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Wed 3 Aug 2011 09:30 AM

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Yemen's reserves plunge as unrest grips country

Foreign currency reserves plunged by $1.3bn in H1 2011; but inflation likely to ease soon

Yemen's reserves plunge as unrest grips country
Yemen's reserves plunge as unrest grips country
IMF warned last month that inflation in Yemen could surge to as high as 30 percent this year due to the unrest (Getty Images)

Yemen's foreign
currency reserves plunged by $1.3bn in the first half of this year as
unrest gripped the country and its economy will be adversely affected but inflation,
at around 15 percent, should start to ease soon, its central bank says.

Six months of popular
unrest against President Ali Abdullah Saleh's 33-year rule and rising violence
in the south have crippled the Arab economy, which surged 8 percent last year .

The central bank's
foreign reserves fell by around $1.3bn in the first six months of this
year and were below $5bn by the end of July, Central Bank of Yemen
Governor Mohamed Bin Humam said on Tuesday.

"Our current net
foreign reserves as of July 30 stand at $4.6bn. We expect the level to
improve once we put the political crisis behind us," Humam said in a
written response to questions.

The turmoil has led
to power shortages and forced many factories to close, laying off tens of
thousands of workers, and tourism revenues and foreign direct investment have
fallen sharply.

"The economic
impact of the crisis forced us in the central bank to intervene in the market
and provide a major [tranche] of foreign exchange to cover the loss of FX
inflows," Humam said.

The IMF warned last
month that inflation in the country could surge to as high as 30 percent this
year due to the unrest, but Humam said annualised inflation stood at 15 percent
at the end of May and should start to ease.

"We expect this
rate to improve during the second half of the year as we expect domestic
inflation to subside with higher rain falls and expected improvement on the
political front," he said.

Yemen's rial currency
has lost around 14 percent of its value during the protests, nearing an
historic low of 250 to the dollar seen last August. It has traded at around 243
to the dollar for the past two months.

The rial's market
rate stood at around 235 to the dollar on August 1, the central bank said.

"This rate,
which we call crisis rate, reflects market forces and without any intervention
from our side," Humam said.

"The central
bank has introduced several measures in the forex arena that aim at limiting
speculation activities and increasing the role of the banking sector," he
said, without giving further details.

The turmoil has
triggered a liquidity crisis among commercial banks with depositors rushing to
withdraw from their dollar and rial accounts.

"The central
bank stepped in to help solving banks' liquidity issue and provide enough cash
in both dollars and Yemeni rial to satisfy banks customers' needs," Humam
said.

Yemen, where a third
of the population faces chronic hunger, is the Arab world's poorest country
with a per capita income of less than $2,600. Poverty, corruption and soaring
unemployment have helped fuel the protests since January.

Some 40 percent of
Yemen's 23 million people live on less than $2 a day.

With Saleh in
hospital in Saudi Arabia since he was wounded in a bomb attack on his compound
in June, a political stalemate has stoked the tensions.

Officials say months
of protest have cost Yemen $4bn this year, and it needs $1.5bn in
foreign aid to meet development plans.

"All these
unfortunate developments will have an adverse impact on GDP growth for this
year," he said.

"It is
difficult, however, to forecast growth for this year, as it is difficult for
anyone to tell how long this situation will continue."

Last month, the
International Monetary Fund (IMF) forecast Yemen's economy would contract this
year, reversing a previous forecast for 3.4 percent growth.

On Monday, Yemeni war
planes bombed a village in south Yemen killing at least 13 people who a local
official said were Islamist militants challenging army control in the
flashpoint province of Abyan.