Reduced oil export revenue expected to drive further reductions in income for civil servants in IRG areas

• Years of protracted conflict have taken a significant toll on Yemen’s economy, reducing opportunities for income-earning and eroding livelihoods. As such, many households rely heavily on market purchases and humanitarian assistance for their food. With prices of food and essential non-food commodities significantly above average, millions of households have likely been unable to compensate for reduced assistance rations since early 2022. Most poor households will likely continue to face Crisis (IPC Phase 3) and Crisis! (IPC Phase 3!) outcomes throughout the projection period, while some without income sources will likely face Emergency (IPC Phase 4) or worse outcomes. Given the high share of displaced households who are heavily dependent on assistance and the upcoming agriculture off-season in highland areas, Emergency (IPC Phase 4) outcomes are expected at the area level in Marib and Hajjah.

• In a shift of fighting tactics toward intensified economic warfare, forces of the Sana’a-Based Authorities (SBA) have continued to target oil export activities in areas controlled by the internationally-recognized government (IRG) since the expiration of the ceasefire in October. This is expected to reduce a key source of IRG revenue, further undermining the IRG's ability to provide public services and pay civil servants' salaries. In response, IRG authorities and the allied Saudi-led coalition (SLC) are reportedly again delaying the clearance of fuel ships to dock in SBA-controlled ports. This is likely to lead to a resumption of fuel shortages and higher fuel prices in SBA areas. While not part of the most likely scenario, food prices in IRG areas could also rise beyond what is currently anticipated should lack of revenue disrupt the foreign currency auction mechanism used to finance imports.

• According to data from FAO, food prices remain significantly above average across the country. However, livestock prices and labor wage rates have increased in the past year in many (but not all) governorates. While this has driven improvements in purchasing power for pastoralists and laborers compared to the same time last year, purchasing power remains significantly below the five-year average. Additionally, purchasing power for pastoralists in December remained below last year in some governorates – by 61 percent in Al Jawf, 25 percent in Shabwah, 12 percent in Sana’a, 9 percent in Socotra, and 6 percent in Hadramout Valley – due mostly to higher food prices, but also to lower livestock prices in the case of Shabwah. Purchasing power for casual laborers also remained below last year in some governorates – by 39 percent in Socotra, 38 percent in Al Jawf, 22 percent in Marib, and 5 percent in Raymah – due to rising food prices, but also due to lower wage rates in Socotra and Marib.

Throughout December, international actors continued to lead diplomatic efforts toward renewing the truce that expired in early October. Though the frequency of conflict incidents has not re-escalated meaningfully, the Sana’a-based authorities (SBA) have adopted a more direct war on resources and continue to target oil export facilities in areas controlled by the internationally-recognized government (IRG). SBA authorities have threatened to continue these attacks and even to resume ground fighting if their demands – including payment of civil servant salaries (including for their military) and a larger share of the country's oil and gas revenues – are not met by the IRG. While it is not currently considered to be the most likely scenario, there is concern that a larger-than-anticipated decline in IRG oil revenue would have a catastrophic impact on government revenue and potentially lead to financial collapse, which would be marked by rapid currency depreciation and rising consumer prices in IRG areas.

Levels of conflict in the main frontline areas of Marib, Taizz, Al Dhale’e, Sa’ada, and Al Hudaydah have remained largely unchanged since the end of the truce. According to data from the Armed Conflict Location and Event Data Project (ACLED), the frequency of most types of conflict events has been lower in the post-truce period (October 3 – December 31, 2022) compared to the same period of the previous year (Figure 1). The number of air/drone strikes was 90 percent lower, the number of shelling/artillery/missile attacks was 52 percent lower, and the number of armed clashes was 41 percent lower. Despite the reduction in active conflict, civilians have increasingly encountered landmines given that previously inaccessible areas have re-opened but are yet to be de-mined. The number of remote explosive/landmine/IED events in the post-truce period was 54 percent higher than in the same time period of the previous year. However, ACLED data shows an overall decline in fatalities by 79 percent compared to the same period of 2021.

Despite this, there are some signs that the situation is beginning to re-escalate. In early December 2022, conflict resumed in Marib governorate after an approximately two-month period of relative calm since the expiration of the truce. Increased instances of violence also occurred in Al Dhale’e governorate, including two SBA drone attacks on IRG positions. Additional clashes between SBA and IRG forces continue to be reported in the Taizz city area. Cross-border attacks from Saudi Arabia also reportedly resumed in western Sa’ada after a period of relative hold since April 2, 2022. Though cross-border attacks targeting Saudi Arabia remain on hold, there is a risk that forces in Yemen will retaliate.

Although levels of conflict in late 2022 were lower than late 2021, some civilians were newly displaced from their homes due to conflict, raising the risk  of acute food insecurity as they are now separated from their assets and normal livelihood activities for producing and purchasing food. During the period of December 11-17, 2022, the IOM recorded that 109 households (around 654 individuals) experienced displacement at least once. Most of these displacements occurred in Marib, Taizz, and Al Dhale’e governorates, with the highest numbers originating in the districts of Marib city, Marib, Harib, Al Qahirah, Al Maafer, Ash Shamayatayn, Qatabah, and Ad Dali. The occurrence of new displacements is concerning given the implications for household safety and food security; however, the number of total new displacements throughout 2022 was nearly 60 percent lower (by 10,135 households) compared to 2021 (24,335 households), according to IOM data.

Yemeni oil revenues accounted for more than two-thirds of public revenues before the war and currently remain the most important source of revenue for the IRG's public budget. However, the IRG has been unable to export oil in recent months due to SBA drone strikes on oil infrastructure in the IRG-controlled ports of Hadramout and Shabwah in October and November. As of the end of December, exports remain on hold due to ongoing threats by SBA authorities to attack facilities again if exports resume. The IRG’s loss of its largest source of revenue further threatens its ability to provide public services and pay civil servant salaries. Even prior to this development, the IRG has continuously struggled with inadequate revenue, causing citizens to face electricity blackouts, lack of access to health services, and rising prices of imported commodities – including staple wheat flour – due to the depreciation of the local currency in the absence of sufficient foreign exchange.

Since late 2021, the Central Bank of Yemen in Aden (CBY-Aden) has held weekly public auctions of foreign currency, selling up to 30 million USD to Yemeni banks for import financing in an effort to exert greater control over the exchange market and stabilize the value of the local currency in IRG-controlled areas. Following an increase in demand at the end of May 2022, traders’ currency requirements have remained below the auction ceiling since October (Figure 2), providing some support the stability of the local currency as traders have not needed to turn to the parallel market to meet additional needs. Despite this, the Yemeni Rial (YER) depreciated by five percent in the IRG reference market of Aden, from 1,140 to 1,197 YER/USD, during the first three weeks of December. Though this tends to occur at the end of the year, it is possible that concerns for future government revenue supply contributed to the depreciation. Overall, the Aden-based local currency has depreciated by 9 percent since the beginning of 2022 (Figure 3). If the IRG’s loss of oil revenue is larger than currently anticipated and disrupts the auction mechanism, it would likely trigger further depreciation of the local currency and lead to greater inflation of consumer goods, with the worst impacts on imported commodities. In contrast, the value of the Yemeni Rial in the SBA reference market of Sana’a city (Amanat al Asimah) remained stable throughout December at about 560 YER/USD.

Following the resumption of wheat exports through Ukraine’s Black Sea ports in August, Yemeni traders have been able to import sufficient wheat to meet national requirements. According to the Ministry of Trade and Industry (MTI) in Sana’a, traders imported a total 232,792 MT of staple food commodities via Yemen’s western Red Sea ports (Al Hudaydah and As Salif) in November 2022, of which 67 percent was wheat (grains and flour) (Figure 4). Around 460,000 MT of wheat is reportedly stocked in silos at Al Hudaydah, which is enough to cover the needs of households in SBA areas for approximately three months. The total amount of food imported in November 2022 was fairly similar to the same month of the previous year (seven percent less) considering that significant month-to-month variability in food imports exists. No information about food imports through IRG seaports is available for November 2022.

As of late December, fuel shortages have not been reported in SBA areas. According to the United Nations Verification and Inspection Mechanism for Yemen, a total of 215,079 tons of fuel were imported through Al Hudaydah port in November 2022, nearly five times higher than the monthly average in 2021 when SBA areas were experiencing fuel shortages. Despite concerns that the IRG and allied Saudi-led coalition (which maintains a naval blockade of the Red Sea ports) may again begin to delay granting clearances for fuel ships entering Yemen’s western Red Sea ports, the average holding time in November 2022 was 5.9 days, 92 percent less than the monthly average in 2021. In December, however, the Sana'a-based Yemen Petroleum Company reported on the 17^th that five fuel ships were being detained. At this time, official petrol prices remain stable compared to last month and are currently trading at 10,500 YER/20 liters (L). Meanwhile, in IRG areas, fuel remains generally available at the rate of 19,500 YER/20L, according to the Aden-based Yemen Petroleum Company.

Since the outbreak of the war in March 2015, the provision of electricity has deteriorated throughout the country due to limited government revenue for the operation and maintenance of power plants. Long periods of power outages are often reported, especially in areas under the control of the IRG. Given its support of the IRG, Saudi Arabia has periodically provided in-kind oil derivatives grants to support the operation of power stations in the IRG areas. After the end of a grant providing 1,260,850 MT of fuel worth 422 million USD between May 2021 and June 2022, Aden and other governorates in IRG-controlled areas began experiencing a period of worsening power outages. On September 29, Saudi Arabia announced a 250,000 MT grant of oil derivatives with a value of 200 million USD to provide fuel to operate power plants. On October 27, 2022, a total 45,000 MT of diesel and 30,000 MT of mazut (a fuel oil used in power plants) reached Aden. More recently, on December 17, the second installment of 40,000 MT of diesel and 30,000 MT of mazut was unloaded in Aden’s oil harbor. The new Saudi oil derivatives grant contributes to the operation of 70 power plants and aims to enhance the operational capacity of hospitals, medical centers, roads, schools, government facilities, airports, and ports in order to support commercial and economic activity. This is expected to continue to support relative improvement in the near term in IRG-controlled areas.

Significantly above-average food prices remain a key barrier to sufficient food access among poor households in both urban and rural areas, with IRG areas worst affected due to the depreciation of the YER, which has made imports more expensive. According to data from FAO, the average cost of the minimum food basket (MFB) in the IRG reference market of Aden in December 2022 was six-and-a-half times the cost recorded in February 2015 (pre-crisis), double the five-year average, and only 12 percent lower than the record highs observed in December 2021, which was a period of rapid currency depreciation and spiking prices. In the SBA reference market of Sana’a city, the average cost of the MFB in December 2022 was 51,248 YER, which is three times pre-crisis levels, 32 percent higher than five-year average levels, and 6 percent higher than in December 2021, despite generally declining since the early 2022 spike related to the Ukraine crisis. Prices of more nutrient-dense foods such as eggs and milk – important sources of protein for poor households – have also seen recent increases. According to FAO data, prices of eggs increased significantly across the country between May and July, likely linked to the impact of the Ukraine crisis on high global fuel prices and rising transportation costs. While fuel prices declined in the latter half of 2022, food prices have not followed suit. In December, egg prices were 40 percent and 18 percent higher than the same time last year in Aden and Sana’a city, respectively, likely at least partially driven by seasonally low egg production during the winter.

In addition to high global food prices and the rising costs of domestic production (driven by high input prices for fuel, seeds, and fertilizer), transportation costs continue to be a key determinant of food prices in Yemen. Fuel prices are not only significantly elevated, but traders also must often take longer travel routes due to conflict and weather-related road closures. On December 15, 2022, the Taizz Hayjat Al-Abd road – the only route currently connecting Taizz to Aden and the southern region – was closed by local residents due to its hazardous condition, which had led to an increase in accidents. According to reports, there have been continuous pleas from local communities to initiate the rehabilitation and maintenance of this vital route, but efforts have been delayed. Though the road was re-opened at the end of December, the temporary closure of the route caused delays in travel times and the delivery of goods. If additional closures occur, this would likely contribute to further food price increases, particularly in Taizz city and other Taizz districts under IRG control that are typically supplied from Aden.

In late November, atypically cold temperatures were reported in northern and central highland areas, negatively affecting crops and livestock in localized areas, though agricultural activities for the start of the winter production season are expected to have started normally. In Dhamar, Sana’a, and Amran governorates, cold temperatures facilitated the spread of crop diseases, particularly impacting vegetables and fruits for affected farmers. More recently, in December, seasonal agricultural activities are expected to be progressing normally. Across much of the highlands, households are cultivating winter crops (cereals and pulses) and engaging in land preparation and agriculture operations for vegetables and fruits. Along the Red Sea coast and Tihama plain, farmers are mainly engaged in the harvesting of sorghum, millet, sesame, and watermelon. Along the Arabian Sea coast, farmers are currently planting cereals (millet and maize) and fruits (mango) and undertaking activities to facilitate the growth of vegetables (fertilizing, weeding, etc.).

Many poor households in agropastoral areas depend heavily on livestock rearing for their livelihoods and, at this time of year, households typically see a seasonal decline in production costs and livestock-related income. In December 2022, commercial dry fodder prices continued to decrease due to seasonal green fodder availability following the October to November harvest. According to data from FAO, dry fodder prices declined by 6 percent from November to December on average at the national level, but remained 31 percent higher than the same time of the previous year and 59 percent higher than the three-year average. Meanwhile, lower seasonal demand during winter has driven a relative decline in livestock prices in SBA areas. However, prices have further increased in IRG areas due to the impacts of inflation, which include high livestock rearing costs. Similarly, above-average food prices have likely forced pastoralists to keep prices high to cope with the high cost of living.

Purchasing power among pastoralists as measured by the terms of trade (calculated as a simple ratio) between the price of a one-year-old sheep and the price of staple wheat flour is generally better than last year in most governorates, though still significantly below the five-year average. According to data from FAO, the average price of a one-year-old sheep in December was generally similar to last year in SBA areas where data is available, with the key exceptions of Al Jawf and Raymah, where prices are 56 and 13 percent higher, respectively. In IRG areas, the average price is generally higher than last year, except in Shabwah and Lahij, where the price is lower by 22 and 17 percent, respectively. However, in some governorates, the terms of trade were below last year – by 61 percent in Al Jawf, 25 percent in Shabwah, 12 percent in Sana’a, 9 percent in Socotra, and 6 percent in Hadramaut Valley – due mostly to higher food prices, but also to lower livestock prices in the case of Shabwah. For consumers, high prices of livestock have likely further limited many households’ consumption of meat.

Opportunities for income-earning from labor and other activities remain limited in Yemen due to poor economic conditions and the declining ability of better-off households to conduct business, given high operating costs (including taxes) and limited purchasing power among the population. Additionally, due to limited government revenue, civil servants’ salaries have not been adjusted to keep up with inflation in IRG areas, and many in both IRG and SBA areas do not receive salary payments regularly. However, labor wage rates have generally been increasing over time due to inflation in most (but not all) governorates. Furthermore, most governorates have witnessed a slowdown in the pace of food price increases over the past year, while some governorates have seen a decline. These trends have led to some improvements in purchasing power in December 2022 compared to the same time last year. According to data from FAO, purchasing power for casual laborers as measured by the terms of trade between labor wage rates and the price of staple wheat flour was better than last year in most governorates where data were available. There remain a few outliers where the terms of trade are below last year, having dropped by 39 percent in Socotra, 38 percent in Al Jawf, 22 percent in Marib, and 5 percent in Raymah. This was mainly due to rising food prices, but in Socotra and Marib, wages rates that were 27 percent and 33 percent lower than the same time last year also contributed.

In Yemen, many poor households continue to rely on humanitarian assistance as a main source of food and income. Due to underfunding, however, assistance levels – both distribution frequency and ration size – throughout 2022 have been lower than last year. As of December 21, 2022, the Yemen Humanitarian Response Plan (YHRP) for 2022 was only 56.2 percent funded. This was similar to 2021 when the YHRP was 57.8 percent funded by the end of the year. In 2022, activities of the Food Security and Agriculture Cluster (FSAC) were only 58 percent funded, 15 percent lower than the 68.5 percent of funding requirements met in 2021. In November, the World Food Programme (WFP) and partners had nearly completed the sixth distribution cycle of 2022, which reached around 13.2 million people with emergency food assistance. According to local key informants, as of November, WFP has increased the frequency of distribution cycles to again occur approximately monthly (as was the case in 2021 and prior years) instead of the approximate six-week cycles that were occurring throughout most of 2022, though WFP has made no formal commitment to continue this. Ration sizes have also increased slightly again in recent months and now cover approximately 65 percent of households’ minimum monthly energy requirements, though this is still lower than the approximate 80 percent rations of 2021 and prior years.

Overall, the recently concluded grain harvests in the highlands and ongoing agriculture activities in Tihamah and other lowland areas are improving access to food and income for many poor rural households. Additionally, the modest scaling-up of humanitarian food assistance with the informal resumption of monthly distributions is likely further reduce food consumption gaps relative to earlier in 2022, particularly for poor households with limited livelihood and income-earning opportunities, including those who are internally displaced and living in settlements, such as in Marib and Hajjah. Furthermore, improvements in purchasing power compared to last year in some – but not all – areas are likely compensating for the reduction in assistance ration sizes compared to last year. However, poor households who do not receive humanitarian assistance due to mistargeting or access constraints and those with highly limited sources of food and income due to the prolonged impacts of conflict on the economy likely continue to face food consumption gaps, particularly as the prices of food and essential non-food commodities remain significantly above average. While the total number of people facing Crisis (IPC Phase 3) or worse outcomes in December has likely reduced compared to last year, over 20 percent of the population are expected to be facing Crisis (IPC Phase 3) and Crisis! (IPC Phase 3!) outcomes across most governorates. Additionally, many poor and displaced households in Marib – where there a high share of the population is displaced – likely continue to experience more severe food consumption gaps and coping strategies given high competition for limited available income-earning opportunities and declining casual labor wages. As a result, Emergency (IPC Phase 4) outcomes are expected in Marib.

The assumptions used to develop FEWS NET’s most likely scenario for the Yemen Food Security Outlook for October 2022 to May 2023 remain valid, except for the following revisions:

• Although negotiations are expected to continue, a renewal of the truce is not expected during the projection period given the growing lack of trust between the warring parties and given that such a renewal is conditioned on demands (including the payment of civil servant salaries in SBA areas and the re-opening of roads in Taizz) that are unlikely to be met during the projection period.
• Given the expectation that a truce will not be renewed, ground fighting is expected to increase gradually in the main frontline areas (including Taizz, Al Dhale’e, Hajjah, Lahj, and Marib) throughout the projection period. However, fighting is unlikely to reach pre-truce levels due to the recent strategic shifts toward intensified economic warfare (including SBA targeting of IRG oil infrastructure) and given international pressure to avoid the re-escalation of fighting.
• Oil and natural gas production in IRG-controlled areas is likely to be slightly lower than in previous recent years, with full resumption not expected during the projection period. However, SBA forces are expected to continue threatening oil infrastructure in IRG areas – including ports – with export levels expected to decline significantly. As such, government revenue and foreign exchange from oil exports are expected to be significantly lower than last year.
• Given expectations for reduced oil export revenue, additional disruptions to the provision of public services – including electricity – and payment of civil servant salaries in IRG areas are likely toward the end of the projection period.
• In retaliation for SBA attacks on oil infrastructure that are blocking exports, IRG forces and the allied Saudi-led Coalition are likely to again restrict fuel imports through the Red Sea ports by delaying the granting of clearances. As such, fuel prices are likely to increase in SBA areas as supply is restricted. However, significant uncertainty exists given ongoing negotiations and international pressure to avoid further escalation.
• Given ongoing funding shortages and uncertainty regarding funding levels in 2023, emergency humanitarian food assistance is likely to continue near current levels and less than in 2021. A reduction in distribution frequency and/or ration size is possible but dependent on funding for 2023.

Through May 2023, many poor households in rural highland areas will experience seasonal reductions in access to food and income during the local agricultural off-season in February and March. Additionally, some re-escalation of conflict and anticipated fuel price increases in SBA areas will likely again increase the costs of engaging in typical livelihood activities and conducting trade. Given these trends, as well as anticipated currency depreciation and reduced foreign exchange inflows in IRG areas, food prices are expected to remain high or rise further across the country, which will further strain the purchasing capacity of market-dependent households in both urban and rural areas. Amid the continuation of reduced assistance levels, millions of poor households will likely remain unable to meet all of their food needs. Crisis (IPC Phase 3) and Crisis! (IPC Phase 3!) outcomes are expected to persist across the country, and many worst-affected households who do not have regular income sources will most likely be in Emergency (IPC Phase 4). The areas of highest concern include Marib and Hajjah, where at least 20 percent of the population is expected to face Emergency (IPC Phase 4) outcomes, given the high proportion of displaced households who are highly dependent on humanitarian assistance, anticipated upticks in conflict and resultant displacement in these areas, and the decline in food availability during the agriculture off-season in the highlands.

Events that Might Change the Outlook

Table 1. Possible events over the next six months that could change the most-likely scenario.