Digital Riyal; Houthis Propose Digital Currency Amid Cash Deficit Crisis

The Houthi government in Sana’a has started preparing towards what it called “Digital Riyal,” a new currency that would be used locally, on which it is accused of swallowing what is left from cash liquidity of the Yemenis in the regions under its control.

The Houthis have closed all entry points that connect the regions under its control in the north of Yemen with those under the control of the legitimate government of the temporary-capital Aden. The Iran-backed militias, Houthis, have also limited the circulation of certain Yemeni banknote editions and would only allow older editions to be circulated inside its controlled-regions. All of which have caused an economic chaos in all of Yemen, pushing the Houthis towards finding other measures to solve its cash deficit.

Economic Mess

Ever since the Saudi war on Yemen to rule-out the Houthis from the previous legitimate capital, Sana’a, back in 2014, Yemen has gone through a turmoil in its economic status.

The accumulative occurrences in the two governments and other parties in the war since 2014 have resulted in two different Yemeni riyal currencies with different values. The Riyal that is used in the regions under control of the legitimate government has less value by approximately one-third of the Riyal that is used in the regions under control of the Houthis in exchange with the US dollars. The two different currencies only differ in the year they were printed, as newer editions are not allowed in the Houthi-controlled regions.

Back in 2017, the Central Bank of Aden printed 400 billion Yemeni riyals in 1,000 riyals banknotes, which were released in the market in July of the same year, and were circulated throughout all Yemeni regions, including those under the Houthi control. Those prints had the signature of the first Governor of the Central Bank of Aden Munsir Al-Qu’aiti.

The Central Bank in Sana’a, under the Houthi control, has recently banned the circulation of the new 1,000 riyals banknotes that were printed similar to the old banknotes used by the Houthis, on the background of spreading news of the arrival of 60 billion riyals from the newly-printed 1,000 banknotes into the its regions. It is said that the Aden-based Central Bank had to take such measures to evade the Houthi ban and address the shortage of cash in the market, according to Arab News.

The renewed ban has caused a sharp fall for the Yemeni riyals against US dollars. According to a report published on the Yemen Monitor website, “the Yemeni riyal has fallen to a record decline against foreign currencies after a temporary pause in the last period.” The demand for one US dollar has reached 955 Aden-based Yemeni riyals, while the Sana’a-based riyal is last recorded at 597.5 against one US dollar.

Money transfer between the two regions of Houthi and legitimate government has been of great concern for the Yemeni people. Due to the different values of the currencies, the exchange and money transfer firms charge for the difference in the value of the currencies—mainly when transferring from the Houthi regions—and for the service commission, which would totally cost up to 50 percent of the amount transferred.

With the recent ban that the Houthis have set, the transfer commission rose significantly to 58 percent of the amount transferred. Consequently, the Yemeni Money Exchange Association directed the closure of all financial transfer networks in the temporary capital, Aden, on Monday June 28, 2021 until further notice, due to the record decline in the currency rate.

Digital Riyal

The so-called Economic Committee of the Houthi militias, led by former Minister Saleh Al-Sha’ban, has initiated procedures to issue the “Digital Riyal,” as an alternative to paper currency amid a cash deficit, accusing the Aden-based Central Bank of pumping hundreds of billions of the old edition riyals that are allowed to be circulated in its regions.

The Digital Riyal is a financial service that is coordinated with banking and service companies. Some believe that the Digital Riyal is an ideal solution to the liquidity crisis and the deterioration of the local currency price.

According to an article published on Asharq Al-Awsat Newspaper, the Houthis plan to have the Digital Riyal as an alternative for paper currency for two reasons. First is to reduce the money transfer commissions from the regions controlled by the legitimate government by up to 50 percent, while the second reason is to face the large deficit in financial liquidity as a result of preventing the circulation of new editions of the currency.

Resurface

This is not the first time that a digital currency was proposed in the Houthi-controlled regions, as they have had two failed tryouts beforehand with similar approaches. Back in 2016, the Houthis have issued vouchers and distributed them to government personnels for the same reasons; this system, however, did not last long and was totally cancelled.

The Digital Riyal was first introduced back in 2018 by the Houthi militias, and was later used via a mobile application in April 2019 despite the opposition of other institutions to the move. This system was meant to be used to pay salaries for oil companies’ personnels, yet it only lasted for 9 months to its failure. The service, nonetheless, is still active and from several providers and is used to pay for bills and other daily transactions, while some private companies use it to pay for the salaries of their employees. 

The Aden-based Central warned back in 2019 against dealing in Digital Riyal, and against any legally unlicensed payment methods targeting the national economy and robbing citizens’ savings.

Depisotor’s Concerns

In an interview published at the Yemeni Almushahid website, back in 2020, the economic expert Dr. Taha Al-Fuseel, professor at Sana’a University, shared his opinion on the Yemeni Riyal. Al-Fuseel believes that the Digital Riyal system must be based on certain rules and assets, not on random decisions, and it needs a digital network structure between banks.

The Digital Riyal is closer than any other currencies to become worthless due to fraud or hacking operations, and due to circulating outside the official dealing rules, there is no bond or documents for the depositor in the event they lose their wealth.

Back in 2019, the Houthi government granted compensation in Digital Riyal to those from whom it withdrew the new banknotes printed for the Aden-based Central Bank, yet the company sponsoring the project was not announced at the time, and the government’s revenue streams were still refusing to deal with digital currency.

According to Dr. Al-Faseel, the refusal of the Customs Authority and the Tax Authority to agree to deal with merchants in the Digital Riyal, shakes people’s and businessmen’s confidence in the government’s decision, and places many question marks around it.

Al-Faseel stresses that the banking system is currently outside the specified framework, and the decisions taken between financial centers are not studied practically and objectively, and are reactions, which makes banks and merchants in great trouble.

It is worth noting that the economy in Yemen is highly dependent on cash, and that before the 2014 war, the total number of Yemenis with bank accounts was only 6 percent, according to Central Bank data, which will be one of the major problems that will face the Houthis’ dream of the digital currency amid cash deficit, in what the opposition describe as “preparing for steps to perpetuate economic separation.”