Yemen’s Customs Valuation Reform: Motives and Potential Implications

The Yemeni government’s decision to liberalize the exchange rate used for customs valuation opens the door to a broader debate over the limits of fiscal remedies in an economy suffering from a sharp decline in public revenues, the suspension of oil exports, and the state’s inability to meet its obligations, foremost among them the payment of public-sector salaries and the provision of basic services.

In terms of its underlying motives, the decision appears to be an attempt to increase customs revenues and bring the official valuation of imports closer to the actual exchange rate in the market. However, it also comes in an extremely fragile economic environment—one that is heavily dependent on imports, marked by weak household incomes, eroded purchasing power, and rising living costs.

Accordingly, any assessment of the decision should not be limited to its potential impact on improving treasury revenues. It must also examine its effects on prices, import activity, domestic production, consumers, and the market’s capacity to absorb additional burdens under the current conditions.

Motives Behind the Decision

The decision to liberalize the customs valuation exchange rate comes amid a worsening fiscal crisis facing Yemen’s internationally recognized government, within the broader context of the ongoing war that has gripped the country since 2014. The conflict has been accompanied by a sharp decline in oil revenues and a weakening of public resources in recent years, particularly following the suspension of oil exports as a result of attacks and hostile measures carried out by the Houthi group against oil export terminals.

As the fiscal deficit has widened, customs duties and taxes have become among the most important sources of revenue available to the state.

The internationally recognized government argues that continuing to calculate customs duties based on a low dollar exchange rate is no longer appropriate in light of the significant depreciation of the local currency in the market. It also maintains that this practice has led to a real decline in customs revenues when measured against the actual value of imports.

The main justifications put forward for the decision include:

• Increasing government revenues after the significant loss caused by the suspension of oil income.
• Raising customs collections in line with the market exchange rate of the dollar.
• Compensating for the decline in public resources and external support.
• Reducing customs evasion and manipulation of commercial invoice values.
• Providing resources that could help the internationally recognized government cover salaries, public services, and operational expenditures.

Impact of the Decision on Prices and Markets

The main concerns surrounding the decision center on its direct impact on commodity prices, particularly given that the Yemeni market relies heavily on imports to meet basic needs. As the customs valuation exchange rate rises, the duties imposed on imported goods increase automatically, raising the cost of bringing goods into the local market.

The effects are expected to be most visible in sectors directly linked to imports, including:

• Food commodities.
• Medicines and medical supplies.
• Construction materials.
• Spare parts and equipment.
• Fuel and transportation.

Impact of the Decision on Domestic Production

The impact of the decision will not be confined to imported goods alone. It is also likely to extend to domestic production, as many economic activities inside Yemen depend on materials and equipment imported from abroad.

Factories require raw materials; farmers rely on fuel, pesticides, and spare parts for pumps; and the transport sector depends on fuel and vehicle parts. As import costs rise, production and operating costs will also increase. This may lead either to higher prices for locally produced goods or to a slowdown in some activities as businesses struggle with weak market demand and rising costs.

Impact of the Decision on Inflation

The decision is expected to trigger a further rise in market prices. Higher customs duties mean a higher cost of entry for imported goods, and since Yemen depends heavily on imports for food, medicine, and essential commodities, any increase in import costs is likely to be passed on directly to the end consumer.

Impact of the Decision on Employment and Jobs

The effects of the decision may also extend to the labor market, particularly if higher costs lead to a decline in trade and production activity. Some commercial or productive establishments may be forced to reduce expenses or cut staff in order to cope with rising operating costs and weaker market activity.

Continued price increases and weak consumer demand may also make it more difficult for small businesses to survive or expand in the coming period.

Concerns and Objections Among Importers

The decision has been met with concern within commercial circles, particularly among importers and traders dealing in essential goods. Many argue that the market is already operating under difficult conditions, and that any new increase in customs duties will be reflected directly in prices and in buying and selling activity.

This comes at a time when the market is already suffering from weak liquidity and declining purchasing power among citizens. Some also fear that the new increases could reduce import volumes or push some small businesses out of the market due to higher costs and shrinking profit margins.

Concerns have also emerged that the decision could lead to an increase in smuggling or encourage some commercial activity to shift toward less costly entry points and markets, particularly given the continued differences in fees and economic policies between areas controlled by the government and those controlled by the Houthis.

Proposed Alternatives and Mitigation Measures

Many traders and specialists believe that addressing the revenue crisis should not rely solely on raising customs duties, especially amid weak market activity and declining purchasing power. For this reason, several options have been proposed to help ease the impact of the decision on citizens and the commercial sector.

The most notable proposals include:

• Implementing the decision gradually rather than all at once.
• Exempting certain essential goods from the customs increase, such as food and medicines.
• Improving customs collection and curbing smuggling.
• Reducing corruption and waste in public revenues.
• Reviving oil and gas exports to increase state resources.

Some argue that a gradual implementation of the decision could give the market time to adapt to the new costs and help reduce the risk of sudden price increases, particularly for goods directly linked to citizens’ daily lives.

Conclusion

The decision to liberalize the customs valuation exchange rate reveals the scale of the financial pressures facing the internationally recognized government following the decline in oil revenues caused by the suspension of exports, itself the result of attacks and hostile measures carried out by the Houthi group against oil export terminals. These pressures have been compounded by the broader weakness of public resources. At the same time, however, the decision places the market before new challenges related to rising costs and prices.

While the decision may provide the government with an increase in customs revenues in the short term, its actual impact will remain tied to the market’s ability to continue functioning, import volumes, price levels, and the extent to which citizens can bear additional burdens amid persistently weak incomes and disrupted salary payments.

Continued reliance on revenue-raising measures alone, without broader steps to stimulate the economy, support production, and improve resource management, could increase pressure on the market and the commercial sector in the coming period.

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