How the Houthis' alternative economy is worsening Yemen's humanitarian crisis

On 30 March, Yemen's Houthi-led de facto government in Sana’a minted a new 100-riyal coin. The unprecedented move came under the pretext of finding a solution to the growing problem of damaged banknotes.

Yemeni analysts, however, saw it as yet another step the Iran-backed militia group has taken in an alternative, independent economy it has created, which further threatens ‘peace and stability’ in the war-torn nation.

In response to what it described as a “grave escalation,” the Internationally Recognised Government (IRG) in Aden warned citizens not to use the “counterfeit” currency, and in April issued a decision requiring banks in areas under Houthi rule to relocate their headquarters within 60 days to Aden.

The directive, said the head of the Studies and Economic Media Center in Yemen, Mostafa Nasr, was “necessary”, but “difficult to achieve”.

"The Houthis seized foreign currency reserves of $5 billion and Yemenis' bank deposits worth YER 500 billion ($ 1.9 billion) during the early years of the war"

“Financial institutions in areas under Houthi control need to find a framework to implement the new decision issued by Aden, otherwise, the whole banking system is under threat of collapse,” he explained.

The roots of the financial division can be traced back to 2014 when the rebel group first took hold of Yemen’s capital, Sana’a, and the IRG’s subsequent decision to move the central bank to Aden two years later.

“But concerns over an independent Houthi economy began to take shape in 2019, after the Houthis, citing concerns over inflation, decided to ban all newly issued IRG banknotes, relying instead on what was already being circulated in the pockets under their control,” Mohammed Qahtan, professor of economy at Taiz University, told The New Arab.

Sana’a’s de facto government also pegged the Yemeni riyal’s exchange rate to the US dollar in 2019, leading to a disparity in the exchange rate. In IRG-controlled areas, the official rate has reached about YER 1,650, while in rebel-controlled areas it is set at around 560 riyals to the dollar.

“This fractured dual-rial banknote system can only widen the financial division and compound the humanitarian crisis afflicting the people,” Nasr told The New Arab. “It is absurd how a money transfer from government-held to Houthi-controlled areas, which many Yemenis depend on, can cost up to 70 percent of the total amount in fees.”

The rise of an empire

This complete financial split, which the Houthis aim to achieve according to independent economic journalist and analyst Wafiq Saleh, stems from their seizure of IRG coffers and its foreign currency reserves of $5 billion and YER 500 billion ($ 1.9 billion) in Yemeni bank deposits during the early years of the war.

During the same period, the rebel group assumed authority over the financial market in the areas under their control: it introduced 180 oil import enterprises, 250 currency exchange businesses, and 1,023 trading companies, all of which were granted tax and customs exemptions. Meanwhile, many companies in Yemen’s pre-war private sector were pressured into shutting down.

“These companies sprung out of nowhere, with many of their CEOs serving as a front,” an anonymous source, who operates in Houthi-controlled regions, told The New Arab. “The Houthis have provided them with capital and all necessary facilitations, whether for establishing factories or for importing raw materials.”

According to 2018 World Bank data, nearly 35 percent of Yemeni businesses have gone bankrupt since the start of the war, while more than 51 percent of the ones that survived experienced a reduction in their size and a decline in their operations.

“The new businesses that the Houthis introduced are blessed with a special status that grants them several privileges many of those within the private sector are deprived of,” Qahtan states. “This enables the rebels to control the flow of investment in their territories.”

"The Houthis keep their balance sheets under tight wraps, but according to an Internationally Recognised Government committee of experts, the rebel group generates about $1.8 billion annually in revenues"

A hostile takeover

The Houthis keep their balance sheets under tight wraps, but according to an IRG committee of experts, the rebel group generates about $1.8 billion annually in revenues. While a portion of this income stems from the financial infrastructure already established in their governed areas, a significant portion is derived from the customs sector, wherein the group has substantially ramped up fees in recent years.

Restrictions imposed on imported commodities through seven newly established Houthi customs checkpoints, where tariffs are 1,000 times those collected in IRG ports, have led to significant price hikes for basic goods in a country where 90 percent of foodstuffs are imported.

“I pay around $1,300 in customs fees at the port of Aden, but in Houthi ports, I can pay up to $15,000 for the same merchandise,” Majed Ahmed, who owns a small imports business, says.

Another importer, who preferred to remain anonymous for security concerns, says that what he pays at the port of Aden amounts to less than four percent of what he pays to the Houthi in customs.

According to Saleh, the Houthis are also waging a “war on the IRG’s economy,” employing various tactics such as launching drone attacks on IRG’s oil export ports in October 2022, boycotting gas purchases from Safer, Yemen's sole producer located in a government-controlled region, and obstructing the entry of products from government-controlled regions.

Yemenis are suffering

The impact of all this is strongest on citizens, according to Abdul Karim Haydar, a humanitarian activist in Taiz, who describes the economic situation as “catastrophic”.

“I have been working for years with several local and international aid groups, but we still can’t help these families get the most basic of needs,” he explained, adding that hundreds of Yemeni families are now living in tents relying on only one meal a day.

“We have been seeing also a growing number of malnutrition cases owing to an ongoing food shortage that impacts the most vulnerable Yemenis.”

Citizens report a recent surge in taxes that came after the World Food Programme’s (WFP) decision in December 2023 to suspend its activities in Houthi-controlled pockets.

In a press statement, the WFP announced the suspension of their food aid program due to insufficient funding and unsuccessful talks with the Houthis. The negotiations, which spanned nearly a year, sought to reduce the aid coverage from 9.5 million to 6.5 million people, but no agreement was reached.

“The rebel group has been exploiting humanitarian aid as a means to control the population and further boost its coffers,” says Qahtan.

The divisive monetary policies implemented by the Houthis led to an increase in prices across all of Yemen, as businesses, to generate profit from government-controlled areas to offset the burden of Houthi levies, imposed unified prices for their products and services, which many citizens say that they cannot afford.

"Restrictions imposed on imported commodities through newly established Houthi customs checkpoints, where tariffs are 1,000 times those collected in IRG ports, have led to significant price hikes for basic goods in a country where 90 percent of foodstuffs are imported"

Since the fall of Sana’a, Jameel Rajeh, a teacher and father of six, has been struggling to put food on the table.

“We used to pay less than YER 70,000, but now the rent went up to 80,000. We had to move to a small room, and it still wasn’t enough,” he said. “We eventually had to cut down to two meals a day.”

“The ban on exports from government-held regions has made everything worse. I work for 12 hours a day and I can’t get my family enough food or keep them warm,” Tawfiq Al-Sharbi, a resident of Sana'a, said, adding that the price of a gas cylinder, which used to be $5, now costs three times as much.

Hesham Al-Mahya is a veteran Yemeni journalist who has worked with several local online and print news outlets

This article is published in collaboration with Egab.