Economists criticize Central Bank’s currency policy [Archives:2006/929/Business & Economy]
Specialist economists criticized the Central Bank of Yemen's policy of pumping millions of dollars into the market in an attempt to preserve the national currency price, discrediting the move as causing banking market disturbance. They say the policy indicates the extent of its negative effect in the case of Watani Bank for Trade and Investment. Despite that, the Yemeni government considers the Central Bank's measures necessary to keep price rates stable against deterioration from time to time. Nevertheless, this excites worry and criticism by a number of economists.
Sources affirmed that such pumping volume during January, February and March of this year has amounted to $249 million, a great sum compared to Yemen's modest banking market. However, national currency prices have not improved against other currencies and local market price rates have not retreated but continued their sharp rise until sugar prices increased twofold.
Specialists emphasized that the local currency's price retreated 15 percent in the past two months, pointing out that the CBY does not have a clear monetary policy and that Yemen's dollar price is not governed by market dealings but rather by a group of beneficiaries possessing foreign currency stocks.
Economists are skeptical about CBY rescue steps, describing them as going to a group of exchange dealers rather than reaching the banking market to cover the currencies' deficit. All monies the CBY pumps into the market do not reach exchange shops but are given to limited exchange dealers or certain banks.
Banking affairs researcher Saeed Al-Qarshi believes CBY currency price measures are sedatives rather than real cures. He clarified that measures to decrease the dollar price against the riyal include issuing treasury bonds, pumping foreign currency into the market and raising the legal reserve on foreign currency deposits by 30 percent.
Al-Qarshi said he noticed that treasury bonds had a role in keeping the currency relatively stable, but negatively impacted development and the country's economic situation. The reason was that banks began using economic sector loan funds to buy treasury bonds; and by this, thereby achieving stable revenue without risks. Consequently, the treasury bonds withdrew liquidity from the banking sector, which reflected negatively on investment and economic development.
Al-Qarshi considers the problem's reasons inflation, price rise and the consequent drop in local currency purchasing power. Consequently, citizens tend to retain their purchasing power by exchanging what local currency they possess for foreign currency. Another reason is lack of trust in the local currency. By nature, Yemen is a consumer society depending on the external market to import most of its needs.
Dr. Ali Al-Shatir, finance undersecretary for planning, statistic and follow-up affairs, earlier demanded revising the treasury bonds issuing policy. He said he personally believed the bonds contributed to economic recession and there must be some factors to come out of such situations. In his opinion, among such factors is drawing up a serious study of the treasury bonds situation. Al-Shatir pointed out that the treasury bonds were important at the establishment stage, playing a role in land and currency speculations, as well as a type of stability role.
For its part, the CBY asserted its continued market monitoring, with Prime Minister Bajammal defending the policy, indicating that inflation rates affected the currency by 2.4 percent and admitting that demands for the dollar sometimes are unreasonable.
Last year the CBY raised the legal reserve on foreign currency deposits to 30 percent without interest. The purpose was to raise demand for deposits in local currency. However, what happened was completely the opposite. Demand for foreign currency deposits rose from 27 percent in 2004 to 81 percent in 2005.
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