By Abigail Fielding-Smith in Sana’a
Sana'a, March 17, 2011- The central bank of Yemen has held an emergency meeting with commercial banks amid growing concern that a surge in demand for dollars caused by worsening security could trigger a run on the rial.
The International Bank of Yemen said on Thursday that its demand for cash dollars had risen from about $3m-$5m a day to $5m-$8m as the result of recent turmoil in which tens of thousands of anti-government demonstrators have taken to the streets.
“The rial was vulnerable before the crisis,” said Wilfried Engelke, a senior economist with the World Bank in Sana’a, Yemen’s capital. “Those structural issues have become more exposed.”
Yemen is particularly sensitive to concerns about its currency because it is so dependent on imports, with 80 per cent of its food coming from abroad. The rial tumbled 17 per cent to a record low of 250 rials to the dollar last year. According to analysts, the root of the problem is Yemen’s failure to generate enough hard currency export revenues to pay for its import bill.
Various measures undertaken since then, including intervention by the central bank, appeared to be succeeding in stabilising the currency. In recent weeks, however, an unprecedented popular protest movement, inspired by the uprising in Egypt has threatened the regime of President Ali Abdullah Saleh.
“All economic actors try to hedge against risk,” Mr Engelke said. “[The political crisis] would be an enormous stress on any financial system, not only Yemen’s.”
The central bank is expected to take several steps to stabilise the situation, including moving the official exchange rate closer to currency traders prices, as panicked citizens have been rushing to acquire foreign currency. According to traders, the value of the rial against the dollar has fallen almost 8 per cent in the past week.
Before the central bank brought in $100m in cash from abroad to lend to the banks a few weeks ago, there were not enough dollars in the system to meet the surge in demand. Frustrated bank customers contributed to a sense of panic.
Now banks are thought to be rationing supply in an effort to curb speculation and, although dollars are, in theory, available, many report problems withdrawing them from banks. “I tried to get out $5,000,” said one Sana’a resident who holds an account in dollars to pay employees. “They said, ‘there is no cash’.”
The last line of defence is the central bank’s foreign currency reserves, estimated at $5.9bn, which provides about six months of import cover. But with import costs rising and oil revenues, Yemen’s only substantial source of foreign currency, declining, reserves have been falling rapidly. They dropped by $1.6bn last year, and the Economist Intelligence Unit has predicted they are likely to dip below $4bn by 2012, although the forecast is expected to be revised further downwards following recent unrest.
According to Ibrahim al- Nahari, the deputy governor of the foreign banking operation at the central bank, the exchange rate should stabilise in 2011 when liquefied natural gas revenues produce new currency inflows. But Philip McCrum, a Yemen analyst at the EIU, said: “LNG revenue is a bonus but it’s not going to solve Yemen’s problems.”
Source: Financial Times