Hold on import financing mechanism expected to be driving further price increases

• Conflict and poor macroeconomics conditions are expected to continue to drive significantly below-average access to typical sources of food and income throughout the projection period. Crisis (IPC Phase 3) outcomes are expected to persist at the area level even in the presence of large-scale humanitarian assistance, with worst-affected households expected to face Emergency (IPC Phase 4) or Catastrophe (IPC Phase 5) outcomes. Although not the most likely scenario, Famine (IPC Phase 5) would be possible if there is a significant shock to commercial food import levels or if food supply is otherwise cut off from particular areas for a prolonged period.

• According to key informants, all future rounds of Yemen’s letter of credit (LOC) import financing mechanism have been put on hold due to insufficient government revenue, depletion of Saudi financial support, and the rapidly depreciating local currency. Though currency is typically issued to traders quarterly, the most recent LOC distribution occurred in January 2021. As a result, traders have been accessing foreign currency at increased costs, likely contributing to more rapid food price increases via increased costs of importing both food and fuel. This is driving further reductions in household purchasing power due to the expected inability of most households to expand income-earning. As of the last week of May 2021, the cost of the minimum food basket at the national level was 20 percent higher than the already significantly above-average levels recorded at the beginning of January 2021. Further price increases are expected throughout the projection period.

• In highland areas, harvesting of winter cereals has recently concluded and summer cereal cultivation is nearing conclusion. The late onset of the first rainy season and high input prices have likely reduced area cultivated under summer cereals. Harvesting of spring cereals has ended in the eastern plateau and is beginning in coastal areas. Food from the harvests will temporarily improve food access for farming households. Meanwhile, some fruit harvesting and, in highland areas, year-round qat harvesting is likely providing some labor opportunities. Overall, profits from crop sales in 2021 are expected to be below average and lower than last year due to high prices of inputs, including fuel.

Current Situation

Conflict and political instability continue to drive deteriorating macroeconomic conditions, below-average access to income, and significantly above-average prices of food and essential non-food commodities in Yemen. In the north, the Sana’a-based authorities (SBA) continue to reject peace negotiations until their longstanding demand for lifting the Saudi blockade of ports and Sana’a airport is met. In the south, tensions between the internationally recognized government (IRG) and the Southern Transitional Council (STC) have escalated. Following the departure of IRG authorities from Aden in the first quarter of 2021, STC authorities have been establishing government bodies and filling appointments without consultation of the IRG side, according to a Yemeni security firm. A new round of talks between the IRG and STC is ongoing in Riyadh as of mid-June.

After a period of escalation from January to March 2021, levels of conflict in Yemen have decreased slightly in April and May but remain high overall according to data from the Armed Conflict Location & Event Data Project (ACLED). From January to May 2021, 1,351 battles and 1,563 incidents of explosions/remote violence were recorded. These totals were 19 and 35 percent lower, respectively, than during the same time period of last year. However, according to the Logistics Cluster’s access constraints map as of May 6, 2021, segments of major roads continue to be closed or difficult to access. In Marib, where conflict escalated in February, missile strikes aimed toward Marib City continue to cause civilian casualties, damage infrastructure, and destroy property.

According to IOM monitoring, 6,292 households have been displaced across 10 of 24 monitored governorates in Yemen from January 1 to June 19, 2021. This total is 62 percent lower than the number displaced in these governorates in same time period of 2020. In both years, the majority of displacements occurred in the first quarter of the year, alongside escalated conflict in Marib. More recently, flooding in the first week of May 2021 displaced 262 households in the period of May 2-8.

The Yemeni economy—which had already been struggling following multiple shocks since 2011—has been devastated by conflict since 2014, driving real GDP loss of approximately 45 percent and cumulative losses in economic activity estimated at around 66 billion US dollars by the end of 2019 according to the Yemeni Ministry of Planning. Currently, the most important sources of government revenue are oil and gas production, taxes, and customs duties, with remittances and foreign assistance providing important sources of foreign exchange alongside oil and gas. In 2020, declining inflows of government revenue, foreign assistance, and remittances further worsened the economic situation, exacerbating foreign exchange shortages and further limiting government capacity to support importation, pay salaries, and fund public services and local operations budgets.

Disparate monetary policies continue to contribute to a widening gap in exchange rates between northern SBA and southern IRG areas (Figure 1). In the south, the currency has continued to depreciate alongside the printing of new bank notes. In the north, where the new bank notes are banned, the exchange rate has remained relatively stable over the past year and a half. Diverging exchange rates and the ban on new bank notes in the north are resulting in fees of more than 50 percent to send cash transfers from southern to northern areas. This has significantly increased the cost of sending internal remittances and has increased traders’ reliance on foreign currency as an alternative. On average across IRG governorates, the parallel market exchange rate in May 2021 had reached a record 904 YER/USD according to data from FAO, representing a 36 percent loss of value since the same time last year. Meanwhile, in the north, the exchange rate has remained generally stable since late 2019. More recently, in June, all transfers of hard currency from southern areas have been halted in an effort to control the exchange rate.   

Oil products contribute 63 percent of Yemen’s total exports, with revenues accounting for about 70 percent of the country’s general budget. Current average production is about 55,000 barrels per day. In May 2021, the Yemeni Minister of Oil and Minerals announced that five international oil companies who froze their operations in Yemen with the onset of the conflict in 2015 would resume operations in the country. He also announced plans to increase oil production by an estimated 20,000-25,000 barrels per day alongside new efforts to increase production and exploration in Shabwah, Marib, and Hadramaut. However, the kidnapping of three employees of foreign oil companies in June has already posed a set-back to operations.

An estimated 60 to 70 percent of Yemen’s food and non-food imports enter through the main seaports of Al Hudaydah, As Salif, Aden, Socotra, and Al Mukalla. Typically, the Central Bank of Yemen (CBY) based in Aden supports the importation of essential food and non-food commodities through the country’s letters of credit (LOC) import financing mechanism, which provides foreign currency to traders at preferential exchange rates. However, since early this year, all future rounds of the LOC mechanism have been put on hold due to insufficient government revenue, depletion of Saudi financial support, and the rapidly depreciating local currency (as the value of foreign currency had been changing between the time when traders submitted applications and the time when foreign currency was issued). Though foreign currency is usually issued on a quarterly cycle, the most recent distribution occurred in January 2021 following approval to withdraw batch number 39 of the Saudi deposit which has been financing the LOC mechanism. As a result, traders have been accessing foreign currency on the parallel market at increased costs, expected to be putting additional upward pressure on food prices both directly via higher costs of importing food and indirectly via higher costs of importing fuel.

From January to April 2021, 2,027,811 tons of food were imported through all of Yemen’s main seaports and land ports (Shahin and Wadiea’ah) according to data from FAO, of which 62 percent was wheat grain and 7 percent was wheat flour. Monthly average food import levels during this period were 19 percent higher than the monthly average during the same period of 2020 and 11 percent higher than the monthly average throughout 2020. According to the Ministry of Trade and Industry (MTI), stocks of wheat in Al Hudaydah and As Salif silos totaled around 6,585,760 sacks as of May 2021, similar to levels last month. Stock levels are assessed to be enough to cover consumption requirements in northern SBA areas for approximately three months.

The latest fuel crisis ongoing since mid-2020 in SBA-controlled areas has continued to negatively affect livelihoods and put upward pressure on prices of food, water, and other essential goods. As of May 26, six ships carrying 148,653 metric tons of fuel had been cleared by UNVIM to enter Al Hudaydah port but had not been permitted by the Saudi Coalition to enter. However, as of the first week of June, an unspecified number of ships had been allowed by the Saudi coalition to enter and unload according to media reports. As of June 9, one ship was unloading, with fuel to reach local markets beginning the next day. According to the Yemen Petroleum Company, fuel was being supplied to official stations in SBA-controlled areas with retail prices of 425 YER/Liter for petrol and 395 YER/Liter for diesel. Though these prices are 47 and 36 percent higher, respectively, than official prices at the same time in 2020, they are more than 30 percent lower than unofficial prices, on average. According to key informants as of late June, lines for fuel at official stations have been declining. As such, increased fuel availability at lower official prices is expected to be providing some relief in SBA areas.

Meanwhile, in IRG areas, fuel prices remain significantly higher than at the same time last year, by 94 percent for diesel and 127 percent for petrol, as of May 2021. Official fuel price increases in recent months are likely at least partially attributable to the absence of support through the LOC mechanism. Despite some improvement in public services following receipt of the first batch of fuel from the Saudi fuel grant in May, technical and structural issues have to date prevented significant improvement. In mid-June, the second tranche of fuel support arrived in Al Mukalla, intended to support provision of electricity in Hadramaut. The fuel grant is equivalent to 422 million USD and will supply the public service for one year.

Food prices have generally continued to increase in both IRG- and SBA-controlled areas in recent months, with the fastest rates of increase in prices of the minimum food basket (MFB) recorded in February and March 2021 (Figure 2). IRG-controlled areas continue to be worst-affected by food price increases, due primarily to depreciation of the currency, though fuel price increases in 2021 have put additional upward pressure on food prices across Yemen. According to data from FAO, average prices of staple wheat flour (imported) in IRG-controlled areas remained stable from April to May 2021, though at levels around 66 percent higher than last year. Worst affected over the past year has been Marib governorate, where prices have increased significantly since the beginning of 2021 alongside escalated conflict, due to households stockpiling food. In May 2021, wheat flour prices in Marib were more than double prices recorded at the same time last year. In SBA-controlled areas, prices of food have been increasing more gradually over the past year, driven primarily by rising fuel prices. Average prices of wheat flour in SBA areas remained stable overall in May 2021 though at levels 21 percent higher than in May 2020.

According to data from FAO, labor wages have also been generally increasing over the past year due to inflation, through trends are mixed across governorates. However, wage increases have generally been insufficient to keep up with rising food prices. In May 2021, purchasing power for laborers as measured by the terms of trade (a ratio) between wheat flour prices and wage rates was worse than at the same time last year in almost all governorates (Figure 3). Meanwhile, though some households reportedly received government salary and pension payments in June 2021, payments remain irregular overall. Additionally, salaries have not been increased since the start of the conflict, resulting in much lower real value, especially in IRG areas.

As the economic situation has deteriorated, remittances from Yemenis working abroad have increasingly served as a significant source of income for many households. However, remittance inflows likely declined in 2020 according to monitoring by the Cash Working Group, largely expected to be due to the impacts of COVID-19 on economies in Saudi Arabia and the Gulf. While levels of foreign remittance inflows are expected to have recovered somewhat relative to the pre-COVID period alongside economic recovery in Saudi Arabia, a new vaccination requirement imposed by Saudi Arabia at land borders in June 2021 has been preventing Yemeni workers from entering. As full vaccination with the AstraZeneca vaccine requires at least two months, some Yemenis will likely lose their job opportunities in Saudi Arabia due to inability to afford renewal fees for visas.

Cumulative precipitation during Yemen’s first rainy season from March to May 2021 was near average across most of the country but below average across western and northwestern areas (Figure 4). Rainfall was also erratically distributed over time. While precipitation was below average through much of April, most rain was received from mid-April to mid-May, resulting in flooding in some areas. This precipitation also improved vegetation conditions to above-average levels according to satellite imagery, likely improving pastures for livestock including in the Tihama region where most of Yemen’s livestock are raised. As such, pastoralists are currently expected to be holding and fattening their livestock in advance of Eid Al Adha.

The recent rainy season has increased the threat of locust breeding. However, control operations and dry conditions in Saudi Arabia have resulted in declining numbers of hopper bands across the Arabian Peninsula in June, with locust presence in Yemen remaining minimal. According to FAO, detection teams have been deployed in the Yemen interior.

In highland areas, harvesting of winter cereals has recently concluded and summer cereal cultivation is nearing conclusion. The late onset of the first rainy season and high input prices have likely reduced area cultivated under summer cereals. In coastal areas and the eastern plateau, harvesting of spring cereals is beginning, temporarily improving food access for farming households. Although households are largely expected to rely on family labor for cereal cultivation, some fruit harvesting and, in highland areas, year-round qat harvesting is likely providing some labor opportunities. Meanwhile, below-average precipitation likely increased reliance on ground water for irrigation water in some areas, with farmers dependent on diesel pumps expected to be facing reduced profit margins due to above-average fuel prices.

The fishing sector remains challenged by conflict-related access constraints, significantly above-average fuel prices, and lack of cold chain infrastructure. Currently, the beginning of the windy monsoon season is expected to be limiting income from fishing along Yemen’s southern coast and in Socotra.

The number of new COVID-19 cases reported daily in IRG areas has significantly declined since the peak of the second wave in March 2021 and has remained under thirty per day since early May. Overall, limited health system and testing capacity likely continues to result in underreporting of cases. In SBA areas, information remains limited due to the absence of reporting. As of June 20, a total 251,385 vaccine doses out of a planned 317,363 have been administered across IRG-controlled areas. Demand for the vaccine has increased due to the proof of vaccination requirement to enter Saudi Arabia. Meanwhile, authorities in Sana’a have agreed to receive 10,000 vaccine doses to vaccinate health workers under WHO supervision. Within Yemen, internal COVID-19 restrictions remain lifted.

Across Yemen, nearly 9.7 million people (around a third of the population) received emergency food assistance in April 2021 according to FSAC, with rations equivalent to approximately 80 percent of one month’s caloric needs. According to WFP, approximately 8.4 million beneficiaries were targeted in May 2021. In April, WFP resumed monthly distributions of humanitarian assistance in 11 districts (three in Al Jawf, five in Amran, and three in Hajjah) projected by the latest IPC analysis conducted in late 2020 to have households facing Catastrophe (IPC Phase 5) outcomes. In other SBA areas, assistance was received in either April or May. However, new contributions from donor states including from the EU have reportedly allowed WFP to resume monthly food distributions in SBA-controlled areas of Hajjah, Al Jawf, Amran, Al Hudaydah, Raymah, Al Mahwit, Sa’ada, Dhamar, and Taizz beginning in June 2021. In other SBA-controlled areas, distributions will continue to occur every other month.

According to WHO nutrition surveillance at 154 sentinel sites across 21 governorates, the prevalence of Moderate Acute Malnutrition (MAM) and Severe Acute Malnutrition (SAM) as measured by weight-for-height z-score among children screened in March 2021 were similar to the same time last year. Though these are non-representative data and are subject to bias from changes in the locations of sites and the number of people seeking treatment, an increase in MAM and SAM prevalence would provide reason to investigate a potentially worsening nutrition situation.

Assumptions

The most likely scenario for the June 2021 to January 2022 period is based on the following national-level assumptions:

• Conflict between SBA and IRG forces in western Yemen is likely to continue at current high levels, similar to past years, with typical volatility in conflict intensity. Although not the most likely scenario, it remains possible that SBA forces reach Marib City during the projection period (see events that could change the scenario). In the south, progress toward implementation of the Riyadh agreement is expected to remain stalled, with fragmented leadership impeding policymaking and increasing levels of civil unrest (relative to the current period) likely in areas worst affected by price increases and insufficient provision of public services including electricity and water.
• According to international forecasts, cumulative rainfall during Yemen’s second rainy season from July to October is expected to be above average. Given this, risk of flooding is expected to be above average, with eastern lowland areas most at risk. A typical risk of cyclone strikes and associated flooding exists for Socotra and the southern coast through December 2021, with peak risk expected from October to December.
• According to international forecasts, above-average mean temperatures are most likely through October 2021 while average mean temperatures are most likely from November 2021 to January 2022.
• Risk of water- and vector-borne diseases such as cholera, malaria, and dengue are expected to be elevated during Yemen’s second rainy season (in particular in association with flooding) and in areas where active conflict threatens infrastructure linked to water and sanitation. 
• Desert locust presence in Yemen will likely remain minimal given current minimal presence, declining presence in Saudi Arabia, and the presence of FAO detection personnel on the ground in Yemen. Some risk of re-infestation persists—especially in the Yemen interior lowlands including in Shabwah, Marib, Al Jawf, and Hadramaut—through September due to anticipated above-average rainfall and associated favorable conditions for locust breeding.
• Overall, crop production levels are expected to be to be similar to last year but below pre-crisis levels due to the impacts of protracted conflict and increasing prices of inputs. While irrigation costs are expected to be higher than last year due to rising fuel prices, above-average rainfall during the second rainy season is likely to slightly decrease reliance on groundwater for irrigation. Overall, nominal income from crop sales is likely to be higher than last year due to inflation, but real income is expected to be similar to last year and below pre-crisis levels.
• Harvesting of qat is expected year-round in higher elevation areas. Qat production is expected to be near average given prioritization of this cash crop. Real income from qat sales is expected to be near average.
• As is typical, pasture conditions are generally expected to improve from July to September/October and then deteriorate throughout the remainder of the projection period. Given expectations for rainfall in the second rainy season, pasture conditions are likely to remain above-average through at least January 2022.  
• Given several rounds of livestock vaccination by FAO and MAIL in late 2020/early 2021, livestock body conditions are productivity are expected to be similar to last year, with improvements over last year possible in some areas. Milk availability is expected to remain seasonally available through the October-December period. Livestock demand and prices are expected to increase prior to Eid Al Adha in July, increasing access to income from livestock sales, with improved fuel ability expected to facilitate households’ ability to transport to market without paying middlemen. Overall, nominal income from livestock and livestock product sales is expected to be above average, while real income is expected to be similar to last year but below pre-crisis levels due to declining herd sizes.
• Food and income from fishing in the Red Sea is expected to improve during the first half of the projection period, while fishing in the Arabian Sea is expected to reduce through September due to the windy monsoon season, with Socotra highly impacted. Overall, fishing will likely remain below pre-conflict levels due to significantly above-average fuel prices, conflict-related access constraints, and lack of cold chain infrastructure.
• Significant shifts in oil production are not expected within the timeframe of the projection period. Oil production and export levels in 2021 are likely to be similar to levels in 2020. Given the likelihood that global oil prices will remain generally stable as global supply controls are eased, foreign exchange earnings from oil exports in 2021 are expected to be slightly higher than last year’s levels and above the five-year average, but significantly below pre-conflict levels.
• Some limited COVID-19 vaccination is expected alongside the anticipated arrival of a cumulative 1.9 million doses in 2021. Currently enacted control measures including at land borders are expected to remain in place. Restrictions on businesses and gatherings are likely to remain limited and unenforced.
• Income from foreign remittances is expected to remain below pre-COVID levels. While COVID-19 vaccination requirements to enter Saudi Arabia will likely stall recovery in the first half of the projection period, gradual recovery is expected in the second half of the projection period. Income from domestic remittances is expected to remain below average due to significant fees for money transfers from IRG-controlled areas to SBA-controlled areas.
• Given expectations for oil export revenue, remittances, and funding for humanitarian operations, foreign currency shortages are expected to persist throughout the scenario period. Informal markets will continue to play a key role in regulating access to foreign currency.
• Due to the impacts of protracted conflict and foreign currency shortages, macroeconomic conditions are likely to continue deteriorating. In IRG-controlled areas, the YER is expected to depreciate throughout the projection period due to the inability of the CBY in Aden to meaningfully intervene, likely reaching levels above 1,000 YER/USD[1] by the end of the projection period. In SBA-controlled areas, the YER is expected to remain generally stable.[2]
• Due to persistent government revenue shortages, payment of pensions and civil servant salaries will likely remain intermittent or absent in many areas. Real income will remain significantly below pre-conflict levels.
• In lowland coastal areas, availability of agricultural and non-agricultural labor is expected to seasonally decrease from June to September and seasonally increase from November through the remainder of the projection period. In highland areas, availability of labor is expected to seasonally increase through late 2021. Availability of labor is expected to remain below average overall. Though wages are expected to increase in many areas due to inflation, the real value of income from labor is expected to remain stable or decrease and remain below average.
• Given expectations for currency depreciation, government revenue, and tensions between the IRG and STC, traders are not expected to access foreign currency through the LOC mechanism during most of the projection period, increasing costs of importing food and fuel. Given the typical lag time in the importation supply chain, this is expected to drive further price increases of basic imported food commodities throughout the projection period. Food imports of basic commodities are expected to continue at levels generally similar to those recorded in the first half of 2021, though a reduction in certain luxury food commodities (such as high-quality basmati rice, milk, and cheese varieties) is likely as traders begin to face import financing gaps in the remainder of 2021. A sharp and sustained decline in levels of food imports is not expected in the projection period, though remains possible should there be a shock to foreign currency availability. Informal trade of food and livestock across land borders is expected to be constrained due to Saudi Arabia’s COVID-19 vaccination requirement, similar to the dynamics at the same time last year.
• In SBA-controlled areas, month-to-month volatility in levels of fuel formally imported through the Red Sea Ports is likely to continue. Fuel is likely to continue to be unofficially imported from Marib and other IRG areas. Given recent fuel imports in June, official fuel stations are likely to remain generally supplied in the short term (one to three months). Official fuel prices will likely remain close to current levels. Fuel will also likely continue to be supplied to private stations, with unofficial selling prices remaining higher than official prices. In IRG-controlled areas, fuel imports are expected to continue at levels similar to those recorded in the first half of 2021. Given recent significant price increases in early 2021, official fuel prices are expected to remain near current significantly above-average levels.
• Driven by depreciation of the YER, increased costs of imports, and increasing fuel prices, prices of essential food and non-food items are expected to increase throughout the scenario period, with southern areas worst affected (see price projections in “Areas of Concern” section below).
• Provision of emergency food assistance is expected to continue at current levels as of the June scale-up. Some scale-up in other humanitarian programs is expected in SBA areas. Access to assistance is expected to be temporarily constrained where conflict or flooding block roads. WFP school feeding programs are expected to start with the school year in September/October. Nutrition treatment programs are expected to continue operating at current capacity.

Most Likely Food Security Outcomes

In rural areas, food from the recently concluded winter cereal harvest in the highlands and the ongoing spring cereal harvests in the lowlands is expected to temporarily increase many rural households’ access to food from own-production, though contribution to total food needs will be limited. In lowland areas, availability of food and income is expected to seasonally decline throughout most of the projection period, while in highland areas availability of food and income is expected to seasonally increase.

Overall, poor households’ capacity to access food from markets—the key food source for most—will be similar to or lower than during the corresponding period of last year and significantly below pre-conflict levels throughout the projection period. Increases in nominal income are expected to be insufficient to keep up with the rising costs of essential food and non-food commodities, with ability to expand income-earning to compensate expected to be limited. In southern IRG-controlled areas worst affected by price increases and declining purchasing power, an increasing number of poor households are likely to face consumption gaps as they exhaust available coping strategies. However, in many northern SBA-controlled areas, the scale-up in humanitarian assistance is expected to reduce consumption gaps for many households, improving their overall access to food relative to last year and reducing the number of households facing Crisis (IPC Phase 3) or worse outcomes.

Most areas of western Yemen are expected to remain in Crisis (IPC Phase 3) throughout the projection period, though with the support of large-scale humanitarian food assistance preventing more severe outcomes in many areas. During this time, households who are fully market-dependent for food—including urban households—are expected to be worst affected by declining purchasing power, with widening consumption gaps expected for many and deterioration to Emergency (IPC Phase 4) or Catastrophe (IPC Phase 5) likely for worst-affected poor households whose income earning is most limited and who are not receiving humanitarian assistance. The prevalence of acute malnutrition is expected to decrease somewhat at the national level from around July to around October/November in line with typical seasonal trends, before increasing through the remainder of the projection period.

Needs are expected to increase seasonally in lowland areas and decrease seasonally in highland areas for the majority of the projection period. Overall, at the national level, approximately 17-19 million people are expected to be in need of humanitarian assistance to prevent consumption gaps and protect livelihoods through January 2021. In a worst-case scenario, significant declines in commercial import levels and/or conflict that cuts off food supply to some areas could lead to food security outcomes in line with Famine (IPC Phase 5).

Events that Might Change the Outlook

Possible events over the next eight months that could change the most-likely scenario: