Banking conflict exacerbates Yemen's cholera and famine

ABU DHABI — The biggest contributor to Yemen’s humanitarian crisis today may not be a cholera infection or dwindling food supplies but something far more fundamental: Cash. Roughly one year ago, the country’s Central Bank stopped paying approximately 1.5 million Yemeni civil servants, from teachers to health workers to trash collectors. In the months since, the country’s economy, services and fragile social safety net have collapsed.

Nearly a dozen humanitarians and analysts told Devex that restarting salary payments is the single most urgent priority to contain a burgeoning cholera outbreak, wrapped inside near-famine conditions. Unfortunately, there is no sign that will happen. The Central Bank of Yemen is now at the center of the political conflict. Even if the country’s two rival, warring governments agree on a path forward, the bank’s coffers are depleted, its technocratic employees are scattered, and international banks are too wary to do business.

The unpaid salaries issue “has a humanitarian question but as such is not a humanitarian question. It needs a political solution,” Peter Maurer, president of the International Committee of the Red Cross, said at a press conference in Sana’a, in response to questions from Devex. “We are certainly engaged from all humanitarian sides of the community to get this on the agenda,” he said.

Until August 2016, the 1.5 million government-salaried Yemenis were keeping the country afloat in two ways: Staffing public services and supporting the rest of society. Analysts estimate that they were the sole breadwinners for between 10 to 15 million people — or up to 50 percent of the population.

When the rug was pulled from under that crucial support system, it set off a chain reaction of humanitarian crises. Families started to run short of cash and cut back spending on even essential goods. The lack of money moving into the economy put pressure on already beleaguered traders, who were reluctant to extend customer credit lines. Malnutrition grew. Today, a worrying two-thirds of Yemeni children are stunted, a condition that will affect their development and health for decades to come.

Meanwhile, unpaid workers stopped showing up to staff health clinics, drive garbage trucks, and operate water treatment facilities. Many civil servants still report for duty, but others have been forced to spend their time scrounging whatever living they can in other ways. With no staff or ministry budgets, public services collapsed, feeding a vicious cycle of growing needs and fewer mechanisms to address them.

“The lack of payment is having widespread ramifications,” said Hannah Hilleson, senior program officer for the Middle East at Mercy Corps. “There is less money being put into hands of employees which is in turn limiting their ability to spend money on food and nutritional food, which in turn increases malnutrition rates. Once we increase malnutrition relates, there’s increased vulnerabilities to disease, increasing risk to cholera, and once they contract cholera, growing need to go back to those public health facilities, which aren’t open.”

Restarting the payment of salaries may be the only way to turn the cycle around.

A Central Bank in turmoil

In the initial months of Yemen’s civil conflict, the Central Bank remained a bastion of stability, widely regarded by analysts as both the country’s most functional and apolitical institution. After Houthi rebels captured the capital Sana’a in 2014, and again after a coalition led by Saudi Arabia intervened in 2015 to reinstall the government, the bank continued to pay salaries across the frontlines.

As conflict dragged on, however, government revenues collapsed, draining the bank’s reserves to just a quarter of what they had been precrisis. Meanwhile, the Saudi-backed government based in the southern city of Aden began to argue that paying ministry budgets and salaries was tantamount to supporting the rebel side, since the Houthis controlled the capital, in the north. They were particularly concerned about rebel diversion of the defense ministry budget to pay for the war effort.

In September, 2016, Yemeni president Abdrabbuh Mansur Hadi announced he was moving the Central Bank to Aden to regain control. But the move had largely taken place without preparation. The bank’s coffers were nearly dry, its technocratic staff in Sana’a were replaced by Hadi appointees, the institution lacks a SWIFT code needed to conduct international transactions, and there is a growing lack of physical cash notes to distribute, according to a recent report by the Arab Gulf States Institute in Washington.

Currently, the southern government says it cannot pay salaries in the north for both political and practical reasons: The Houthi government is not remitting government revenue to the bank and it has refused to release data on civil servants — raising concerns the rosters are stacked with their own fighters. Meanwhile, the Houthi government argues it has no revenue to remit and nonpayment of salaries essentially amounts to forced starvation.

“The lack of cooperation between the Houthi-Saleh bloc and the Hadi government over the need to pay civil servant salaries is a clear example of how Yemen’s alarming humanitarian crisis is being used in a merciless game of tit-for-tat political point scoring,” said Anthony Biswell, a senior analyst on Yemen at the Delma Institute in Abu Dhabi.

Even if the political challenges were resolved, international bankers would remain wary. Yemen’s banks require correspondent institutions overseas in order to undertake international transactions — to buy or sell dollars, for example. These currency transactions are vital for international trade and the import of goods such as food and medicine. But the ongoing conflict has deterred even the most intrepid global banks from dealing with the country. Neither the central bank, nor local banks and traders have been able to find correspondent institutions for well over a year.

Trickle down economics

Astonishingly, Yemen’s humanitarian crisis could be far worse were it not for a social safety net that “has long baffled aid workers” with its resilience, writes Peter Salisbury, senior researcher at Chatham House, in the AGSIW report. “Most developmental metrics have forecast famine for years. But Yemeni families and communities have been a safety net in and of themselves, somehow preventing outright catastrophe despite constant strain.”

State salaries, however, were crucial to that system’s functioning. Since they were withdrawn, families have doubled down on austerity. By January 2017, 60 percent of families were employing “negative coping” methods such as skipping meals, a United Nations World Food Programme assessment found. Nearly the entire population is now in need of humanitarian assistance, 9.8 million of them acutely.

On the streets, the unpaid salaries manifest in dilapidated services. Litter lines the roads, sewage goes unpumped, and utilities including electricity and water rarely function. “Rarely in another country in the region do you see what it means when the conflict disintegrates systems, health system that falls apart, waste system that falls apart,” said Maurer. “There is a chain reaction.”

The cholera crisis has drawn particular attention to the health sector, where many nurses, doctors and technicians continue to work despite their own economic hardship. Others have abandoned their posts or come only when they are able.

"More than 30,000 health workers haven’t been paid their salaries in more than 10 months, but many still report for duty,” the heads of UNICEF, WHO and WFP said in a joint statement on July 26, following a visit to the country. “We have asked the Yemeni authorities to pay these health workers urgently because, without them, we fear that people who would otherwise have survived may die.”

The three agencies, as well as some other international NGOs are trying to supplement health workers’ incomes where they can. But even they are having trouble getting cash to pay salaries. For the same reason that the Central Bank is unable to transact abroad, aid groups face enormous logistical hurdles sending money to Yemen. If transfers or foreign cash does arrive, there is a shortage of Yemeni bank notes with which to pay workers.

“It’s challenging to find local partners who are able to continue working, because obviously there is a cash shortage in country. There are so many problems with liquidity” to pay local staff, said Hilleson of Mercy Corps.

A pilot plan

Political conflict is at the heart of the salary crisis, and politics may be the only hope for solving it. With broader ceasefire negotiations stalled, U.N. Special Envoy for Yemen Ismail Ould Cheikh Ahmed is focusing on a pilot program for peace, which could be extended if it works. The plan aims to place the key port city of Hodeidah, currently controlled by the Houthi government, under third-party control to facilitate imports and serve as a test run of restarting Central Bank salary payments.

Under the initiative, the Central Bank would open a branch in Hodeidah, run by public sector staff “who were present before 2010” and overseen by either the World Bank or a U.N. agency. The international community would then be responsible for ensuring salaries are paid according to precrisis budgets from 2014, the plan says. After revenue from Yemen’s small oil industry are directed to the bank, the World Bank would cover any remaining deficit to pay salaries for at least a year.

If the plan works, it could offer a model for how to restart civil service payments across the country. The involvement of the World Bank and other U.N. technical experts may speed efforts to regain the trust of the international bankers and counter-terror finance watchdogs.

Perhaps the more fundamental question, however, is how much of a state will be left to reactivate by then. The longer ministries go unmanaged, health facilities go unstaffed, and schools go unattended, the harder it will be to bring those services back into operation. Equipment and facilities are already dilapidated or destroyed from conflict, exacerbating the challenge.

But, humanitarians say, it’s really the only exit to the cycle of need. Short of a state that can minimally function, the ongoing food and health crises here will simply reappear in other iterations.

“At the very least we need some kind of movement on sustaining the public sector,” said Sara Tesorieri, roving advocacy and policy adviser at Norwegian Refugee Council, who recently visited Yemen. “We would like to see international community seized by this issue because it’s driving this collapse of Yemen as a country.”

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