Dr. Mohamed Ahmed Al-Afandi
Sana’a University
This paper aims at analyzing the economic and social impacts resulting from floating the Yemeni currency. Floating the Yemeni Rial represents a shift towards adopting a new exchange rate system which was to be implemented in two stages. Stage One extends over the period starting 1990 until July 1996 initiated a partial floatation of the Yemeni Rial by allowing market forces to determine the exchange rate freely and without intervention. However, in the second stage starting July 1996, the Yemeni currency was totally liberalized and the prevalent multiple exchange rates were unified by the free-market rate.
Floating the currency is an option that can only be resorted to in times of severe economic crises, and when economies undergo external pressures to restructure as a result of local imbalances that may eventually lead to external imbalances.
In the second part of the research, focus is directed to developments in the international monetary system. The paper also discusses the main factors that prepare the right environment for the option of floatation as well as various arrangements for either a free, flexible, or floating exchange rate system.
A further discussion of the stages of floating the Yemeni Rial is the highlight of part three, where a distinction is being made between the two stages. The second stage of total liberalization was part of the Economic Reform Program (Stabilization and Enhanced Structural Adjustment) which the Yemeni Government is undertaking with support from the IMF and the World Bank. Hence, this part also sheds some light on the importance of analyzing the theoretical background behind IMF’s approach based on the Monetarists’ school of thought, which has been criticized by advocates of the Structuralist school.
Part Four concentrates attention on tracing the impacts and consequences of floating the Yemeni Rial. It was realized that the big price shock has been envisaged during the first stage of floating the Rial in the parallel market. Also, and as a result of growing inflation coupled with the deviation of the floating exchange rate, the purchasing power as well as the standards of living have been continuously deteriorating. Those factors have resulted in declining growth rates as well as in persistent recession and unemployment. Recession continues to prevail even after the complete liberalization of the currency in July 1996 because of contracting fiscal and monetary policies.
The paper concludes with the following:
The policy of floating the currency coupled with some other policies has led to declining growth rates.
Because of the increase in imports and the limited non-oil exports, demand for both imports and exports has been inelastic, thus causing limited effect on the balance of trade and the balance of payments.
Extremely high inflation rates during 1990-95 have resulted in declining real wages and deteriorating living standards.
Despite the increase in oil export proceeds valued at a high exchange rate and leading to greater public revenues as well as a reduction in the budget deficit, such overall improvement up to now has not materialized in correcting budget imbalance in favor of social and development spending.
There is a need to maintain a floating and stable exchange rate that would be considered a monetary stabilizer. Any large change in the nominal exchange rate as an excuse to seek the economy’s competitive position, would lead to the collapse of the exchange rate and turmoil in macroeconomic indicators, hence a return to an unstable economy.
Improving the economy’s competitive position can be achieved through structural policies and programs that aim at enhancing the economy’s productive capacity, and encouraging investments in a conducive environment. This cannot be done unless steps are taken to enforce security, to protect individual’s rights, to enhance the role of the judiciary, to fight administrative corruption, and to direct more attention to administrative reform.
