October 24, 2019
Lina Abdelfattah – IFPRI
This is a summary of a regional program policy note published by IFPRI titled “Yemen: Economy-wide impact of conflict and alternative scenarios for recovery”. The Full note can be accessed here.
The impact of conflict in Yemen has threatened millions of lives and has led to one of the worst humanitarian catastrophes in the world. According to the UNHCR, 22 million people (75% of Yemen’s population) require some form of humanitarian assistance, 15 million people are on the verge of starvation, 3 million people were forced to flee their homes, and nearly 400,000 children suffer from severe malnutrition.
Overview of the economic impact of the conflict in Yemen
In addition to the unprecedented humanitarian crisis and the creation of space for militant groups, the conflict in Yemen is also taking a heavy toll on the economy. According to estimates from the International Monetary Fund (IMF 2018), the Yemeni economy may have contracted by about 40% between end-2014 and 2018. The World Bank’s Yemen Dynamic Needs Assessment (World Bank 2018) suggests that physical damage was worst in the housing sector (33% of units have been either partially damaged or completely destroyed). The education, health, transport, and water, sanitation and hygiene (WASH) sectors have also been severely affected, with overall damage ranging from 27% (transport) to 31% (WASH). The power and ICT sectors have been somewhat less affected (estimated damage levels of 13% and 11%, respectively).
The destruction of physical infrastructure, the loss of productive factors, and damaged economic networks and supply chains have severely reduced incentives to pursue productive activities (Moyer et al. 2019). Hydrocarbon exports have been substantially reduced throughout the conflict period, which has resulted in a severe shortage of foreign exchange and restricted imports of food, fuel, and other goods. Private consumption has been hard hit by the economic decline, foremost through increased food prices, delayed public-sector (25% of the workforce) salary payments, and soaring unemployment. In addition, almost all investment has been either halted or withdrawn. As a result of this economic and social decline, the World Bank estimates that the poverty headcount in Yemen may have increased to now stand between 71 and 78% (World Bank 2017).
Modeling conflict and reconstruction
In order to analyze the economy-wide impact of conflict and possible reconstruction options, the authors use a recursive dynamic computable general equilibrium (DCGE) model that offers a consistent analytical framework.
Estimates based on the model suggest that the accumulated economic losses caused by the ongoing conflict in Yemen amount to nearly one and a half times Yemen’s pre-conflict GDP. One effect of this economic collapse is that the share of Yemen’s population living below the poverty line is estimated to have reached 77% in 2018. Even when the conflict ends, Yemen’s GDP is projected to stay well below its 2014 levels for many years to come if any conflict resolution scenario is not accompanied by extraordinary external financial and other development support by Yemen’s partners.
Under a Recovery-Low Aid scenario (which simulates foreign aid inflow of USD 1.9 billion/year in addition to domestic spending), Yemen’s economy is projected to again reach the GDP level of 2014 by 2025, but poverty levels are likely to remain very high, which will pose risks to societal healing and to the formation of a new social contract post-conflict.
The two figures below summarize the impact of reconstruction scenarios on poverty and GDP.
Alternative reconstruction scenarios and impact on poverty
Alternative reconstruction scenarios and impact on GDP
Only under the Recovery-HighAid scenario (which simulates a higher foreign aid inflow of USD 3.9 billion/year), if accompanied by substantial improvements in absorptive capacity, will Yemen’s GDP reach the economic and poverty levels that it would have reached in 2025 without the conflict having arisen. To reach such a positive outcome, aside from the core work of conflict resolution, critical massive efforts will also be needed in the years to come to replace and upgrade the capital stock, rebuild economic institutions, and restore economic networks.
