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Impact of conflict on the financial sector in Yemen: implications for food security

Working paper

Written by Sherillyn Raga, Sherine El Taraboulsi-McCarthy, Moizza Binat Sarwar, Yazeed al-Jeddawy

In a country as poor as Yemen, food insecurity has long been an endemic challenge. The conflict has since propelled millions more people into food insecurity, through direct conflict impacts and indirect effects on market prices and household incomes. By utilising mixed methods, this paper analyses how the fragmentation and deterioration of the financial sector act as an operating channel that contributes to food insecurity in Yemen.

Our findings suggest two central developments among Yemen’s financial institutions and agents. First, the conflict has weakened the banking sector capacity, contributing to a loss of confidence in formal financial institutions. As a result, there has been an increasing reliance on informal financial institutions and agents for financial services in Yemen. Second, the conflict has expanded to an economic war over differential public salary distribution, revenue mobilisation, trade financing support and exchange rate management, affecting prices and financial transaction costs. These developments have contributed to inefficiencies in the financial system, creating negative knock-on effects on food security. These effects include reduced food demand as a result of eroded purchasing power, sub-optimal imported food supply due to lack of foreign exchange, and discouraged agricultural production due to low availability of credit.

Our analysis highlights that ending the war is the ultimate policy priority for Yemen. We also offer entry points for the international community to help stabilise financial sector operations and facilitate convergence in economic and monetary policy more broadly. These include intermediation for parties to insulate financial services from political influences, providing higher levels of aid than previous commitments, expediting digital investment, and increasing capacity building for financial services providers and consumers. These recommendations are expected to create positive knock-on effects on food security in Yemen.