As Yemen recovers from its political crisis of 2011 and growth returns to its economy, the country is renewing its focus on Islamic finance and seeking increased foreign investment to assist its ambitions. DR MONEER HASAN SAIF outlines the current situation.

Yemen is entering a new era, and offering an inspiring model among other Arab nations with the recent completion of its National Dialogue Conference (NDC); which achieved some tangible outcomes including the agreement to create a decentralized and federal system.

Political transition is also moving forward; and economic reforms, supported by large external inflows including the 2012 Rapid Credit Facility (RCF), have helped Yemen to stabilize its economy. However, the political and security situation remains fragile, poverty and unemployment are widespread and there are no reliable numbers to show their rates. Furthermore, the underlying fiscal deficit has widened and large wage and subsidy outlays are crowding out social spending and investment.

The fledgling recovery is projected to continue over the medium-term, supported by the implementation of the authorities’ economic plans. However, stronger reforms and donor support are needed to achieve sustainable high and inclusive growth as well as prevent deterioration in public debt and the external position.

The deteriorating security situation reflected in the repeated attacks on the oil pipelines and electricity stations have caused a significant decline in the total of foreign assets reserves of the central bank. Reserves fell for the fifth consecutive month to reach US$4.7 billion in April, representing the lowest level since June 2012.

According to the International Monetary Fund (IMF), the delays in reforms, shortfalls in donor support and sabotage activities curtailing oil and electricity supply could undermine the stabilization gains, reduce growth prospects, and threaten fiscal and external sustainability.

 

• Despite all of these events, the currency has remained remarkably stable, due to the central bank’s stabilization measures and intervention.

• Inflation rose to about 10.7% as recorded in March — although still lower than the 20% recorded in 2011. Estimates or this year range between a ‘normal’ 10-12% and single-digit rates.

• GDP grew 2.4% in 2013. The current account deficit narrowed in 2012 to about 1% of GDP compared to 4.1% in the preceding year.

• The budget deficit stands at around 6.7% of GDP according to the IMF, due to higher spending, including on wages and subsidies.

• Unemployment, although no reliable data is available, reached an all-time high 46-56% in 2011 and decreased later in 2012 as many construction and commercial activities resumed.

• The banking system is stable and has low risk related to liquidity and other issues. The capital adequacy ratio is estimated at 29.6% at the end of December 2012, partly due to the large share of zero risk-weighted government securities in the banks’ portfolios, and the high interest rates earned on these securities. However, non-performing loans stood at 25.5%, reflecting the level of credit risk and some deficiencies in commercial banks’ risk management capacities.

Banking sector performance in 2013
The Central Bank of Yemen (CBY) released its consolidated balance sheet report including some important banking activity indicators in 2013. The total consolidated budget of Islamic and commercial banks at the end of December 2013 reached YER42 billion (US$195.12 million) to YER 2.78 trillion (US$12.92 billion). Foreign assets rose to YER516.7 billion (US$2.4 billion) at the end of March 2013 to YER549.8 billion (US$2.55 billion) at the end of June 2013 with a 6.4% increase of YER33.1 billion (US$53.78 billion).

Total reserves of banks reached US$8.5 billion (2.7%) at the end of December 2013. The total banks’ credit to the private sector fell from YER530.1 billion (US$2.46 billion) in January 2013 to YER510 billion (US$2.37 billion) at the end of December 2013, a decrease of YER20.1 billion (US$93.38 million) and 3.8%. Total bank deposits rose to 2.6% from YER2.17 trillion (US$10.08 billion) at the end of November 2013 to YER2.23 trillion (US$10.36 billion) at the end of December 2013. Commercial banks’ treasury operations and repos were YER1.2 trillion (US$5.57 billion) at the end of 2013 compared to YER1.19 trillion (US$5.53 billion) in the previous month.

Sukuk shaping new Islamic finance era in Yemen
As the Sukuk industry grows and evolves in Yemen, we remain on the lookout for implications for investors and creditworthiness. We believe that it is only a matter of time before the market develops a sufficient pool of available liquidity.

Islamic bonds (Sukuk) commenced in Yemen at the beginning of 2011 with a single issuance followed by another in early 2012 and was stopped until the end of 2013 when the two issuances of Sukuk were resumed.

The implementation of Sukuk is conducted by the CBY Sukuk Unit as a speculator for Islamic banks in the local market to finance projects or purchasing materials or goods. Contract formats vary from process to another based on the Islamic financing instruments and the nature of assets to which the finance was allocated.

The central bank issued seven issuances since 2011 at a total amount of YER196.59 billion (US$914 million). The first issuance was to finance construction projects for the government with an amount of YER53.25 billion (US$247.39 million) by Istisnah method while the rest  were to finance the oil derivatives by Salam. Mohamed Al-Hafi, the head of Sukuk Division at CBY, stated that they are seeking new Islamic methodologies that can finance big government projects to promote economic growth in Yemen. He added that their financial goals include financing several construction and industrial projects in the near future.

Sukuk issuance is still limited in its ability to promote growth since the paper was issued to finance only oil derivatives in the market, rather than financing the development and infrastructure projects that Yemen is badly in need of. The future of Sukuk is promising and the government will benefit in terms of financing alternatives for huge projects that are needed to build the country. Therefore, the NDC strongly supported the inclusion of Sukuk as a vehicle to achieve economic growth in Yemen in its NDC Statement.

Dr Moneer Hasan Saif is the executive director of Invest Capital for Consulting & Investment Services. He can be contacted at
[email protected]
.