Improvement in the Yemeni riyal: Is it a genuine recovery or a temporary bubble?

The Yemeni rial has witnessed a sudden and significant improvement in its value against foreign currencies, a development that has sparked anticipation and caution in economic and business circles. This rapid recovery, following a sharp decline, has put market confidence to the test and raised legitimate questions about the sustainability of this improvement and whether it is the result of genuine reforms or merely temporary speculation.

Context of the economic crisis and historical background

To understand the nature of this sudden improvement, it is necessary to return to the roots of the economic crisis that has plagued Yemen since the outbreak of conflict in 2015. The ongoing war has led to a sharp contraction in GDP and a halt to oil and gas exports, which were the mainstay of the national budget. The situation was exacerbated by the decision to relocate the Central Bank of Yemen from Sana'a to Aden in September 2016, which resulted in a split in the country's financial and monetary institutions and the emergence of two different exchange rates between areas controlled by the internationally recognized government and those controlled by the Houthis.

Over the past years, the national currency has lost a significant portion of its value, leading to runaway inflation and soaring prices for basic commodities in a country that relies on imports to cover 90% of its food needs. The riyal's exchange rate has consistently been more closely tied to external interventions, such as Saudi deposits, or political developments, than to productive economic factors.

Market confusion and confidence challenges

The current improvement comes amid concerns among traders and importers that this rise is "illusory" or short-lived. The main problem is that food and consumer goods prices are not responding to this improvement as quickly as they did to currency devaluation. Traders fear selling their inventory at discounted prices based on the new exchange rate, only to have the currency fall again, exposing them to capital losses. This state of "uncertainty" reflects a deep crisis of confidence between the market and the monetary policies in place.

Importance and expected impact

This event is of great importance on several levels:

• Locally, Yemenis are eagerly awaiting the impact of this improvement on their purchasing power, as millions live below the poverty line. Currency stability is the first key to alleviating the humanitarian crisis, which the United Nations describes as the worst in the world.
• Economically: This improvement is considered a test of the Central Bank in Aden’s ability to enforce monetary policy tools, control the turbulent exchange market, and combat currency speculation that has harmed the national economy.
• Regionally and internationally: International donors and financial institutions (such as the International Monetary Fund) are monitoring these developments to assess the feasibility of economic reforms and financial support provided to Yemen.

In conclusion, the sudden improvement in the Yemeni rial remains a double-edged sword; it could be the beginning of a gradual recovery supported by strict government measures and sustained external support, or it could be just a temporary "bubble" that may burst and return the currency to its initial lows, unless the structural imbalances in the Yemeni economy are addressed and monetary policy is unified.