Yemen’s Astonishing Financial Meltdown

SANAA, Yemen — The bustling Rowaishan roundabout in central Sanaa connects the upmarket Hadda district with Algeria Street, a strip of shopping malls and fast food restaurants where wealthy Yemenis gather to whet their appetites for Western clothing, electronics, and overpriced coffee.

On a crisp bright morning in late November, Fatima Ali al-Saudi, a 45-year-old divorcee from Mahwheet, an agricultural district 70 miles northwest of the capital, weaved her way through the passersby. Dressed in a black abaya spotted with dirt kicked up by passing cars, she clutched a piece of paper that offered a potted history of her desperation: divorced, unemployed, nine children (four of school age). Until a year earlier, Fatima had made ends meet in her home village by picking qat, the mild narcotic leaf that Yemenis like to while away afternoons chewing. “But there’s no more work,” she said.

Yemen was already a poor country when a 2011 popular uprising descended into inter-elite violence, bringing the economy to a standstill and tipping millions of people into poverty. Today, more than half of Yemenis live on $2 a day or less, while other metrics of wellbeing, like child malnutrition rates, are frighteningly high — among the worst in the world. The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) estimates that some 15.9 million people — roughly 60 percent of the population — now need some kind of humanitarian assistance in order to maintain basic living standards.

“After the revolution, it got worse,” says Fatima. For her and countless others, the past three years have resembled life at Rowaishan roundabout. Members of the Yemeni elite, diplomats, and development workers speed by on their way to meetings to discuss the country’s plight, usually in settings detached from the quiet turmoil roiling across the rest of the country, as people like Fatima look helplessly on. Despite the politicians and foreign officials who regularly pay lip service to their plight, ordinary Yemenis have seen few improvements to their day-to-day lives. “They’ve let us down,” Fatima said.

In November 2011, Ali Abdullah Saleh, Yemen’s president of 33 years, agreed to step down under the terms of a deal brokered by the country’s Gulf Arab neighbors. He ceded power to his longtime deputy Abd Rabbu Mansour Hadi, who was tasked with guiding Yemen through a political transition that is meant to end with a referendum on a new constitution, followed by general elections. For much of the transition, though, the government — deeply divided between those who backed Saleh during the revolution and those who did not — has proved weak and ineffective, prone to infighting and finger-pointing.

This October, President Hadi appointed a prime minister as part of a peace deal brokered by the United Nations to end a four-day siege of the capital by the Houthis, a Shiite rebel group from the north. The new premier, Kahled Bahah, has declared the economy to be a top priority for the supposedly technocratic cabinet he put together a month after being appointed. But that doesn’t mean that things are about to get better. The Bahah government is in crisis mode, worrying aloud that it may not be able to pay wages within two to three months.

As a top finance ministry official recently told me, there’s simply no money left. “We’ve forecasted our cash flows for the end of the year,” the official told me. “We won’t be able to pay wages for the rest of 2014.”

Hadi administration officials often bemoan the Houthis’ intransigence (in September they forced a reinstatement of costly and unsustainable fuel subsidies), the political infighting that has beset the country since Saleh’s ouster, and the slow pace at which promised aid has been disbursed. But that is somewhat misleading. The fact is that, since Saleh’s ouster, Sanaa has spent more — and received more foreign support — than at any other point in Yemen’s history.

The government is on course to spend $14 billion in 2014, almost three times its expenditures of a decade earlier. Meanwhile it’s been bringing very little in. Repeated attacks on a major oil export pipeline have cut off an important source of state revenues, while collection of taxes and payments to state utilities has been minimal. So, to finance its budgets, Sanaa has turned to bonds and treasury bills issued in the local market at exorbitantly high interest rates of around 15 percent — more typical of a credit card than a government — while financing its overdraft at the Central Bank of Yemen to a level that several officials at the finance ministry and central bank say is technically illegal.

The government’s response to the mounting fiscal crisis: Ask the neighbor for more money and keep on spending. For much of the past three years, members of the Hadi administration have been traveling around the region, caps in hand, begging for assistance from their neighbors — who, it should be said, have not been unforthcoming. Saudi Arabia has given Yemen more than $4 billion since 2012, most recently handing its southern neighbor about $2 billion in cash in a July meeting attended by both Hadi and King Abdullah bin Abdulaziz al-Saud. The Saudis gave Hadi $435 million for social welfare, about $1 billion to pay for fuel, and promised another $700 million in military assistance, about $500 million of which has been disbursed.

That money has already been spent pretty much in its entirety. So where did it go? The answer to this question provides a worrying insight into the way the country has been managed since Hadi ascended to the presidency after a February 2012 election in which he ran unopposed. The backers of the transition — the United Nations, the United States, the United Kingdom, and the states of the Gulf Cooperation Council — have imposed practically no accountability on the president, offering him seemingly limitless political support and refraining from criticism even as he has foundered.

Take the $435 million the Saudis gave to underwrite the cost of welfare payments. Although the money — one and a half times the welfare fund’s total requirements for the year — was transferred to the government in July, the fund has struggled to get the finance ministry to cough up the cash it needs to make quarterly payments. So far, a mere $218 million of the total has been paid out, and officials at the welfare fund now say that they do not have enough money to make payments for the final quarter of the year, which were due in November. The extra money for the fund was meant to underwrite a 50 percent bump in payments — which, if it completes the payments for the year, the government does not seem plan on disbursing.

When I asked the finance ministry official what had happened to the grant for welfare payments — and the other money the Saudis gave in July — he replied simply: “We spent it.” The money, he explained, had been transferred to an account at the central bank, a central pool of funds that the ministry uses as a current account. The ministry had decided that other tasks took priority over social welfare, he said.

Similarly, in December 2013, Qatar pledged $350 million towards reparations to military officers, civil servants, and landowners who were forcibly retired or had property stolen after 1994 north-south civil war. An initial tranche of $150 million was transferred to the Central Bank of Yemen shortly after the agreement was signed. Along with other government sources, the finance ministry official again confirmed that at least “some” of the Qatari money has been spent — and not on southerners.

When I asked where, exactly, the money spent over the past three years had gone, the official said most had disappeared into a “black hole” of spending. The army and a number of government ministries have gone on a hiring spree since 2011, even as service delivery and security have deteriorated. Subsidy payments for fuel and electricity have continued apace. A punishing debt repayment regime now accounts for around a fifth of all state spending. Yet Sanaa has spent practically nothing on investment and infrastructure improvements — in other words, the kind of spending that produces growth and jobs.

Keeping track of the money being spent hasn’t been a priority. “We’ve been running the finance ministry on an ad hoc basis for a long time,” the official told me. “The ministry has always been run like a cash register. People receive money and they pay money. Fiscal or economic or monetary policy has not been done here.”

An explanation of outright incompetence in financial management in Sanaa has a certain appeal. But the already rampant corruption within the government has, if anything, worsened since Hadi came into power. And many in Sanaa are asking whether some of the money lavished upon Yemen has been helping the beleaguered and unpopular president to remain afloat.

A number of political insiders in Sanaa say that Jalal Hadi, the president’s son, has been flush with cash of late. Strikingly, two people I’ve interviewed describe almost the exact same sequence of events after meetings with Jalal, who until 2011 was deputy minister for expatriate affairs, hardly a job that comes with a huge salary. Both sources were led into a room stacked with pallets of cash, where aides handed them sums of up to a million Yemeni riyals, about $5,000. Two other people who have met with the president’s son, but have not been offered money, say that he is open about the extent to which he “helps” people. (A presidential official declined to comment, saying that Hadi’s son is a private individual.)

A number of people in the southern port city of Aden say that a close Hadi adviser has approached them offering patronage, meanwhile. The adviser is said by several people to be the conduit through which Hadi has been funneling payments to the so-called “Popular Committees,” the tribal militias Hadi brought into Aden in November to secure the port in the face of growing calls for secession among southerners.

During the financial and economic crisis of 2008-2009, much was made of the question of “moral hazard.” By bailing the banks out, Washington and other Western capitals in effect sent the message that the unsustainable profit-seeking that brought the economy to the verge of collapse would go unpunished. The banks were too big to fail.

International interventions in countries like Yemen come with their own moral hazards. The West feels the need to back transitional administrations and presidents because they see them as the best option for stability — and because that often serves western interests in other realms, such as security. Hadi, for example, has given firm support to U.S. counterterrorism efforts in Yemen.

That helps to explain the muted response to the missing money for welfare payments to Yemen’s large population of poor people. Members of the diplomatic community in Sanaa acknowledge that there’s an issue and talk about “pressuring” Hadi to resolve the problem, but say that they can’t push too hard because of the need to keep the president onside. Diplomats in the capital who acknowledge that Hadi and his son probably have their hands in the cash register seem unperturbed. The implication is that this should be considered as the cost of doing business, just as it was in Afghanistan and Iraq. (The grim implications of those precedents are left unaddressed.)

The problem for the transition’s backers is that they have turned a blind eye to Yemen’s profligacy largely on the assumption that Riyadh will always step in and bail Sanaa out. Yemeni officials are experts at playing on fears over the rise of the local al Qaeda franchise and an influx of Yemeni economic migrants over their borders. Accordingly, they have also assumed — and continue to do so — that the Saudis will always be around to help them out in a tough spot.

But the takeover of the capital in September by the Houthis, who the Saudis believe are backed by Iran, and the rapid pace at which the group has expanded its territorial control elsewhere, have prompted Riyadh to shut off the flow of cash, say diplomats and government officials. (The Saudis, who fought the Houthis in 2009, fear, among other things, that the Houthi spirit of rebelliousness could jump over to their own restive Shiite population.) Without a helping hand from its neighbors, Yemen is veering towards destitution.

As a long-brewing humanitarian crisis — itself a predictable product of decades of underdevelopment under the Saleh regime, a onetime client of the United States — deepens, it’s clear who will pay the price for these mistakes in the short term. “The economy collapsed and the main victim was poor people,” a leading official at the Social Welfare Fund told me. “They pay the cost. There is no plan from the government to direct efforts towards the poor people. They have other plans. The main interest of the government is security and political conflicts.”

MOHAMMED HUWAIS/AFP/Getty Images