Economy Of Yemen

The economy of Yemen has long been characterized by its weakness and underdevelopment, a condition that has been significantly exacerbated by the outbreak of the Yemeni Civil War. This conflict has not only caused profound political instability but has also precipitated a severe humanitarian crisis, further undermining the country’s already fragile economic foundations. Prior to the unification of North Yemen and South Yemen in 1990, each region maintained distinct economic systems that were similarly struggling and underdeveloped. South Yemen operated under a socialist-oriented planned economy, whereas North Yemen had a more traditional, agrarian-based economy, yet both faced substantial challenges such as limited industrialization, poor infrastructure, and low levels of foreign investment. The economic difficulties intensified following Yemen’s support for Iraq during the 1990–91 Persian Gulf War. This political stance led to significant repercussions, most notably the expulsion of nearly one million Yemeni workers from Saudi Arabia, a critical source of remittances and foreign exchange for Yemen. In addition to this mass expatriation, both Saudi Arabia and Kuwait substantially reduced their economic aid to Yemen, further straining the country’s financial resources. The subsequent 1994 civil war within Yemen itself compounded these challenges by depleting the nation’s economic resources and destabilizing its already fragile political environment. The conflict disrupted trade, damaged infrastructure, and diverted government spending toward military expenditures rather than development. Faced with these compounded difficulties, Yemen became heavily reliant on aid from multilateral agencies to sustain its economy. In exchange for this assistance, the Yemeni government committed to implementing significant economic reforms aimed at stabilizing and restructuring the economy. In 1997, the International Monetary Fund (IMF) approved two major programs to substantially increase Yemen’s credit lines: the Enhanced Structural Adjustment Facility (ESAF), which was later renamed the Poverty Reduction and Growth Facility (PRGF), and the Extended Funding Facility (EFF). These programs were designed to support macroeconomic stability, structural reforms, and poverty reduction efforts. The Yemeni government attempted to implement a series of IMF-recommended reforms, which included measures such as reducing the civil service payroll to alleviate fiscal pressures, eliminating subsidies on diesel and other commodities to improve budgetary efficiency, lowering defense spending to redirect resources toward development, introducing a general sales tax to broaden the tax base, and privatizing state-run industries to stimulate private sector growth. However, progress on these reforms was limited, and the IMF suspended funding to Yemen between 1999 and 2001 due to the government’s failure to meet agreed-upon reform benchmarks. In October 2002, the World Bank extended a four-year economic support package to Yemen worth US$2.3 billion, complementing assistance from other bilateral and multilateral lenders. Despite this infusion of funds, Yemen’s continued failure to implement significant reforms led the World Bank to announce in late 2005 a planned reduction of financial aid by one-third over the period from July 2005 to July 2008. The World Bank also withheld a key component of $300 million in concessional financing pending the renewal of Yemen’s PRGF agreement with the IMF, signaling ongoing concerns about Yemen’s reform commitments. Nevertheless, in May 2006, the World Bank adopted a new assistance strategy for Yemen that included $400 million in International Development Association (IDA) credits for the 2006–2009 period, aiming to support poverty reduction and economic development initiatives. Further demonstrating international support, Yemen’s development partners pledged a total of $4.7 billion in grants and concessional loans for the period 2007–2010. Despite these substantial financial commitments and the country’s possession of significant oil and gas resources as well as agriculturally productive land, Yemen remained one of the poorest low-income countries globally. By 2018, over 80 percent of Yemen’s population lived in poverty, reflecting the deep and persistent economic challenges faced by the nation. The economy also faced additional strain from an average monthly influx of approximately 1,000 Somali refugees seeking work, which compounded existing challenges such as a high unemployment rate estimated to be between 20 and 40 percent. Yemen remained under considerable international pressure to implement economic reforms to avoid losing critical international financial support, underscoring the fragile nature of its economic recovery efforts. Historically, North Yemen’s economy suffered significant setbacks due to the civil war from 1962 to 1970 and frequent droughts, which severely damaged what had previously been a relatively prosperous agricultural sector. The northern region’s main export and primary source of foreign exchange had been coffee production; however, this sector declined as cultivation of khat, a mild narcotic leaf widely consumed in Yemen, increased in prominence. The shift toward khat cultivation reduced the land available for coffee and other cash crops, thereby diminishing export revenues. Additionally, low domestic industrial output and a lack of raw materials made the Yemeni Arab Republic heavily dependent on a wide variety of imports, creating a structural trade imbalance and vulnerability to external shocks. The ongoing Yemeni Civil War, which escalated dramatically in 2015, along with the Saudi-led coalition’s air bombing campaign, has further devastated Yemen’s economy. The conflict has disrupted production, trade, and infrastructure, leading to widespread economic dislocation. As a result of the civil war, Yemen experienced significant inflation and a devaluation of the Yemeni rial, which eroded purchasing power and increased the cost of living for ordinary Yemenis. The overall economic impact has been severe, with Yemen’s economy contracting by approximately 50 percent from the start of the civil war on 19 March 2015 through October 2018. This contraction reflects the cumulative effects of conflict-related destruction, reduced oil production and exports, diminished government revenues, and the collapse of basic services and markets.

The gross domestic product (GDP) of Yemen since its unification has been systematically measured at market prices in millions of Yemeni Rials, with historical data extensively compiled and reported by the International Monetary Fund (IMF). This data provides a comprehensive overview of Yemen’s economic trajectory over several decades, reflecting both the country’s growth patterns and the challenges it has faced. In 1989, the year preceding unification, Yemen’s GDP stood at 125,562 million Yemeni Rials. At that time, the exchange rate was approximately 11.70 Yemeni Rials per US dollar, and the inflation index, with the year 2000 as the base (indexed at 100), was recorded at 5.10. This relatively low inflation index indicated a period of relative price stability in the Yemeni economy during the late 1980s. By 1995, significant changes had occurred. Yemen’s GDP had increased substantially to 516,643 million Yemeni Rials, marking a notable expansion in economic output following unification. However, this period was also characterized by a marked depreciation of the Yemeni Rial against the US dollar, with the exchange rate falling to 40.49 Rials per dollar. Concurrently, the inflation index surged to 51, indicating a rapid increase in the general price level and reflecting underlying economic pressures such as currency devaluation and inflationary trends. These developments underscored the challenges Yemen faced in stabilizing its economy amid political and structural adjustments during the early post-unification years. The turn of the millennium saw further economic growth, with GDP reaching 1,539,386 million Yemeni Rials in 2000. The exchange rate had depreciated further to 161.00 Yemeni Rials per US dollar, consistent with ongoing currency pressures. The inflation index was standardized at 100 for the year 2000, serving as the reference point for subsequent inflation measurements. This period marked a critical juncture for Yemen’s economy, as it sought to consolidate gains while grappling with inflation and currency depreciation. By 2005, the GDP nearly doubled again to 2,907,636 million Yemeni Rials, with the exchange rate moving to 191.37 Yemeni Rials per US dollar. Inflation continued to climb, with the index reaching 175, signaling persistent inflationary challenges that affected purchasing power and economic stability. In terms of purchasing power parity (PPP) comparisons, data from 2009 indicated that the US dollar exchanged at 150.11 Yemeni Rials, providing a more stable basis for international comparisons of economic output and living standards. At this time, the mean wage in Yemen was approximately $1.06 per man-hour, reflecting the low wage levels and limited labor productivity that characterized much of the Yemeni workforce. These figures highlight the broader structural constraints on Yemen’s economy, including limited industrialization and reliance on low-wage labor. Yemen’s economy has historically been burdened by perennial trade deficits, which have necessitated external financial support to sustain balance of payments stability. These deficits have been primarily financed through remittances sent home by Yemenis working abroad, as well as foreign aid from international donors. The reliance on remittances underscores the importance of the Yemeni diaspora, which constitutes a significant economic resource for the country. Large Yemeni diaspora communities are found across the Arabian Peninsula, Indonesia, India, East Africa, the United Kingdom, and the United States. These expatriate populations have played a crucial role in supporting household incomes and providing foreign exchange inflows that help offset trade imbalances. Since the mid-1950s, Yemen’s international economic relations have been shaped by substantial assistance from the Soviet Union and the People’s Republic of China. These countries provided large-scale aid to the Yemen Arab Republic (YAR), which included funding for major construction projects, scholarships for Yemeni students, and military assistance. This support was instrumental in developing Yemen’s infrastructure and human capital during the early stages of modernization, particularly in the northern part of the country. The Soviet and Chinese aid programs reflected the geopolitical alignments of the Cold War era and contributed to shaping Yemen’s economic and political landscape. An examination of Yemen’s main economic indicators from 1990 to 2023, supplemented by IMF staff estimates for the period 2025 to 2029, reveals significant trends in the country’s macroeconomic performance. GDP measured in billion US dollars at purchasing power parity (PPP) grew from 24.20 billion in 1990 to an estimated 98.48 billion in 2029. This substantial increase reflects both population growth and nominal economic expansion over nearly four decades. Similarly, GDP per capita in US dollars (PPP) rose from 1,845 in 1990 to an estimated 2,542 in 2029, indicating moderate improvements in average living standards despite persistent economic challenges. Nominal GDP in billion US dollars also increased, rising from 12.64 billion in 1990 to an estimated 24.52 billion in 2029. This nominal growth, however, masks considerable volatility in real GDP growth rates, which fluctuated widely over the years. Notably, Yemen experienced significant economic contractions during periods of political instability and conflict. For example, real GDP growth fell by 12.7% in 2011 and plummeted by 28.0% in 2015, reflecting the severe impact of civil unrest and war on economic activity. The downturn continued in subsequent years, with negative growth rates of 9.4% in 2016 and 5.1% in 2017, underscoring the protracted nature of Yemen’s economic crisis. Inflation rates in Yemen have also exhibited considerable variability. The highest recorded inflation rate in the period was 51.2% in 1992, a reflection of economic instability and currency depreciation during the early post-unification years. Conversely, inflation reached a low of 0.9% in 2023, suggesting a period of relative price stability despite ongoing economic difficulties. Projections indicate that inflation will stabilize around 10% by 2029, reflecting expectations of gradual macroeconomic stabilization and improved fiscal management. Government debt as a percentage of GDP has shown significant fluctuations over the years, with data for the early 1990s unavailable. The debt burden peaked at 96% of GDP in 1999, highlighting the fiscal pressures faced by the Yemeni government at the end of the decade. Following this peak, government debt levels have varied but remained elevated, reaching 87% of GDP in 2020 and maintaining high levels through 2024. IMF projections suggest a gradual decline in government debt to 50% of GDP by 2029, contingent on economic recovery and improved fiscal discipline. Specific yearly highlights further illustrate Yemen’s economic trajectory. In 1991, the country’s GDP was estimated at $26.59 billion (PPP), accompanied by a real growth rate of 6.3% and an inflation rate of 44.9%. This year marked a period of rapid economic expansion but also high inflationary pressures. By 1999, despite a GDP of $47.42 billion (PPP), government debt had escalated to 96% of GDP, reflecting fiscal imbalances and the cost of economic adjustment. The years from 2011 to 2017 were particularly challenging, with negative GDP growth rates of −12.7% in 2011, −28.0% in 2015, −9.4% in 2016, and −5.1% in 2017, corresponding to the outbreak and intensification of civil conflict that severely disrupted economic activity. Inflation during this turbulent period spiked to 22.0% in 2015 and remained elevated at 30.4% through 2017, exacerbating the hardship faced by Yemeni households. Government debt also increased during this time, reaching 87% of GDP in 2020 and remaining high through 2024. Looking ahead, the IMF projects a gradual economic recovery beginning in 2025, with GDP growth rates expected to range between 5.5% and 7.0% from 2025 to 2029. Inflation rates are forecast to decline to around 10%, while government debt is anticipated to decrease steadily to 50% of GDP by 2029, contingent on the resolution of conflict and the implementation of effective economic reforms.

Prior to gaining independence, the economic activity in southern Yemen was predominantly concentrated in the port city of Aden, which served as the region’s principal commercial hub. Aden’s economy relied heavily on seaborne transit trade, functioning as a critical refueling and transshipment point for ships navigating between Europe, Asia, and Africa. The port’s strategic location on the southern coast of the Arabian Peninsula enabled it to capitalize on maritime commerce, with the transit trade accounting for a substantial portion of local employment and revenue. This dependence on maritime trade shaped the economic landscape of southern Yemen, fostering a service-oriented economy centered around shipping, logistics, and related industries. However, this economic model faced a severe disruption following two pivotal events in 1967. The closure of the Suez Canal, a vital maritime passage connecting the Mediterranean Sea to the Red Sea, drastically reduced the volume of shipping traffic passing through Aden. This closure, coupled with Britain’s withdrawal from Aden in the same year, led to the collapse of the seaborne transit trade that had sustained the city’s economy. The British departure marked the end of colonial administration and precipitated a shift in political and economic structures, while the canal closure diverted maritime traffic to alternative routes, diminishing Aden’s role as a transit hub. Consequently, the city’s economy contracted sharply, necessitating a reorientation of economic policies and development strategies in the newly independent southern state. In the aftermath of independence, the People’s Democratic Republic of Yemen (PDRY), established in the southern region, adopted a centrally planned Marxist economic system. This model was heavily reliant on extensive aid from the Soviet Union, which provided financial assistance, technical expertise, and military support. Soviet aid formed the backbone of the PDRY’s economy, enabling the government to maintain public sector employment and fund social services despite limited domestic revenue sources. Additionally, remittances from south Yemenis working abroad, particularly in the Persian Gulf states, contributed a vital stream of foreign currency that supported household incomes and local consumption. The Aden oil refinery, constructed in the 1950s, also played a significant role in generating government revenue and providing employment. This refinery processed crude oil for both domestic use and export, serving as one of the few industrial assets underpinning the southern economy during this period. The economic stability of the PDRY was severely undermined by the dissolution of the Soviet Union in the early 1990s, which resulted in the abrupt cessation of Soviet aid. The withdrawal of this critical financial and technical support precipitated the effective collapse of the southern economy, as the PDRY lacked alternative sources of funding and investment to sustain its centrally planned system. The loss of Soviet subsidies exposed the structural weaknesses of the southern economy, including its dependence on external assistance and limited diversification. The resulting economic crisis exacerbated social and political tensions, undermining the viability of the PDRY’s economic model and setting the stage for future challenges in national integration. Following the unification of North Yemen (the Yemen Arab Republic) and South Yemen (the PDRY) in 1990, the newly formed Republic of Yemen faced the formidable task of integrating two economically disparate systems. The northern economy was characterized by a more market-oriented approach, albeit underdeveloped and reliant on agriculture and remittances, while the southern economy had been shaped by socialist central planning and state ownership. Reconciling these divergent economic structures required harmonizing fiscal policies, legal frameworks, and administrative institutions, a process complicated by differing political ideologies and economic legacies. The government sought to create a unified national economy capable of promoting growth and stability, but the disparities in infrastructure, industrial capacity, and human capital between the two regions posed significant obstacles to integration. Economic growth in the unified Yemen was further impeded by several severe shocks during the early 1990s. One of the most significant was the return of approximately 850,000 Yemenis from the Persian Gulf states in 1990, many of whom had been employed in the oil-rich Gulf economies. This mass repatriation was largely a consequence of the Gulf War and the political fallout affecting Yemeni expatriates. The sudden influx of returnees placed immense pressure on Yemen’s labor market, social services, and housing infrastructure, exacerbating unemployment and poverty levels. The government struggled to absorb this large population into the domestic economy, which was already constrained by limited resources and underdeveloped industries. This demographic shock disrupted social cohesion and strained public finances, hindering efforts to stimulate economic development. Compounding these challenges was a major reduction in foreign aid flows after unification, which further strained Yemen’s fragile economy. Prior to unification, both northern and southern Yemen had received substantial foreign assistance from various donors, including the Soviet bloc, Western countries, and Gulf states. However, the political uncertainties surrounding unification and concerns about governance and stability led to a decline in aid commitments. The reduction in external financial support limited the government’s ability to invest in infrastructure, social programs, and economic reforms necessary to foster growth and integration. This contraction in aid coincided with an increasing fiscal deficit and balance of payments difficulties, constraining macroeconomic management and development planning. Internal political disputes between northern and southern factions escalated into open conflict during the 1994 civil war, which had profound negative consequences for economic development and integration efforts. The war disrupted economic activities across the country, damaging infrastructure, displacing populations, and diverting scarce resources toward military expenditures. The conflict deepened regional divisions and eroded trust between the formerly separate entities, undermining the political consensus required for effective economic policymaking. Post-war reconstruction efforts were complicated by lingering grievances and the need to reintegrate combatants and affected communities. The instability generated by the civil war delayed reforms and discouraged foreign investment, further impeding the process of economic integration and national development.

Since 1990, agriculture has served as the cornerstone of Yemen’s economy, consistently contributing more than 20 percent to the nation’s gross domestic product (GDP). According to data from the Central Bank of Yemen, the agricultural sector accounted for 20.4 percent of GDP in 2005, underscoring its enduring economic importance. Employment statistics further highlight agriculture’s pivotal role, with over half of Yemen’s working population engaged in this sector; specifically, in 2003, 54.2 percent of the labor force was employed in agricultural activities. This substantial share of employment reflects the sector’s significance not only as a source of income but also as a foundation of rural livelihoods across the country. However, estimates of agriculture’s contribution to GDP vary among different sources. While the Central Bank of Yemen reported a contribution exceeding 20 percent, a U.S. government estimate placed the sector’s share at only 13.5 percent of GDP in 2005. This discrepancy may stem from differences in data collection methodologies, the informal nature of much agricultural activity, or variations in the valuation of agricultural output. Regardless of the precise figure, it remains clear that agriculture constitutes a major component of Yemen’s economy and employment landscape. The growth and productivity of Yemen’s agricultural sector have been constrained by several environmental challenges. Soil erosion, driven by overgrazing and deforestation, has degraded arable land, reducing its fertility and crop yields. The encroachment of sand dunes further threatens cultivable areas, particularly in arid and semi-arid regions. Deforestation, often a consequence of the demand for fuelwood and agricultural expansion, has exacerbated land degradation and disrupted local ecosystems. Among these challenges, water scarcity stands out as the most critical factor limiting agricultural development. Yemen’s arid climate results in low and erratic rainfall, compelling farmers to rely heavily on groundwater resources to sustain crop production. The dependence on groundwater extraction has led to a rapid depletion of Yemen’s aquifers. Water tables are reported to be falling at an alarming rate of approximately two meters per year, reflecting unsustainable withdrawal rates. In the capital city of Sanaa, this trend poses a particularly severe threat; estimates suggest that groundwater supplies could be completely exhausted by 2030 if current consumption patterns persist. This impending water crisis threatens not only agricultural productivity but also the broader socio-economic stability of the region. In response to water scarcity and the need to maximize agricultural output, Yemeni farmers have increasingly adopted irrigation techniques. This shift has transformed the agricultural landscape, with a growing emphasis on fruit and vegetable production, which are better suited to irrigated cultivation and often yield higher economic returns than traditional crops. Consequently, fruit and vegetables have emerged as the primary cash crops in Yemen’s agricultural economy. This transition has been accompanied by a decline in the production of traditional rain-fed crops such as cereals, which are more vulnerable to rainfall variability and less profitable under current market conditions. Among the crops cultivated in Yemen, khat has gained particular prominence. Khat is a mildly narcotic plant whose leaves produce natural stimulants when chewed, and it holds significant cultural and economic importance in Yemeni society. According to the Central Bank of Yemen, khat cultivation increased by 6.7 percent in 2005, reflecting its expanding role in the agricultural sector. That year, khat accounted for 5.8 percent of Yemen’s GDP, underscoring its substantial contribution to the national economy. The widespread consumption of khat throughout Yemen reinforces its entrenched position in social and economic life. Economic analyses by the World Bank and other economists indicate that khat cultivation dominates Yemen’s agricultural economy to an even greater extent. These sources estimate that khat accounts for approximately 10 percent of GDP and provides employment for an estimated 150,000 people, highlighting its role as a major livelihood source. However, khat farming also poses significant challenges for water resource management and agricultural diversification. It is estimated that khat cultivation consumes roughly 30 percent of Yemen’s irrigation water, a substantial share given the country’s water scarcity. Moreover, the expansion of khat farming has displaced agricultural land that could otherwise be used to grow exportable crops such as coffee, fruits, and vegetables, potentially limiting Yemen’s agricultural export potential and economic diversification. In addition to its terrestrial agricultural resources, Yemen possesses extensive territorial waters and marine resources with considerable potential for fisheries development. The country’s marine environment is capable of producing up to 840,000 tons of fish annually, offering a significant opportunity to diversify the economy and enhance food security. Despite this potential, Yemen’s fishing industry remains underdeveloped and largely characterized by small-scale operations. Individual fishermen typically operate small boats, limiting the scale and efficiency of fish harvesting and processing. The fishing sector experienced some growth following the government’s removal of restrictions on fish exports. By 2005, fishing production had reached approximately one-quarter of its estimated capacity, generating revenues valued at around US$260 million. Although fish and fish products contributed only 1.7 percent to Yemen’s GDP, they represented the country’s second-largest export sector, indicating the strategic importance of fisheries for foreign exchange earnings and economic diversification. Recognizing the need to develop and manage its fisheries sustainably, the World Bank approved a US$25 million credit in December 2005 to fund a Fisheries Management and Conservation Project. This initiative targeted all coastal governorates along the Red Sea and the Gulf of Aden, aiming to improve the infrastructure and regulatory framework governing the sector. The project sought to enhance fish landing and auction facilities, thereby improving market access and reducing post-harvest losses. It also planned to provide ice plants for fish preservation, crucial for maintaining product quality and extending shelf life. Furthermore, the project aimed to strengthen the capacity of Yemen’s Ministry of Fisheries by supporting research activities, resource management planning, and regulatory enforcement, thereby promoting sustainable fisheries management and conservation practices across the country’s coastal waters.

Yemen has long been recognized as an oil-producing country with considerable untapped offshore oil and gas deposits, which have attracted the involvement of numerous foreign oil companies operating under production-sharing agreements with the Yemeni government. These agreements have allowed international firms to explore, develop, and produce hydrocarbons while sharing revenues and risks with the state, reflecting Yemen’s strategy to leverage foreign expertise and investment to maximize its resource potential. The country’s reliance on oil production is profound, as income derived from this sector accounts for between 70 and 75 percent of government revenue, and approximately 90 percent of its total exports. This heavy dependence on oil underscores the central role that hydrocarbons have played in Yemen’s economy, shaping its fiscal policies and international trade relations. Yemen’s proven crude oil reserves have been estimated to exceed 9 billion barrels (approximately 1.4×10^9 cubic meters), positioning the country as a significant player in the regional oil market. However, these reserves have been in decline, a trend exacerbated by damage to older oil fields caused by prolonged periods of conflict and corruption, which have impaired production infrastructure and deterred investment. The degradation of these fields has led to a gradual decrease in output, raising concerns about the sustainability of Yemen’s oil sector. Oil exports, which constitute about 90 percent of the country’s total exports, remain the backbone of the national economy, yet this dependence also exposes Yemen to vulnerabilities stemming from fluctuating global oil prices and internal instability. The World Bank issued a forecast in the late 2000s predicting a sharp decline in Yemen’s oil and gas revenues during 2009 and 2010, with projections indicating that such revenues would fall to zero by 2017 as the country’s oil supplies became depleted. This projection highlighted the urgency for Yemen to diversify its economy and develop alternative sources of income to mitigate the impending fiscal crisis. The decline in oil revenues was anticipated to have profound implications for the government’s budget and the broader economy, given the sector’s dominant role in public finance and export earnings. Concerns about Yemen’s stability have been voiced by international think tanks and organizations, including the United Kingdom’s Royal Institute for International Affairs, which warned that instability within Yemen could extend a zone of lawlessness stretching from northern Kenya to Saudi Arabia. The institute characterized Yemen’s democracy as “fragile,” citing ongoing armed conflicts involving Islamist militants and tribal insurgents as significant sources of instability. This fragile security environment has complicated efforts to maintain consistent oil production and attract foreign investment, while also raising alarms among Western governments and international leaders who have vested interests in preserving Yemen’s stability to prevent adverse regional outcomes. These stakeholders have sought to support Yemen through diplomatic engagement and development assistance aimed at fostering political stability and economic resilience. According to data from the U.S. Energy Information Administration, Yemen’s crude oil output averaged 413,300 barrels per day (65,710 cubic meters per day) in 2005, representing a slight decrease from 423,700 barrels per day (67,360 cubic meters per day) recorded in 2004. This marginal decline reflected the challenges faced by the sector, including aging fields and operational disruptions. For the first eight months of 2006, crude oil output remained relatively steady, averaging 412,500 barrels per day (65,580 cubic meters per day), indicating a temporary stabilization in production levels despite ongoing difficulties. The exploration history of Yemen’s oil sector includes several notable discoveries that have shaped its development trajectory. In 1982, a minor oil discovery was made in southern Yemen, marking an early indication of the region’s hydrocarbon potential. Subsequently, in 1984, an American company discovered an oil basin near Ma’rib, which would become one of the country’s key producing areas. By 1995, the Ma’rib oil basin had achieved production levels of approximately 27,000 cubic meters per day (170,000 barrels per day), contributing significantly to Yemen’s overall output. The establishment of a small oil refinery near Ma’rib in 1986 further facilitated the processing and utilization of domestically produced crude oil, enhancing the country’s energy infrastructure. In the southern governorate of Shabwah, an oil field initially discovered by Soviet geologists proved only marginally successful, even after being taken over by another group attempting to develop the resource. This limited success underscored the challenges of exploration and production in certain areas of Yemen, where geological complexity and logistical constraints have impeded large-scale development. Conversely, a Western consortium began exporting oil from the Masila field in Hadhramaut in 1993, and by 1999, production at this site had reached 67,000 cubic meters per day (420,000 barrels per day). The Masila field emerged as a critical asset for Yemen’s oil sector, demonstrating the potential for increased output through foreign investment and technical expertise. Further exploration efforts have yielded new oil finds in the Jannah block, formerly known as the Joint Oil Exploration Area, as well as in the eastern Shabwah blocks. These discoveries have contributed to the country’s resource base and offered prospects for extending the life of Yemen’s oil industry. In 1995, Yemen’s oil exports generated approximately US$1 billion in revenue, reflecting the sector’s importance as a source of foreign exchange and fiscal income. Yemen’s offshore oil and gas deposits are estimated to contain billions of barrels of oil and gas, representing a substantial resource base that remains largely untapped. Among the country’s onshore fields, the Ma’rib oil fields are notable for containing associated natural gas reserves, which have provided opportunities for the development of Yemen’s gas sector alongside oil production. Recognizing the strategic importance of natural gas, the Yemeni government signed an agreement in September 1995 designating the French energy company TotalEnergies as the lead company for a liquefied natural gas (LNG) export project. This partnership marked a significant step toward diversifying Yemen’s hydrocarbon exports and capitalizing on its gas resources. In 1997, the Yemen Gas Company entered into partnerships with various private companies to establish Yemen LNG (YLNG), an entity tasked with developing and operating the country’s LNG infrastructure. The project gained momentum in August 2005 when the Yemeni government granted final approval to three LNG supply agreements, enabling YLNG to award a $2 billion contract to an international consortium responsible for constructing Yemen’s first LNG liquefaction plant at Balhat on the Arabian Sea coast. This facility represented a major investment of $3.7 billion over a 25-year period, with an expected annual production capacity of approximately 6.7 million tons of LNG. The LNG produced at Balhat was intended primarily for export to key international markets, including the United States and South Korea, reflecting Yemen’s integration into the global energy trade. LNG production officially commenced in October 2009, marking a milestone in the country’s energy sector and providing a new source of revenue. The Yemeni government anticipated that the LNG project would contribute an additional $350 million annually to its budget, thereby enhancing fiscal stability. Furthermore, the development of the LNG industry was expected to facilitate the growth of a petrochemicals sector, diversifying the economy and creating new opportunities for industrial development beyond the traditional oil sector.

The industrial sector in Yemen has played a significant role in the country’s economy, with estimates from the United States government indicating that it accounted for approximately 47.2 percent of Yemen’s gross domestic product (GDP). This substantial share underscores the importance of industry as a pillar of economic activity, although when combined with services, construction, and commerce, these sectors collectively employed less than 25 percent of the nation’s labor force. This disparity between the sector’s contribution to GDP and its share of employment suggests a relatively capital-intensive industrial base, where productivity per worker is higher compared to other sectors such as agriculture. Within the manufacturing segment of Yemen’s industrial sector, oil refining emerged as the dominant activity, contributing roughly 40 percent of the total revenue generated by manufacturing. The prominence of oil refining reflects Yemen’s status as an oil-producing country, where the processing of crude oil into refined products has historically been a critical source of industrial output and government revenue. The refining facilities have been central to the manufacturing landscape, supporting not only domestic energy needs but also export earnings. Beyond oil refining, the remainder of the manufacturing sector primarily focused on the production of consumer goods and construction materials, sectors that cater to the domestic market’s growing demand for everyday products and infrastructure development. Manufacturing’s overall contribution to Yemen’s GDP was approximately 9.5 percent in 2005, indicating a moderate but meaningful role within the broader industrial framework. This figure highlights the diversification within the industrial sector beyond oil refining, as manufacturing activities expanded to include a range of products supporting both consumer consumption and the construction industry. The relatively modest share of manufacturing in GDP also reflects challenges such as limited industrial infrastructure, reliance on imported inputs, and the impact of political instability on industrial growth. By the year 2000, Yemen had nearly 34,000 industrial establishments employing close to 115,000 workers. This industrial base was characterized predominantly by small-scale enterprises, with the majority of establishments defined as small businesses employing between one and four individuals. The prevalence of small businesses within the industrial sector points to a fragmented industrial landscape, where many operations are family-owned or micro-enterprises rather than large-scale factories. This structure has implications for productivity, access to capital, and the ability to scale operations, which in turn affect the sector’s overall contribution to economic development. Almost half of all industrial establishments in Yemen were engaged in processing food products and beverages, making this subsector the largest within the industrial fabric. The food processing industry’s prominence reflects Yemen’s agricultural base and the need to add value to locally produced raw materials. The processing of food and beverages not only supplies domestic consumption but also supports food security and rural livelihoods. In recent years, there has been a notable increase in the production of staple food items such as flour and cooking oil, which are essential components of the Yemeni diet. This growth in flour and cooking oil production indicates efforts to enhance self-sufficiency and reduce dependence on imports, thereby strengthening the domestic food manufacturing capacity. In addition to food processing, approximately 10 percent of Yemen’s industrial establishments were classified as manufacturers of mixed metal products. This category includes the production of a variety of metal goods such as water-storage tanks, doors, and windows, which are integral to the construction and infrastructure sectors. The manufacturing of mixed metal products serves both residential and commercial construction needs, contributing to the development of housing and public buildings. The presence of this subsector highlights the interconnection between manufacturing and construction, with metal fabrication playing a key role in supporting the country’s built environment. Overall, Yemen’s industrial sector presents a complex picture characterized by a significant contribution to GDP, a labor force concentrated in small-scale enterprises, and a manufacturing base dominated by oil refining, food processing, and metal product fabrication. The sector’s evolution has been shaped by the country’s resource endowments, economic policies, and structural challenges, with ongoing efforts to diversify industrial output and increase productivity. Despite constraints, the growth in food manufacturing and metal products points to areas of industrial activity that hold potential for further development and economic resilience.

Economists reported that Yemen’s services sector constituted a substantial portion of the country’s gross domestic product (GDP), accounting for 51.7 percent in 2002. This share increased slightly to 52.2 percent of GDP in 2003, indicating a modest growth in the sector’s relative importance within the national economy. However, the United States government provided a different assessment, estimating a lower contribution of the services sector to Yemen’s GDP, with figures of 39.7 percent in 2004 and 39.3 percent in 2005. This discrepancy between sources may reflect variations in data collection methods, definitions of the services sector, or economic fluctuations during that period. Regardless, the services sector remained a critical component of Yemen’s economy, encompassing a wide range of activities including trade, finance, public administration, and tourism. Yemen’s tourism industry, while recognized for its potential due to the country’s rich historical and cultural heritage, faced significant challenges that impeded its development. One of the primary obstacles was the limited infrastructure, which constrained the ability to accommodate and attract international visitors. The hospitality facilities, including hotels and restaurants, were generally considered to be below international standards, negatively impacting the overall tourism experience. Many establishments lacked modern amenities and services expected by foreign tourists, which diminished Yemen’s competitiveness as a travel destination. This deficiency in quality was compounded by the inadequacy of the country’s air and road transportation infrastructure. Airports outside the capital and major cities often had limited capacity and outdated facilities, while road networks were insufficiently developed, poorly maintained, or unsafe, making travel within the country difficult and time-consuming. Security concerns further exacerbated the challenges facing Yemen’s tourism sector. Kidnappings of foreign tourists remained a persistent threat, particularly in regions outside the main urban centers such as Sanaa, Aden, and Mukalla. These incidents created a climate of fear and uncertainty, deterring potential visitors and discouraging investment in tourism-related infrastructure. The situation was aggravated by a series of terrorist bombings, most notably those targeting the Port of Aden in 2000 and 2002. These attacks not only caused physical damage and loss of life but also heightened international perceptions of Yemen as an unsafe destination. The resulting security concerns led many governments to issue travel advisories, warning their citizens against non-essential travel to the country. In September 2006, the security situation was underscored by the kidnapping of four French tourists in the Shabwa province, located east of the capital, Sanaa. These tourists had been traveling to Aden when they were abducted by local tribesmen, an event that drew international attention to the risks faced by foreign visitors in Yemen. The hostages were held for approximately two weeks before being released, an outcome that, while fortunate, highlighted the volatility and unpredictability of the security environment in certain parts of the country. This incident prompted further caution among tourists and governments alike, reinforcing concerns about the safety of travel outside Yemen’s principal cities. Following these developments, the U.S. Department of State issued a travel warning in October 2006, strongly urging U.S. citizens to carefully consider the risks associated with traveling to Yemen. The advisory emphasized the dangers posed by terrorism, kidnapping, and general lawlessness, reflecting the deteriorating security conditions. Similarly, the British Foreign Office released a comparable advisory, cautioning travelers about the heightened security risks and urging vigilance. These official warnings contributed to a more cautious approach among potential tourists and travel agencies, affecting the flow of visitors to Yemen. Despite the numerous challenges related to infrastructure and security, Yemen experienced a significant increase in tourist arrivals during the early 2000s. The number of tourists visiting the country rose sharply from 155,000 in 2003 to 274,000 in 2004, demonstrating a growing interest in Yemen’s unique cultural and historical attractions. This increase suggested that, notwithstanding the obstacles, there remained a segment of travelers willing to explore Yemen, drawn by its ancient cities, archaeological sites, and distinctive landscapes. The growth in tourist numbers also indicated some degree of resilience in the sector and the potential for further development, provided that improvements in infrastructure and security could be achieved. Nonetheless, the overall impact of tourism on Yemen’s economy remained limited by the prevailing conditions, which continued to restrict the industry’s expansion and its contribution to national GDP.

In 2003, agriculture and herding constituted the primary source of employment for the majority of Yemen’s working population, engaging approximately 54.2 percent of the labor force according to data from the United States government. This dominant role of the agricultural sector reflected Yemen’s largely rural economy, where subsistence farming and livestock rearing formed the backbone of livelihoods for a significant portion of the population. In contrast, the combined sectors of industry, services, construction, and commerce accounted for less than 25 percent of the labor force during the same period, underscoring the limited diversification of Yemen’s economy and the relatively small size of its formal urban employment sectors. This distribution highlighted the challenges faced by Yemen in fostering industrial growth and expanding service-oriented employment opportunities beyond the traditional agricultural base. The World Bank characterized Yemen’s civil service as a workforce that was both large and poorly compensated, with salary structures that failed to provide adequate differentiation between high-skilled and low-skilled positions. This lack of meaningful salary differentials hindered the government’s ability to attract and retain qualified personnel, contributing to inefficiencies within the public sector. The civil service’s remuneration system did not sufficiently reward expertise or experience, which in turn affected the overall performance and motivation of government employees. Such structural weaknesses in public sector employment were a significant concern for policymakers aiming to improve governance and service delivery in Yemen. In an effort to address some of these issues, the Yemeni government implemented a substantial salary increase for civil servants in 2004, raising wages by 20 to 40 percent. This measure was intended to mitigate the anticipated negative effects of planned economic reforms that, in the event, were not realized. The salary hike led to a 20 percent increase in overall wage costs for the government, with civil service wages accounting for approximately 7 percent of Yemen’s gross domestic product (GDP) in that year. This considerable fiscal burden reflected the government’s commitment to maintaining public sector employment levels and wage standards despite the absence of broader structural reforms. The national budget for 2005 introduced further fiscal adjustments by reducing economic subsidies, a move aimed at improving the government’s financial position. However, the budget also included concessions to public sector employees, notably plans to increase civil service wages by an additional 10 to 15 percent by 2007. This wage adjustment was part of a broader national wage strategy designed to address issues of compensation and employment conditions within the civil service. The strategy sought to balance fiscal discipline with the need to maintain social stability by ensuring that government workers received adequate remuneration. The International Monetary Fund (IMF) offered an economic assistance package to Yemen, contingent upon the implementation of comprehensive civil service reforms. These reforms were expected to streamline the public sector workforce and improve efficiency. However, the Yemeni government resisted these measures, citing concerns over the country’s high unemployment rate, which was estimated to range between 20 and 40 percent. The government feared that aggressive civil service downsizing could exacerbate social tensions and unemployment, thereby undermining political stability. This resistance highlighted the complex interplay between economic reform imperatives and socio-political considerations in Yemen. In 2004, the Yemeni government reported having reduced the size of the civil service labor force through a combination of retirements and layoffs. Despite these efforts, the substantial salary increases implemented during the same period appeared to offset the potential fiscal savings from workforce reductions. The net effect was a limited impact on overall government wage expenditures, as higher salaries counterbalanced the decrease in employee numbers. This outcome illustrated the challenges of achieving meaningful public sector reform in the absence of coordinated measures addressing both employment levels and compensation structures. The IMF maintained that civil service salaries as a proportion of GDP should be reduced by 1 to 2 percent to ensure fiscal sustainability and economic efficiency. Achieving this target was deemed possible only through continued reductions in the size of the civil service workforce, underscoring the necessity of structural reforms aimed at downsizing and rationalizing public sector employment. The IMF’s position emphasized the importance of aligning public wage bills with the country’s economic capacity to avoid fiscal imbalances and to create room for investment in other critical areas. Despite the formulation of a national wage strategy intended to streamline the civil service system and eliminate irregularities, uncertainty remained regarding its effectiveness in reducing employment costs in Yemen. The strategy aimed to address issues such as wage disparities, ghost workers, and inefficient employment practices, but its success depended on the government’s ability to implement reforms amid social and political constraints. The persistence of high unemployment rates and the government’s cautious approach to reform raised questions about whether the strategy would achieve its fiscal and administrative objectives in the medium to long term.

The official currency of Yemen is the Yemeni riyal (YR), which underwent a significant shift in monetary policy in July 1996 when it was floated on the open market. Prior to this change, the riyal’s value had been maintained through a fixed exchange rate system, but the decision to float the currency allowed its value to be determined by market forces, reflecting supply and demand dynamics rather than government-imposed rates. This move was part of broader economic reforms aimed at stabilizing the economy and integrating Yemen more fully into global financial markets. The floating of the Yemeni riyal marked a departure from rigid exchange rate controls and introduced a mechanism for gradual adjustment in response to economic conditions. Following the floatation of the Yemeni riyal, the Central Bank of Yemen adopted a policy of periodic intervention in the currency market to manage the riyal’s value. Since 1999, the bank has actively engaged in these interventions with the objective of enabling a controlled, gradual depreciation of the currency at an approximate rate of 4 percent per year. This strategy was designed to maintain competitiveness in Yemen’s export sectors while avoiding abrupt fluctuations that could destabilize the economy. By allowing the riyal to depreciate slowly, the Central Bank sought to balance external trade considerations with domestic inflationary pressures, recognizing the complex interplay between exchange rates and economic stability. The exchange rate of the Yemeni riyal against the U.S. dollar during the mid-2000s reflected this gradual depreciation trend. In 2005, the average exchange rate stood at approximately YR191.5 per U.S. dollar, indicating a relatively stable but slightly weakening currency compared to previous years. This depreciation continued into 2006, with the average exchange rate reaching YR197.5 per U.S. dollar. By late November 2006, the exchange rate had further declined to around YR198 per U.S. dollar, underscoring the ongoing, managed weakening of the riyal in line with the Central Bank’s policy objectives. These figures illustrate the controlled nature of the currency’s depreciation, which was intended to avoid sudden shocks while adjusting to economic realities. Over the longer term, Yemen’s currency experienced significant depreciation, particularly evident in the exchange rate data from March 2023. In government-controlled areas of Yemen, the exchange rate for new Yemeni riyals averaged YR1,252 per U.S. dollar, a dramatic increase compared to rates observed in the early 2000s. This substantial depreciation reflects a combination of factors, including prolonged political instability, economic disruptions, and pressures on Yemen’s fiscal and monetary systems. The sharp decline in the riyal’s value over this period highlights the challenges faced by Yemen in maintaining currency stability amid ongoing conflict and economic hardship. The inflationary environment in Yemen has been closely linked to these currency developments and broader economic conditions. Following the unification of North and South Yemen in 1990, the country confronted severe inflationary pressures, with the average inflation rate soaring to approximately 40 percent during the period from 1990 to 1996. This high inflation rate reflected the economic dislocations and structural adjustments that accompanied unification, including fiscal imbalances, supply constraints, and monetary expansion. The immediate post-unification years were marked by significant economic volatility, which manifested in rapidly rising prices and diminished purchasing power for Yemeni consumers. In response to these challenges, the Yemeni government implemented a series of economic reforms aimed at stabilizing prices and reducing inflation. These measures proved initially successful, as evidenced by the sharp decline in the inflation rate to 5.4 percent in 1997. This reduction signaled a period of relative stabilization and demonstrated the government’s capacity to implement policies that could moderate inflationary trends. The reforms likely included fiscal discipline, monetary tightening, and efforts to improve the efficiency of public spending, all of which contributed to curbing inflation in the short term. Despite these early successes, inflation in Yemen did not remain consistently low in the ensuing years. Various external and internal factors contributed to a general increase in inflation rates following the late 1990s. Notably, rising global oil prices exerted upward pressure on domestic prices, given Yemen’s reliance on oil imports and the significance of fuel costs in the economy. Additionally, reductions in fuel subsidies, implemented as part of fiscal adjustment policies, further exacerbated inflation by increasing the cost of energy for consumers and businesses. These dynamics resulted in inflation rates that fluctuated but generally trended upward, reflecting the ongoing challenges of managing price stability in a complex economic environment. In 2004, the Central Bank of Yemen undertook efforts to tighten the money supply as a means of controlling inflation. This monetary policy tightening aimed to reduce liquidity in the economy, thereby dampening demand-pull inflationary pressures. However, these measures were largely offset by external factors beyond the Central Bank’s control. The weakening of the U.S. dollar, to which the Yemeni riyal was linked through a managed float system, diminished the effectiveness of monetary tightening by increasing the cost of imports priced in dollars. Concurrently, rising global commodity prices contributed to higher costs for essential goods and services within Yemen. As a result, the inflation rate for that year reached 12.5 percent, indicating that domestic monetary policy alone was insufficient to contain inflation amid adverse external conditions. By 2018, inflationary pressures in Yemen had intensified significantly, with the inflation rate rising to 33.65 percent. This marked increase reflected the cumulative impact of ongoing economic challenges, including the protracted conflict that severely disrupted economic activity, reduced government revenues, and undermined the functioning of markets. The high inflation rate eroded real incomes and purchasing power for much of the Yemeni population, exacerbating humanitarian and social difficulties. The inflationary environment during this period underscored the fragile state of Yemen’s economy and the limited capacity of economic institutions to stabilize prices under conditions of crisis. Taxation policies in Yemen have also played a role in the country’s economic landscape, particularly in relation to consumption taxes. In July 2005, the Yemeni government responded to public opposition by reducing the new general sales tax from 10 percent to 5 percent. This policy adjustment demonstrated the government’s sensitivity to social and political pressures concerning taxation, acknowledging the potential impact of tax rates on consumer behavior and public sentiment. The reduction in the general sales tax was likely intended to alleviate the tax burden on households and stimulate economic activity, reflecting a balancing act between revenue generation and social acceptability. In addition to the general sales tax, Yemen has applied special sales tax rates to certain goods and services, reflecting targeted fiscal policies aimed at specific sectors. For example, telecommunications mobile services have been subject to a 10 percent sales tax, recognizing the growing importance of this sector and its revenue-generating potential. More notably, cigarettes have been taxed at a substantially higher rate of 90 percent, illustrating a fiscal strategy that combines revenue objectives with public health considerations. The high tax on cigarettes serves both to discourage consumption of tobacco products and to generate significant government revenue from a widely used commodity. These differentiated tax rates highlight the government’s approach to taxation as a tool for both economic management and social policy.

Yemen’s financial services sector has long been regarded by economists as underdeveloped, primarily due to its limited scope and structural challenges. The sector is overwhelmingly dominated by the banking system, with the absence of a public stock exchange further constraining the breadth of financial instruments and investment opportunities available within the country. This lack of a stock market restricts the mobilization of capital and limits avenues for corporate financing, contributing to the sector’s overall underdevelopment and impeding the diversification of financial services. The banking system in Yemen consists of several key institutions, anchored by the Central Bank of Yemen, which functions as the primary regulatory authority and monetary policymaker. In addition to the Central Bank, the system includes 15 commercial banks, which are categorized into private domestic banks, private foreign banks, and state-owned banks. Among the private domestic banks, nine operate within the country, with four of these specializing as Islamic banks that adhere to Sharia-compliant financial principles. The private foreign banks number four, reflecting some degree of international banking presence, while two banks remain state-owned. Complementing these commercial banks are two specialized state-owned development banks that focus on financing sectors critical to Yemen’s economic development, such as agriculture and reconstruction. The Central Bank of Yemen holds a multifaceted role within the banking sector. It is tasked with controlling monetary policy, which involves regulating the money supply and interest rates to maintain economic stability. The Central Bank also oversees currency transfers abroad, a critical function given Yemen’s reliance on remittances and international trade. Acting as the lender of last resort, it provides emergency liquidity support to commercial banks facing short-term funding difficulties. Furthermore, the Central Bank supervises commercial banks to ensure compliance with regulatory standards and serves as the government’s banker, managing public funds and facilitating government transactions. Between the end of 2005 and the end of 2010, Tadhamon International Islamic Bank distinguished itself as the leading financial institution in Yemen. It consistently ranked as the top bank across both commercial and Islamic categories in terms of total assets, capital base, and trade business volume. This performance underscored the growing prominence of Islamic banking within Yemen’s financial landscape and highlighted Tadhamon’s role in expanding banking services and trade finance in a challenging economic environment. Among the commercial banks, the largest is the state-owned Credit and Agricultural Cooperative Bank, which primarily serves the agricultural sector and rural communities. Alongside it, the Yemen Bank for Reconstruction and Development, which is majority state-owned, plays a significant role in funding infrastructure projects and economic development initiatives. Both banks have been undergoing restructuring processes aimed at improving their financial health and operational efficiency, with the ultimate goal of privatization. This restructuring is intended to reduce the fiscal burden on the government and enhance the competitiveness and sustainability of these institutions. In response to fiscal difficulties faced by the Credit and Agricultural Cooperative Bank and the Yemen Bank for Reconstruction and Development, the Yemeni government formulated a plan in 2004 to merge these two banks with a third institution to create a new publicly owned Development Bank. The proposed Development Bank was to have a minimum capital of US$50 million, which would provide a stronger financial foundation to support Yemen’s developmental needs. However, despite the initial plan, as of April 2011, the merger had not been realized. The delay reflected ongoing challenges in coordinating the restructuring process and addressing the underlying financial weaknesses of the involved banks. The banking sector in Yemen has been significantly hampered by a large volume of non-performing loans, which have eroded the asset quality of many banks. Low capitalization levels have further weakened the sector’s resilience, limiting banks’ ability to absorb losses and expand lending activities. Additionally, weak enforcement of regulatory standards has contributed to systemic vulnerabilities, with many banks operating in a technically insolvent state. These factors collectively undermine the stability and effectiveness of Yemen’s banking system, constraining its capacity to support economic growth. Widespread debtor defaults have led Yemeni banks to adopt highly restrictive lending practices, focusing their credit activities on a limited group of reliable consumers and businesses. This cautious approach has resulted in the banking system holding less than 60 percent of the total money supply, indicating that a substantial portion of Yemen’s monetary transactions occurs outside formal banking channels. The predominance of cash-based transactions reflects both the limited reach of banking services and a lack of public confidence in the financial system, further impeding financial intermediation. To address some of these challenges, legislation passed in 2000 granted the Central Bank of Yemen enhanced authority to enforce stricter lending requirements. This legislative empowerment aimed to improve credit discipline and reduce the accumulation of non-performing loans. In mid-2005, the Central Bank introduced new capital requirements for commercial banks, which were designed to curb currency speculation and safeguard depositors’ funds. These regulatory measures sought to strengthen the banking sector’s stability and promote prudent financial management, although their effectiveness was constrained by broader economic and institutional limitations. In March 2023, the Houthi-controlled parliament based in Sana’a enacted a law banning the charging of interest on loans, reflecting an ideological shift influenced by religious considerations. This legislation was met with criticism from various quarters, including MP Ahmed Saif, who warned that the ban could have potentially catastrophic consequences for both banks and citizens. The prohibition of interest challenged the conventional banking model, raising concerns about the viability of financial institutions and the accessibility of credit for businesses and individuals. The Minister of Finance and the governor of the Sana’a-based Central Bank of Yemen publicly refused to endorse the 2023 anti-interest law, signaling institutional resistance to the legislation. A banking official in Sana’a indicated that religious hardliners within the Houthi movement had driven the enactment of the law, emphasizing the ideological underpinnings of the policy shift. This development highlighted the complex interplay between political authority, religious ideology, and economic policy in Yemen’s banking sector, underscoring the challenges of maintaining a functional financial system amid ongoing conflict and governance fragmentation.

Yemen’s electricity sector has been predominantly controlled by the state-owned Public Electricity Corporation (PEC), which operated approximately 80 percent of the country’s electricity generating capacity. This capacity was estimated to range between 810 and 900 megawatts, reflecting the limited scale of Yemen’s power infrastructure relative to its population and economic needs. The PEC also managed the national power grid, serving as the central authority responsible for generation, transmission, and distribution of electricity throughout the country. This centralized control underscored the government’s dominant role in the energy sector, although it also highlighted challenges related to efficiency, infrastructure development, and service reliability. Over the past decade, the Yemeni government undertook various strategic initiatives aimed at addressing the country’s significant electricity shortage, which had become a critical constraint on economic growth and social development. Among these strategies was the restructuring of the PEC to improve operational efficiency and financial sustainability. The government also explored the integration of the power sector through small-scale privatization measures, particularly by transferring ownership or operational responsibilities of certain power stations to private entities. This approach was intended to introduce competition, attract investment, and enhance service quality. Additionally, the government promoted the establishment of independent power projects (IPPs), which are privately financed power plants that sell electricity to the national grid under long-term contracts. These IPPs were seen as a means to supplement public generation capacity without requiring immediate government capital outlays. Furthermore, there was a concerted effort to introduce gas-generated power plants to conserve Yemen’s limited oil reserves for export purposes, thereby optimizing the country’s energy resource management and foreign exchange earnings. Despite these well-conceived plans, the realization of large-scale IPPs and broader privatization initiatives was hampered by inadequate infrastructure, regulatory challenges, and political instability. The absence of a robust transmission and distribution network, coupled with institutional weaknesses, limited the scale and effectiveness of such projects. Nevertheless, several smaller-scale independent power projects were successfully completed, particularly in the southern port city of Aden and the coastal city of Mukalla. These projects demonstrated the potential for private sector participation in the power sector and provided localized improvements in electricity supply. Contracts for additional future projects were also signed, indicating ongoing efforts to expand private investment and diversify the power generation mix, although the pace of implementation remained slow relative to demand growth. In 2004, Yemen’s electricity production was heavily reliant on diesel-run power plants, which generated approximately 4.1 billion kilowatt-hours of electricity. This level of production was insufficient to meet the country’s growing electricity demand and failed to ensure a consistent and reliable supply across Yemen. Diesel generation, while flexible and relatively quick to deploy, was costly and dependent on imported fuel, which strained government finances and contributed to frequent power outages. The reliance on diesel also underscored the lack of diversification in Yemen’s energy mix and the pressing need to develop alternative sources such as natural gas and renewable energy to enhance energy security and sustainability. Between 2000 and 2004, electricity demand in Yemen increased by an estimated 20 percent, reflecting population growth, urbanization, and expanding economic activities. Despite this rising demand, only about 40 percent of the total population had access to electricity from the national power grid. Access was particularly limited in rural areas, where the grid infrastructure was sparse or non-existent. Even among those connected to the grid, electricity supply was often intermittent, with frequent outages and voltage fluctuations disrupting residential, commercial, and industrial activities. This gap between supply and demand highlighted the urgent need for investments in generation capacity, transmission infrastructure, and distribution networks, as well as reforms to enhance the sector’s operational efficiency. To address the growing demand and alleviate the electricity shortage, the Yemeni government set ambitious plans to increase the country’s power generating capacity to 1,400 megawatts by the year 2002. This target represented a significant expansion from the existing capacity and was intended to support economic development goals, improve living standards, and reduce reliance on costly fuel imports. The plan included the development of new power plants, modernization of existing facilities, and the introduction of gas-fired generation to capitalize on domestic natural gas reserves. However, achieving this target was complicated by financial constraints, technical challenges, and political instability, which delayed many projects and limited the overall progress in expanding Yemen’s electricity infrastructure.

In 1995, Yemen embarked on an economic reform program designed to align with the conditions stipulated by the International Monetary Fund (IMF). Central to this program was a comprehensive fiscal policy reform aimed at addressing the persistent problem of budget deficits while simultaneously broadening the government’s revenue base. The reform initiatives sought to create a more sustainable fiscal environment by improving tax collection mechanisms and rationalizing public expenditures. These efforts were part of a broader strategy to stabilize the economy, promote growth, and reduce Yemen’s dependence on external financial assistance. Despite the government’s commitment to reform, significant challenges emerged in controlling primary expenditures, particularly those related to subsidies. The fuel subsidy, in particular, remained a substantial fiscal burden, undermining efforts to reduce the budget deficit. Subsidies constituted a major portion of government spending, and attempts to curtail them were met with resistance from various sectors of society that relied on subsidized fuel prices for affordability. This resistance complicated the government’s ability to implement meaningful expenditure cuts, resulting in continued fiscal strain. In January 2005, Yemen’s parliament narrowly approved the national budget for that year, which projected a reduced budget deficit of approximately 3 percent of gross domestic product (GDP). This budget was formulated within the framework of a reform package that proposed significant fiscal measures to improve the government’s financial position. Key among these measures was the introduction of a broad-based 10 percent general sales tax (GST), intended to increase government revenues by expanding the tax base. Additionally, the reform package called for a substantial reduction in the fuel subsidy by 75 percent, aiming to alleviate the fiscal pressure caused by these expenditures. However, the implementation of these reforms faced considerable public opposition, particularly concerning the proposed 10 percent GST. In response to widespread protests and social unrest, the government deferred the introduction of the 10 percent GST for 18 months in July 2005. Instead, a compromise was reached with the introduction of a hybrid 5 percent GST, which was less burdensome but also less effective in raising revenue. Concurrently, the government modified its plan to reduce the fuel subsidy, scaling back the intended cuts to mitigate public discontent. These adjustments reflected the delicate balance the government sought to maintain between fiscal consolidation and social stability. Despite these subsidy reform attempts, the overall cost of subsidies, predominantly for fuel, escalated dramatically in 2005. The expenditure on subsidies surged by nearly 90 percent compared to previous years, reflecting both the government’s difficulties in implementing subsidy reductions and rising global fuel prices. By the end of 2005, subsidies accounted for nearly 25 percent of total government expenditures and approximately 9 percent of GDP, underscoring the significant fiscal challenge posed by these outlays. This increase in subsidy costs substantially constrained the government’s fiscal space and limited its ability to finance other critical sectors. In addition to rising subsidy costs, other major components of government spending also increased sharply in 2005. Civil service wages and salaries were raised by 24 percent, reflecting government efforts to address public sector demands and maintain social peace amid economic reforms. Defense spending experienced an even more pronounced rise, increasing by 42 percent during the same period. These expenditure increases further exacerbated fiscal pressures, contributing to the widening budget deficit and complicating the government’s efforts to achieve fiscal discipline. As a result of these combined expenditure pressures, Yemen recorded a government budget deficit of US$350.8 million in 2005, which represented more than 2 percent of GDP. This deficit highlighted the ongoing fiscal challenges faced by the government despite its reform efforts and underscored the difficulty of balancing expenditure commitments with revenue generation in a politically sensitive environment. The persistence of such deficits indicated the need for continued fiscal adjustment and structural reforms to ensure long-term fiscal sustainability. Looking ahead to 2006, the Yemeni government planned a sharp 41 percent increase in overall spending, reflecting both continued commitments to public sector wages, subsidies, and defense, as well as anticipated investments in development projects. Economists estimated that this substantial rise in expenditures would result in a fiscal deficit of approximately US$800 million, equivalent to 4.2 percent of GDP. This projected deficit signaled a further deterioration in the fiscal balance and underscored the ongoing challenges Yemen faced in managing its budgetary resources effectively while pursuing economic and social objectives. The government’s fiscal trajectory during this period illustrated the complex interplay between reform ambitions, political constraints, and economic realities.

During the 1990–91 Persian Gulf War, Yemen took a controversial stance by supporting Iraq’s invasion of Kuwait. This political alignment significantly strained Yemen’s relations with Saudi Arabia and Kuwait, two neighboring countries that had previously been critical financial benefactors to Yemen. The support for Iraq alienated these Gulf states, which viewed Yemen’s position as antagonistic to their own interests and regional stability. As a direct consequence, both Saudi Arabia and Kuwait withdrew their financial aid, which had been vital for Yemen’s economic stability. Moreover, Saudi Arabia expelled nearly one million Yemeni workers, a measure that severely disrupted the flow of expatriate remittances to Yemen. These remittances had constituted a substantial portion of Yemen’s government revenue, and their sudden decline had a disastrous impact on the country’s budget, exacerbating existing economic challenges. The economic situation in Yemen deteriorated further with the outbreak of the civil war in 1994. The conflict not only caused widespread destruction but also drained the country’s already limited resources, placing additional strain on the government’s finances. In the aftermath of the war, Yemen found itself increasingly reliant on external assistance to stabilize its economy. In 1995, the country sought aid from multilateral agencies to address its fiscal deficits and to support reconstruction efforts. The following year, in 1996, the International Monetary Fund (IMF) responded by granting Yemen a stand-by credit facility worth US$190 million. This initial financial support was followed in 1997 by the approval of two additional funding facilities, which collectively increased Yemen’s credit line by approximately US$500 million. These funds were intended to support Yemen’s economic recovery and structural adjustment programs. The IMF’s financial assistance was conditional upon Yemen implementing stringent economic reforms aimed at improving fiscal discipline, reducing public sector deficits, and fostering sustainable growth. However, Yemen experienced limited success in adopting these reforms, often hindered by political instability, bureaucratic inertia, and pervasive corruption. As a result, the IMF suspended its lending to Yemen from late 1999 until February 2001, reflecting concerns over the country’s commitment to the reform agenda. Despite this setback, the IMF extended the two funding facilities, including the Poverty Reduction and Growth Facility (PRGF), through October 2001. This extension was contingent on Yemen’s renewed commitment to economic reforms. Nevertheless, Yemen’s insufficient compliance with the agreed-upon measures led the IMF to withhold approximately US$300 million in concessional financing starting in 2002, further limiting the country’s access to critical development funds. Discussions regarding the renewal of the PRGF remained ongoing as of the latest available information, indicating a continued, albeit cautious, engagement between Yemen and the IMF. In the year 2000, after a period of estrangement, Kuwait and Saudi Arabia resumed financial aid to Yemen, signaling a partial thaw in diplomatic relations and recognition of Yemen’s need for economic support. This resumption of aid was a crucial development, as it helped to alleviate some of the fiscal pressures Yemen faced. Subsequently, in October 2002, a coalition of bilateral and multilateral lenders, led by the World Bank, agreed to provide Yemen with a comprehensive four-year economic support package valued at US$2.3 billion. This package was structured to include 20 percent grants and 80 percent concessional loans, representing a significant increase in financial assistance—nearly eight times the amount Yemen had received under the IMF’s PRGF. The scale of this support underscored the international community’s recognition of Yemen’s economic challenges and the need for substantial investment to promote development and stability. Despite the increased funding, the Yemeni government’s ongoing inability to implement meaningful economic reforms and effectively combat corruption undermined the potential benefits of international aid. As a result, the World Bank announced in December 2005 a reduction of its funding commitment by more than one-third, decreasing the allocation from US$420 million to US$240 million for the period spanning July 2005 to July 2008. This reduction reflected concerns about Yemen’s governance and institutional weaknesses, which hindered the efficient utilization of aid resources. In May 2006, the World Bank adopted a new Country Assistance Strategy (CAS) for Yemen covering fiscal years 2006 to 2009. The strategy aimed to foster improvements in fiscal management and human development indicators, pledging approximately US$400 million in International Development Association (IDA) credits over this period. The CAS represented a recalibrated approach to aid delivery, emphasizing targeted interventions to address Yemen’s most pressing development challenges. Yemen’s external debt obligations also played a role in shaping its economic landscape. As of the latest data, Yemen owed approximately US$264 million to Japan, one of its largest bilateral donors. In a gesture aimed at easing Yemen’s debt burden, Japan pledged in December 2005 to write off US$17 million of this debt. This debt relief was part of broader international efforts to support Yemen’s economic recovery and to encourage fiscal sustainability. Concurrently, Germany committed to increasing its annual aid to Yemen to US$83.6 million over the subsequent two years, with funding primarily directed toward education and water improvement projects. This increase in aid reflected Germany’s strategic focus on enhancing Yemen’s human capital and infrastructure. In November 2006, the United Kingdom announced a substantial 400 percent increase in its aid to Yemen, raising its contribution to US$222 million through 2011. This significant escalation underscored the growing international recognition of Yemen’s development needs and the importance of sustained financial support. Yemen’s participation in regional development initiatives also contributed to its economic framework. The country was a member of the Arab Fund for Economic and Social Development, an institution established in 1974 to finance economic and social development projects across Arab states through loans and guarantees. In March 2004, the Arab League provided Yemen with US$136 million specifically earmarked for infrastructure improvements, highlighting the role of regional organizations in supporting Yemen’s development agenda. Further demonstrating the international community’s commitment, a major donor conference held in mid-November 2006 in London saw bilateral and multilateral donors pledge a total of US$4.7 billion over four years (2007–2010) to support Yemen’s economic development. The meeting was co-chaired by the World Bank and the Yemeni government, reflecting a coordinated approach to mobilizing resources and aligning donor efforts. The primary objective of the 2006 London donor meeting was to provide Yemen with sufficient economic aid to enable the country to qualify for future membership in the Gulf Cooperation Council (GCC). Membership in the GCC was viewed as a strategic goal for Yemen, promising enhanced economic integration, increased investment, and greater regional stability. More than 55 percent of the aid pledged at the meeting was expected to come from GCC countries, primarily in the form of grants, underscoring the importance of regional support in Yemen’s development trajectory. This substantial financial commitment was designed to address Yemen’s structural economic weaknesses and to facilitate reforms necessary for GCC accession. On the international trade front, Yemen was granted observer status at the World Trade Organization (WTO) in 1999, marking a significant step toward integrating the country into the global trading system. As of December 2006, negotiations for Yemen’s full WTO membership were ongoing. Achieving full membership was anticipated to enhance Yemen’s access to international markets, attract foreign investment, and promote economic diversification. However, the process required Yemen to undertake comprehensive trade liberalization and regulatory reforms, which were challenging given the country’s economic and political constraints. Nonetheless, Yemen’s engagement with the WTO reflected its broader aspirations to participate more fully in the global economy and to leverage international trade as a driver of development.

In 2005, Yemen’s imports were estimated at approximately US$4.7 billion, reflecting a significant volume of foreign goods entering the country. Projections at the time anticipated a steady increase in import activity, with imports expected to rise to US$5 billion in 2006 and further to US$5.4 billion in 2007. This upward trend underscored growing demand within Yemen for a diverse range of products, driven by both industrial development and consumer needs. The steady growth in imports also highlighted Yemen’s increasing integration into the global trade system during this period. Yemen functioned primarily as a net importer across nearly all major product categories, with the notable exception of fuels. This pattern emphasized the country’s substantial dependence on foreign goods for most sectors, apart from its energy resources. The reliance on imports for machinery, foodstuffs, and processed materials indicated that domestic production was insufficient to meet the needs of the population and industries. Conversely, Yemen’s status as a net exporter of fuels reflected its role as an oil-producing nation, where petroleum products constituted a significant portion of its trade surplus. The principal imports of Yemen during this period consisted mainly of machinery and transport equipment, food and livestock, and processed materials. Machinery and transport equipment were critical to supporting Yemen’s industrial infrastructure and transportation networks, while food and livestock imports addressed the dietary requirements of the population. Processed materials, which included various intermediate goods, were essential inputs for manufacturing and other sectors. This composition of imports revealed the country’s efforts to sustain economic development and meet consumer demand despite limited domestic production capabilities. According to data from the United Nations, Yemen imported over 75 percent of its main dietary staple, wheat, underscoring a pronounced reliance on external food supplies. This heavy dependence on imported wheat highlighted vulnerabilities in Yemen’s food security, as fluctuations in global wheat prices or disruptions in supply chains could have significant impacts on the availability and affordability of staple foods. The reliance on imports for such a critical commodity also reflected challenges in domestic agricultural productivity and the need to supplement local production through international trade. In 2005, the United Arab Emirates (UAE) emerged as the principal source of Yemen’s imports, accounting for 13.4 percent of total imports. However, it is important to note that a substantial portion of these imports through the UAE were re-exports, with the original goods primarily originating from the United States and Kuwait. This trade pattern illustrated Yemen’s position within regional trade networks, where the UAE functioned as a key intermediary or transshipment hub, facilitating the flow of goods from major global suppliers to Yemen. The role of re-exports also highlighted the complexity of Yemen’s import structure and its reliance on regional trading partners. Saudi Arabia was another significant supplier, providing 10.6 percent of Yemen’s total imports in 2005. This close trade relationship reflected geographical proximity and longstanding economic ties between the two neighboring countries. Additionally, China contributed 9 percent of Yemen’s imports during the same year, signaling the growing importance of China as an international trade partner for Yemen. The presence of China as a key supplier indicated Yemen’s engagement with emerging global markets and the diversification of its import sources beyond the traditional Middle Eastern partners. Yemen’s exports totaled US$6.4 billion in 2005, with expectations to reach a record US$8.6 billion in 2006. This anticipated increase was primarily driven by strong oil revenues, which formed the backbone of Yemen’s export economy. The significant rise in export earnings was closely linked to global oil market conditions, which had a direct impact on the country’s trade performance and overall economic health. The projected growth in exports underscored the critical role of petroleum in sustaining Yemen’s foreign exchange earnings and fiscal stability. Petroleum products dominated Yemen’s exports, comprising 92 percent of total exports in 2004 and 87 percent in 2005. This overwhelming reliance on oil exports emphasized the country’s dependence on the energy sector as the main source of foreign currency. The slight decline in the petroleum share between 2004 and 2005 suggested a marginal diversification in the export base, but oil remained the central pillar of Yemen’s trade. The dominance of petroleum exports also exposed the economy to vulnerabilities associated with fluctuations in global oil prices and production levels. Non-oil exports from Yemen were primarily composed of agricultural products, including fish and fish products, vegetables, and fruits. These exports represented efforts to diversify the country’s export sector beyond the petroleum industry. The emphasis on agricultural commodities reflected Yemen’s natural resource endowments and the potential for developing sectors such as fisheries and horticulture. Although non-oil exports constituted a relatively small proportion of total exports, they played a crucial role in supporting rural livelihoods and contributing to economic diversification. In 2005, Asia was the most significant market for Yemen’s exports, with China alone accounting for 37.3 percent of total exports. This dominant share highlighted the importance of China as a trading partner and consumer of Yemeni goods, particularly petroleum. Other important Asian markets included Thailand and Japan, which also absorbed notable volumes of Yemen’s exports. The concentration of exports in Asian markets reflected broader trends in global trade and the growing demand for energy resources in the region. Chile emerged as a major export destination for Yemen in 2005, representing 19.6 percent of total exports. This notable trade relationship outside the Asian region illustrated Yemen’s engagement with diverse international markets. The significant share of exports going to Chile suggested specific bilateral trade arrangements or demand patterns that facilitated this exchange. Yemen’s ability to access markets beyond its immediate geographic region demonstrated the global reach of its export economy, particularly in the energy sector. Over the past decade, Yemen’s import and export values experienced dramatic fluctuations, largely driven by shifts in global oil prices. These variations had a profound effect on the country’s trade balance and economic stability. Periods of high oil prices generally resulted in increased export revenues and trade surpluses, while declines in oil prices led to reduced earnings and trade deficits. The volatility of oil markets thus played a central role in shaping Yemen’s foreign trade dynamics and fiscal health. The trade balance in Yemen shifted markedly from a deficit of nearly US$800 million in 1998 to a surplus of US$1 billion in 2000. This sharp turnaround demonstrated the country’s sensitivity to oil market conditions and the resulting impact on trade flows. The transition from deficit to surplus within a relatively short period highlighted the potential for rapid changes in Yemen’s external accounts, influenced by global economic factors beyond its direct control. Rising oil prices contributed to trade surpluses of US$817 million in 2004 and US$1.7 billion in 2005, reflecting the positive impact of higher oil revenues on Yemen’s economy. These surpluses provided critical resources for government spending, investment, and debt servicing. The improved trade performance during this period underscored the importance of favorable oil market conditions in supporting Yemen’s economic growth and external stability. Despite increasing non-merchandise deficits in recent years, Yemen managed to offset these through record export earnings, resulting in substantial trade surpluses. Non-merchandise deficits, which include services, income, and transfer payments, represented outflows that could potentially weaken the overall balance of payments. However, the strength of export revenues, particularly from petroleum, compensated for these deficits and maintained a positive trade position. This dynamic illustrated the complex interplay between different components of Yemen’s external accounts. The current account remained in surplus due to persistent trade surpluses, with figures of US$175.7 million in 2003, US$524.6 million in 2004, and US$633.1 million in 2005, equivalent to approximately 4 percent of gross domestic product (GDP). These surpluses indicated overall economic stability despite deficits in other areas of the balance of payments. The sustained current account surpluses provided a buffer against external shocks and supported Yemen’s macroeconomic management during this period.

In 1990, following the unification of the Yemen Arab Republic (North Yemen) and the People’s Democratic Republic of Yemen (South Yemen), the newly established Republic of Yemen inherited a substantial and unsustainable external debt burden. This debt was estimated to be approximately 106 percent of the country’s gross domestic product (GDP), reflecting the combined financial obligations of the two formerly separate states. The high debt-to-GDP ratio posed significant challenges for the nascent republic’s economic stability and development prospects, as servicing such a large external debt limited the government’s fiscal space and constrained its ability to invest in critical infrastructure and social services. Throughout the 1990s, Yemen engaged in a series of debt rescheduling agreements with its creditor nations, particularly those organized within the Paris Club, an informal group of official creditors that coordinates debt restructuring for debtor countries facing payment difficulties. These agreements were instrumental in alleviating Yemen’s external debt burden by allowing the country to extend the maturities of its debt, reduce interest rates, and, in some cases, obtain partial debt forgiveness. The rescheduling arrangements provided Yemen with much-needed fiscal relief, enabling the government to redirect resources toward economic recovery and development initiatives during a decade marked by political and economic transition. In addition to bilateral negotiations with Paris Club creditors, Yemen received significant assistance from multilateral institutions, notably the World Bank’s International Development Association (IDA). The IDA, which provides concessional loans and grants to the world’s poorest countries, played a crucial role in supporting Yemen’s efforts to manage and reduce its external debt. Through financial support and technical assistance, the IDA helped Yemen implement structural adjustment programs and economic reforms aimed at improving fiscal discipline, enhancing public sector efficiency, and fostering sustainable economic growth. This multilateral support complemented the bilateral debt relief efforts and contributed to a gradual decline in Yemen’s external debt burden during the 1990s. By the end of 2004, these combined efforts had yielded significant progress in reducing Yemen’s external debt stock. The total external debt had decreased to approximately US$5.4 billion, which represented an estimated 39 percent of the country’s GDP at that time. This marked a substantial improvement from the debt level inherited in 1990, reflecting the effectiveness of debt rescheduling agreements and multilateral assistance in improving Yemen’s debt sustainability. The reduction in debt-to-GDP ratio also indicated a strengthening of Yemen’s economic fundamentals, although the country continued to face challenges related to economic diversification, political stability, and social development. Further improvements were recorded by the end of 2005, when the Central Bank of Yemen reported that the external debt stock had declined to US$5.2 billion. This figure corresponded to approximately 33 percent of Yemen’s GDP, demonstrating a continued downward trend in the country’s external indebtedness. The reduction in debt stock and debt-to-GDP ratio during this period was attributed to ongoing debt management strategies, including prudent fiscal policies, continued engagement with creditors, and sustained support from international financial institutions. These developments enhanced Yemen’s creditworthiness and provided a more stable macroeconomic environment conducive to investment and growth. In the same year, the U.S. government reported that Yemen’s reserves of foreign exchange and gold amounted to US$6.1 billion. These reserves were a critical component of Yemen’s external financial position, serving as a buffer against external shocks and providing the government with the means to manage currency stability and meet international payment obligations. The level of reserves exceeding the external debt stock underscored an improved external liquidity position for Yemen, which was essential for maintaining investor confidence and supporting the country’s balance of payments. The accumulation of such reserves reflected both the prudent management of external resources and the positive impact of debt relief and economic reforms implemented throughout the 1990s and early 2000s.

Yemen’s absence of a stock exchange has posed a significant constraint on the development of inward portfolio investment within the country. Without a formalized and regulated marketplace for trading securities such as stocks and bonds, investors face substantial barriers to entry, including limited liquidity and transparency. This lack of infrastructure has discouraged both domestic and foreign investors from engaging in portfolio investment activities, which typically require a robust financial market to facilitate the buying and selling of financial assets. Consequently, Yemen’s capital markets remain underdeveloped, restricting the diversification of investment sources and limiting the country’s ability to attract short- and medium-term capital inflows through portfolio channels. In parallel, portfolio investment originating from Yemen abroad has also remained very limited. Yemeni investors, constrained by the domestic financial environment and a lack of access to international capital markets, have not significantly engaged in foreign portfolio investment. This scarcity of outbound portfolio flows has contributed to an overall low level of cross-border financial asset transactions involving Yemen. Moreover, the limited scale and informal nature of such investments have resulted in portfolio flows that are largely unrecorded by Yemeni authorities. The absence of comprehensive data on these transactions complicates efforts to assess the full scope of Yemen’s international investment position and hampers effective economic planning and policy formulation. During the early 1990s, Yemen experienced a notable peak in net direct investment, largely driven by the country’s burgeoning oil sector. Foreign investors were attracted to Yemen’s substantial oil reserves, which promised lucrative returns amid rising global energy demand. This period marked a surge in capital inflows as international oil companies sought to explore, develop, and produce hydrocarbons within Yemen’s territory. The influx of foreign direct investment (FDI) during this time played a crucial role in expanding Yemen’s oil production capacity and contributed to the country’s economic growth. The government’s efforts to liberalize the economy and promote foreign participation in the oil industry further facilitated this investment boom. However, since 1995, net direct investment flows into Yemen have turned negative, reflecting a shift in the dynamics of foreign involvement in the country’s oil sector. This reversal occurred because the cost recovery mechanisms for foreign oil companies began to exceed the volume of new direct investment entering Yemen. Under production-sharing agreements and similar contractual arrangements, foreign firms were able to recoup their exploration and development expenditures from oil revenues before profits were shared with the government. As a result, the financial returns extracted by these companies through cost recovery payments effectively outweighed the fresh capital they committed to new projects. This imbalance led to a net outflow of investment funds, signaling a contraction in foreign direct investment and raising concerns about the sustainability of Yemen’s reliance on oil sector FDI. In a significant development in August 2005, the Yemeni government approved a major five-year construction project valued at US$3 billion aimed at establishing a liquid natural gas (LNG) facility. This ambitious initiative represented one of the largest foreign investment projects in Yemen at the time and was designed to capitalize on the country’s natural gas reserves. The LNG project was intended to facilitate the processing and export of natural gas in liquefied form, thereby opening new avenues for energy exports and diversifying Yemen’s hydrocarbon-based economy. The scale and scope of the project underscored the government’s commitment to attracting substantial foreign capital and expertise to develop the country’s energy infrastructure. The LNG construction project involved a consortium of foreign companies collaborating on its development, bringing together international expertise, technology, and financing. This consortium included major multinational energy firms with experience in LNG production and export, reflecting the complexity and capital-intensive nature of the undertaking. The partnership structure allowed for risk-sharing among the participating companies and provided Yemen access to advanced technological capabilities and global markets. The involvement of foreign firms was critical in ensuring the project’s technical viability and commercial success, as well as in enhancing Yemen’s profile as an emerging player in the global LNG industry. The planned LNG facilities were expected to potentially increase foreign investment in Yemen as the project progressed from construction to operational phases. The establishment of LNG infrastructure promised to attract additional capital inflows, not only from the initial consortium but also from ancillary sectors such as transportation, logistics, and services linked to the LNG value chain. Moreover, successful implementation of the LNG project was anticipated to improve investor confidence in Yemen’s energy sector and broader economy, potentially stimulating further foreign direct investment. This development marked a strategic effort by the Yemeni government to leverage its natural resource endowments to foster economic diversification and enhance the country’s integration into international energy markets.

Beginning in the mid-1950s, Yemen became a recipient of substantial international assistance from both the Soviet Union and China, reflecting the geopolitical dynamics of the Cold War era and the strategic interests of these communist powers in the Arabian Peninsula. This assistance was characterized by large-scale development projects and financial aid that contributed significantly to Yemen’s efforts to modernize its infrastructure and economy during a period marked by political transitions and emerging statehood. The Soviet Union’s involvement encompassed a broad range of sectors, including industrial development, military support, and technical training, while China’s aid was more focused on specific infrastructure projects that would enhance Yemen’s connectivity and economic capacity. One of the most notable contributions from China during this period was its participation in the expansion of Sana’a International Airport. This project was instrumental in improving Yemen’s aviation infrastructure, facilitating increased domestic and international air traffic, and thereby enhancing the country’s integration into regional and global networks. The expansion not only enabled greater passenger and cargo capacity but also symbolized a tangible manifestation of China’s growing influence and partnership with Yemen. The airport’s modernization helped lay the groundwork for future economic activities reliant on improved transportation links, such as tourism and trade. Before Yemen achieved independence, economic activity in the southern part of the country was predominantly concentrated in the port city of Aden. Aden served as a critical hub for seaborne transit trade due to its strategic location near the entrance to the Red Sea and its deep-water port facilities. The city’s economy was heavily dependent on the transit trade that passed through its docks, linking Asia, Africa, and Europe. This trade brought considerable revenue and employment opportunities to the local population, making Aden an economic linchpin in southern Yemen. The port’s significance was further amplified by British colonial interests, which had established Aden as a key naval and commercial outpost. However, the seaborne transit trade that Aden relied upon experienced a dramatic collapse following two pivotal events in 1967. The temporary closure of the Suez Canal, a vital maritime route connecting the Mediterranean Sea to the Red Sea, disrupted global shipping patterns and severely curtailed the volume of goods passing through Aden. Simultaneously, Britain’s withdrawal from Aden marked the end of colonial administration and introduced a period of political instability and economic uncertainty. The combined effect of these developments was a severe blow to Aden’s local economy, precipitating a decline in trade activity, loss of jobs, and reduced government revenues. This economic downturn underscored the vulnerability of Yemen’s southern economy to external geopolitical shifts and highlighted the need for diversification and development beyond reliance on transit trade. In response to ongoing economic challenges, the Yemeni government launched a comprehensive economic, financial, and administrative reform program (EFARP) in early 1995. This initiative was designed to stabilize the national economy, address fiscal imbalances, and create a foundation for sustainable growth. The EFARP encompassed a range of measures including fiscal discipline, monetary stabilization, public sector reform, and structural adjustments aimed at improving efficiency and transparency within government institutions. The program also sought to attract foreign investment and enhance Yemen’s integration into the global economy by implementing policies conducive to private sector development. The EFARP received robust support from major international financial institutions such as the World Bank and the International Monetary Fund (IMF), as well as from various bilateral and multilateral donors. This broad international backing was indicative of the global community’s recognition of Yemen’s reform efforts and the importance of stabilizing the country’s economy for regional stability. The involvement of these institutions provided Yemen with technical expertise, financial resources, and policy guidance necessary to implement the reforms effectively. Moreover, the support helped build confidence among investors and donors, facilitating further economic assistance and cooperation. The impact of the EFARP on Yemen’s economy during the period from 1995 to 1999 was notably positive. One of the key achievements of the reform program was the reduction of the government budget deficit to less than 3% of gross domestic product (GDP), a significant improvement from previous years marked by fiscal imbalances and unsustainable public spending. This fiscal consolidation helped restore macroeconomic stability, reduce inflationary pressures, and create a more predictable environment for economic activity. The reforms also succeeded in correcting broader macro-financial imbalances, including addressing issues related to monetary policy, exchange rate management, and public debt. These adjustments contributed to strengthening Yemen’s economic fundamentals and improving the overall business climate. The effectiveness of the reform measures was further reflected in the real growth rate of Yemen’s non-oil sector, which increased by 5.6% between 1995 and 1997. This growth indicated a diversification of economic activity beyond the oil industry, which had historically dominated Yemen’s economy. The expansion of sectors such as agriculture, manufacturing, and services suggested that the reforms were fostering a more balanced and resilient economic structure. This diversification was critical for reducing Yemen’s vulnerability to fluctuations in oil prices and external shocks, thereby enhancing long-term economic sustainability. Despite these developments, Yemen’s engagement with international environmental agreements has remained limited. As of 2024, Yemen is one of only three countries worldwide that have not ratified the Paris Agreement, a landmark global accord aimed at limiting climate change by reducing greenhouse gas emissions. Yemen’s non-ratification of the agreement has significant implications for its access to international support related to climate initiatives, including funding, technology transfer, and capacity-building programs. The absence of formal commitment to the Paris Agreement constrains Yemen’s ability to benefit from global efforts to address climate change, which is particularly critical given the country’s vulnerability to environmental challenges such as water scarcity, desertification, and extreme weather events. This situation underscores the ongoing complexities in Yemen’s international relations and development trajectory, especially in the context of global environmental governance.