Central Bank of Yemen: Balancing Monetary Policy and Banking Sector Challenges

The Central Bank of Yemen plays a crucial role in maintaining the country's financial stability. It has been facing numerous challenges, including the ongoing conflict and economic downturn.

Monetary policy is a key aspect of the Central Bank's work. In 2015, the bank introduced a new currency, the Yemeni rial, to replace the old one, which had been devalued due to inflation.

The bank has also been working to stabilize the banking sector. In 2018, it announced a plan to merge several small banks into larger ones, in an effort to improve their financial stability.

This move aimed to reduce the number of banks in the country, making it easier for them to manage their finances and reduce the risk of bank failures.

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The Central Bank of Yemen (CBY) has a rich history that dates back to 1962. It was established one month after the revolution in the northern part of Yemen, and it marked the beginning of the country's monetary system.

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The CBY's precursor, the Yemen Bank for Reconstruction and Development, was responsible for assigning the functions of the central bank and commercial banks. In 1964, the Yemeni Monetary Committee was established to issue national paper currency and finance the budget deficit.

The CBY was formally established on July 27, 1971, with a capital of 10 million riyals, all of which was owned by the government. This gave the bank the right to issue currency, organize banking and credit activities, and manage the country's reserves of gold and foreign currencies.

The bank's law specified its tasks, competencies, and capital, and it included 14 chapters to ensure the bank's operations were clear and well-defined. The CBY's role in the country's economy has been significant, and it continues to play a crucial part in Yemen's financial landscape.

The CBY's tasks and competencies were outlined in the law, which included following up and supporting the role of the banking system in development. This is a critical function, as it helps to promote economic growth and stability in the country.

Here are the main objectives of the Central Bank of Yemen:

The CBY's role has evolved over the years, particularly after the Yemeni reunification in 1990. The unified government issued a new law that merged the two central government banks into one central bank, which was renamed the Central Bank of Yemen.

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The Central Bank of Yemen has taken drastic measures to stabilize the plunging riyal. The bank raised interest rates on deposits to an all-time high of 27 percent in a bid to strengthen the riyal and reduce inflation.

This significant increase aims to reduce the sharp rise in prices of basic commodities, especially food and fuel. The riyal has lost more than two-thirds of its value since the start of the Saudi-led military campaign against Houthi rebels in March 2015.

The Central Bank has also raised interest rates on government bonds to 17 percent from 12 percent. This move is aimed at attracting more deposits and stabilizing the currency.

To prevent capital flight, the bank banned people from taking out more than $10,000 from Yemen without a prior permit. This measure aims to reduce the outflow of funds and maintain the stability of the riyal.

The bank's actions are a response to the slide in the value of the currency, which has triggered a sharp rise in prices of basic commodities. The Yemeni currency nose-dived at the start of the year despite Saudi Arabia placing a $2 billion deposit in the central bank.

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