In addition to a grueling seven-year military conflict, the Yemeni government and Houthi rebels are fighting on another front – a currency war that has opened a rift in riyal values.
Both the government and the Iran-backed Houthis used the same banknotes until late 2019 when the rebels banned new banknotes printed in government-run Aden on fears of inflation.
The resulting difference in money supply has caused the value of the riyal in government areas to drop to around 1,000 per dollar, while the value in the Houthi-controlled zones has been kept relatively stable at 600.
Citizens and businesses in both government and rebel-controlled zones have been left out of their pockets by the divergence, but particularly those in the former, given the rampant inflation there.
This internal exchange rate has also made trade difficult and has led to profiteering manipulation to the detriment of most in a country on the brink of famine.
“Right now we have … an exchange rate of the same currency within the country,” said Amal Nasser, an economist at the Sanaa Center for Strategic Studies. “That is bizarre from an economic point of view.”
According to Nasser, other experts, and Yemeni citizens, the gap between the two currency values meant higher transfer costs between the two zones.
The conflict in Yemen has divided the country between the largely Houthi-controlled north and the south under the internationally recognized government that moved the central bank to Aden after the armed group captured Sanaa in 2014.
The war has brought the nation, which has long been the poorest in the Arabian Peninsula, to the brink of famine and economic collapse, with most schools, factories, hospitals and businesses either destroyed or closed.
When the riyal fell to new lows in government areas in recent weeks, the local central bank promised to withdraw the banknote series that had accumulated on its territory after the Houthi ban in late 2019.
The central bank in Aden was caught expecting the new banknotes to eventually spread evenly across both zones, but the concentration of supply in the government zone fueled inflation there and drove price divergence.
The government introduced a stash of supposedly “old bills” this month, which drew the anger of rebels who accused it of minting new “counterfeit” money.
The rebel authorities also banned its use and gave civilians instructions on how to identify the “fakes” – something that experts say would be difficult for an average citizen.
“Of course, this new injection of cash will have a negative impact on the economy, increase inflation and affect the purchasing power of citizens,” said Alaa al-Haj, a resident of Aden.
Yemenis are already struggling with rising costs of living in a country where more than 80 percent of the people depend on international aid.
Houthis claim cunning
The Houthis have accused Goznak, a Russian state-owned company, of partnering with the Aden Central Bank earlier this year to print “large quantities of counterfeit currency” – “specifically 1,000 riyals” to mark new banknotes as old.
Wahid al-Fawdai, a central bank adviser, said the government’s recently circulated bills had been in the central bank’s reserves for several years. Goznak and the central bank did not comment.
Social media and newspapers are full of stories of profiteers taking advantage of the unstable economy.
Some people have used the exchange rate differences as an opportunity to make money by using the newly issued “old” banknotes in Aden to buy up the banknotes printed after 2017 at a discount of around 20 percent.
Analysts said that the new “old” notes have a great chance of entering the Houthi areas largely undetected because they are difficult to distinguish from the earlier old notes.
Ultimately, this should help the central bank bridge the price gap between the two zones, they said.