffering requires urgent steps:

  1. A UN-brokered plan for effective Central Bank functioning and a ceasefire to allow immediate resumption of talks.
    • As part of this, the Hadi government would commit to resume paying civil servants throughout the country, suspending plans to move the bank to Aden and continuing to rely on the bank’s infrastructure and staff in Sanaa. Both sides would agree to a plan for collaboration between the bank’s Aden branch and Sanaa headquarters until a peace agreement.
    • To ensure civil-servant salaries will be paid nationally and the liquidity problem is addressed, the sides would agree to support immediate printing of additional riyals, which are essential for resumption of salary payments and should be delivered to Central Bank offices in Sanaa, Aden and elsewhere, according to a plan based on the 2014 budget’s salary stipulations. Ideally, defence ministry salaries would be paid nationally according to the 2014 budget and personnel lists, which include combatants on all sides but exclude Huthi fighters added since 2015. 
  2. Resumption, immediately following a ceasefire, of UN-mediated talks based on a new roadmap in line with the quad initiative.
    • The UN envoy should present the revised roadmap to the belligerents, preferably in writing, including a framework for political and security compromises moving simultaneously to result in phased withdrawals, disarmament and quick formation of a unity government.
    • The Huthi/Saleh delegation should, in response, propose a withdrawal plan to become part of the comprehensive agreement. Concluding an agreement would be contingent on negotiation of the plan’s details.
    • To complete the comprehensive settlement, the envoy should add a mechanism to the settlement package for addressing regional autonomy demands, including the possibility of southern independence.

A devastating economic war of attrition may still be avoided, but only if the sides agree to an immediate ceasefire and return to peace talks. If a settlement cannot be reached based on the quad initiative, at least the ceasefire would give humanitarian agencies and governments time to put in place mechanisms to mitigate the impact on average citizens during the next phase of conflict.