The Liquidity Crisis in Yemen: A Multi-Dimensional Analysis of Causes, Imbalances, and Resolution Pathways
Executive Summary
This paper presents a comprehensive, multi-dimensional analysis of Yemen’s liquidity crisis, combining quantitative analysis of monetary and economic indicators for the period 2017–2025 with a qualitative, interpretive assessment of the monetary cycle, as well as the behavior of key actors and institutions. This approach enables a deeper understanding of the nature of the crisis, its underlying drivers, and potential pathways for resolution.
The paper finds that Yemen’s liquidity crisis is the result of interacting and mutually reinforcing factors, foremost among them a real liquidity deficit. This is reflected in the widening nominal demand for cash, driven by the growth of nominal GDP in Yemeni rials from approximately YER 9.9 trillion in 2017 to over YER 36 trillion in 2025 (an increase of around 264%), compared to a much more limited expansion in currency in circulation outside banks, which grew from YER 1.53 trillion to YER 3.27 trillion (an increase of approximately 114%). This imbalance has intensified in recent years, with cash in circulation increasing by only about 4% between 2022 and 2025, while nominal GDP grew by approximately 37% over the same period.
This imbalance is further compounded by a decline in the ratio of currency in circulation to nominal GDP, which fell from levels between 15%–20% in the early years to around 9% in 2024–2025, alongside a rise in the velocity of money to over 11 times, reflecting increasing pressure on the available money supply.
Estimates also suggest that approximately 30% of circulating currency has partially or fully lost its effectiveness due to physical deterioration and lack of replacement—equivalent to around YER 981 billion in 2025. This significantly reduces effective liquidity to levels far below nominal figures. As a result, the ratio of effective currency to nominal GDP declines to approximately 0.063, while the velocity of money rises further to nearly 15.8 times, indicating even higher levels of pressure on usable liquidity.
The crisis is not limited to quantitative shortages but is deepened by structural, behavioral, and institutional distortions. Key among these are: the continued concentration of 90%–97% of issued currency outside the banking system, inefficient liquidity distribution, declining trust in the banking sector, widespread cash hoarding behavior, weak monetary policy and liquidity management, irregular public revenue flows through the central bank, disruptions in salary payments as a primary liquidity injection channel, and the expansion of informal and parallel financial channels.
The paper concludes that the core of the crisis lies not merely in nominal cash shortages, but in the widening gap between nominal liquidity and effective liquidity—that is, cash that is actually available for transactions at the right time and place. The persistence of this gap not only disrupts daily transactions but also undermines the operational efficiency of economic activity, increases transaction costs, erodes confidence in the banking system, deepens monetary fragmentation, and weakens the effectiveness of monetary policy tools, potentially pushing the economy toward stagflationary conditions.
The paper argues that addressing the crisis requires a coordinated and integrated policy package that tackles structural distortions, restores the normal functioning of the monetary cycle, strengthens financial intermediation, and enables markets to operate effectively. The appropriate response should be gradual and sequenced, beginning with rebuilding effective liquidity through local currency printing on a replacement and precautionary basis. As an initial conservative estimate, the feasibility of printing approximately YER 800 billion could be considered (without treating this as new monetary expansion), with part allocated to replacing damaged currency and the remainder held as a domestic liquidity buffer.
This should be accompanied by improving liquidity distribution, restoring confidence in the banking system, tightening oversight of parallel financial channels, prohibiting exchange companies from engaging in banking activities, ensuring regular public revenue flows through the central bank, guaranteeing consistent salary payments, and accelerating the development of a unified national digital payments system.
At the same time, the paper emphasizes that currency issuance must remain a last-resort and conditional policy tool, to be used only after exhausting alternative measures and within strict safeguards to prevent additional inflationary pressures or monetary instability.
