Identifier
Created
Classification
Origin
09SANAA1103
2009-06-14 13:26:00
CONFIDENTIAL
Embassy Sanaa
Cable title:  

YEMEN: CONCERN RISES AS FOREIGN EXCHANGE RESERVES

Tags:  ECON EFIN EINV YM 
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VZCZCXRO8261
PP RUEHDE RUEHDH RUEHDIR
DE RUEHYN #1103 1651326
ZNY CCCCC ZZH
P 141326Z JUN 09
FM AMEMBASSY SANAA
TO RUEKJCS/SECDEF WASHINGTON DC PRIORITY
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEIGE/FEDERAL RESERVE BOARD WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SANAA 001103 

SIPDIS

NEA/ARP FOR ANDREW MACDONALD
USAID FOR CHRIS KISCO
USTR FOF JASON BUNTIN
DEPT OF COMMERCE FOR TYLER HOFFMAN
DEPT OF TREASURY FOR SAMANTHA VINOGRAD

E.O. 12958: DECL: 06/14/2019
TAGS: ECON EFIN EINV YM
SUBJECT: YEMEN: CONCERN RISES AS FOREIGN EXCHANGE RESERVES
DECLINE

Classified By: Ambassador Stephen A. Seche for reasons 1.4 (b) and (d).

C O N F I D E N T I A L SANAA 001103

SIPDIS

NEA/ARP FOR ANDREW MACDONALD
USAID FOR CHRIS KISCO
USTR FOF JASON BUNTIN
DEPT OF COMMERCE FOR TYLER HOFFMAN
DEPT OF TREASURY FOR SAMANTHA VINOGRAD

E.O. 12958: DECL: 06/14/2019
TAGS: ECON EFIN EINV YM
SUBJECT: YEMEN: CONCERN RISES AS FOREIGN EXCHANGE RESERVES
DECLINE

Classified By: Ambassador Stephen A. Seche for reasons 1.4 (b) and (d).


1. (U) Summary. As foreign exchange reserves decline,
non-ROYG observers have raised a red flag and predicted the
impending collapse of the Yemeni rial. The ROYG, however,
remains complacent and downplays the threat to the rial's
stability. The decline in foreign exchange reserves is
reality, and in combination with other economic problems,
could very well challenge the ROYG's ability to maintain a
stable currency. End Summary.

NON-ROYG OBSERVERS EXPRESS CONCERNS OVER RIAL
--------------


2. (U) The business community has raised a red flag on the
status of Yemen's foreign exchange reserves. General
Director of the Federation of Yemen Chambers of Commerce
Mohammed A. Al-Maitami, speaking on behalf of members of the
private sector, said on May 28 in an open forum that ROYG
foreign exchange reserves have dropped by USD 1 billion in
the first quarter of this year. (Note: This statement
roughly agrees with estimates of the Central Bank of Yemen
(CBY),which reported in March that reserves declined from
USD 8.1 billion to USD 7.4 billion in 2009. End Note.)
Al-Maitami described existing reserves as equivalent to the
size of "a postal store in California" and predicted that, in
the face of high inflation, the rial would collapse.


3. (C) On June 5, political observer and long-time embassy
contact Abdulghani al-Eryani outlined a doomsday scenario
wherein the ROYG would be unable to either support the rial
or pay interest on its treasury bills. He predicted this
would cause not only the collapse of the rial, but the
banking system as well. He noted that the threat to the rial
was not limited to the value of the reserves, but to their
liquidity as well. A German diplomat told Pol/Econ Chief
this spring that a representative of a large German bank had
raised concerns with him about devaluation of the rial,
predicting it would lead to significant price inflation.

ROYG COMPLACENT AMIDST FOREIGN RESERVE DECLINE
-------------- -


4. (C) Government officials continue to downplay the threat
to the foreign exchange reserves. Deputy Finance Minister
Jalal Yaqoub told EconOff on June 2 that he was not worried
about Yemen's foreign exchange reserves, saying that the ROYG
would just print and auction off more local treasury bills to
cover any gap. (Comment: This is a stop-gap measure at best.
End Comment.) Former Prime Minister Abdul-Karim al-Eryani
said that Yemen's foreign exchange reserves are equal to
about six months' imports in a Reuters press report on June

7. He suggested that they are still healthy, but once they
reach a level equal to one month's imports, then the ROYG
face problems. Salah al-Attar, Director of the ROYG,s
General Investment Authority (GIA) also dismissed concerns
about the declining foreign exchange reserves. He told
EconOff on June 1 that the reserves have not been affected by
the global financial crisis since the ROYG has instituted a
very conservative monetary policy. (Comment: Despite ROYG
claims of adherence to conservative investment strategy,
official CBY reports have revealed foreign asset losses in
the Central Bank as well as in the banking system in general.
End Comment.)

COMMENT
--------------


5. (C) While many national economies are suffering from a
decline in foreign exchange reserves due to the global
financial crisis, the Yemeni economy is particularly at risk
as inflation increases, the current account deficit widens,
the annual growth rate worsens, and Yemen's main export
commodity (oil, at 90 percent of exports) decreases.
Furthermore, the ROYG suffers from a general lack of economic
leadership, particularly in managing its budget, which is at
least 70 percent dependent upon oil profits, and in removing
subsidies on oil, which cost the ROYG USD hundreds of
millions per year. The decline of foreign exchange reserves
is not an urban legend and combined with other economic
problems, it could very well challenge the ROYG's ability to
maintain a stable currency. End Comment.
SECHE