In recent weeks, the Yemeni rial has undergone a dramatic transformation, plunging rapidly to unprecedented record lows before staging a sudden recovery, driven by a series of government interventions and stringent monetary measures. Although official bodies were quick to attribute this rebound to their direct efforts in restoring confidence and curbing inflation, the reality extends beyond such surface-level explanations. What occurred reveals a complex interplay of economic, structural, administrative, and political factors.

The importance of examining these developments lies in their direct impact on citizens’ livelihoods, on the structure of the national economy, and on the stability of the monetary market. The exchange rate remains the most sensitive determinant shaping the prices of essential goods and the levels of inflation. It thus plays a decisive role in shaping public sentiment, both socially and politically.

This assessment seeks to analyse the recent shifts in the exchange rate, identify the factors that led to the improvement, and clarify their economic and social implications. It then turns to examine the challenges threatening the sustainability of this recovery, before moving on to outline possible scenarios for the trajectory of the currency in the near and medium term, culminating in practical conclusions and recommendations addressed to decision-makers responsible for managing this sensitive issue.

First: Causes of the Improvement

The recent recovery of the Yemeni rial cannot be understood without first considering the trajectory of deterioration that preceded it. On the economic front, the suspension of oil exports and the scarcity of foreign currency inflows exerted mounting pressure on the rial, resulting in a continuous decline in its value. This was compounded by intense speculative activity led by unregulated money exchangers and other speculators, who sought quick profits by driving foreign currency prices to unrealistic levels. The outcome of this interplay was that, by the end of July, the exchange rate in government-controlled areas had reached approximately 760 Yemeni rials to the Saudi riyal—an inflated and unjustified level unsupported by solid economic fundamentals.

Like an air balloon inflated recklessly from several sides and without restraint, it was inevitable either to deflate it wisely or wait for it to burst. The first option required an external catalyst to alter the course of the market and steer prices back towards equilibrium. This catalyst emerged through a package of precautionary and regulatory measures adopted by the Central Bank in Aden and the Yemeni government. These measures aimed to curb speculation and restore market stability. They included the closure of non-compliant exchange companies and outlets, tighter oversight of exchange activity, and restrictions on foreign currency transactions to limit speculation outside the banking system. Additionally, a national committee was established to regulate and finance imports, thereby controlling demand for hard currency. These steps were reinforced by direct political backing from the Presidential Leadership Council, the government, and local authorities(1), which endowed the measures with executive force and enabled them to reverse the market trend swiftly.

Through this decisive intervention, the balloon was deflated back to a relatively safe size(2), as the inflated rate collapsed within a matter of days, from 760 to around 425–428 Yemeni rials to the Saudi riyal at the beginning of August. In doing so, the rial regained more than 40% of its value, marking one of the swiftest recovery waves in its modern history.

Second: The Economic and Social Impact

The rapid improvement in the Yemeni rial’s exchange rate produced mixed outcomes on both the economic and social levels. On the one hand, the strengthening of the national currency had a positive effect on the prices of imported goods—most notably essential foodstuffs and petroleum derivatives—providing consumers with a measure of relative relief and helping to rein in spiralling inflation(3). The stabilisation of the monetary market also generated a wave of public optimism, reinforcing confidence in the possibility of halting the steady erosion of purchasing power.

These economic gains translated into political capital for both the government and the Central Bank(4), as the success of their monetary and regulatory measures was widely regarded as an achievement that strengthened their standing among the public and supporting constituencies. In addition, narrowing the gap between the exchange rate in government-controlled areas and those under Houthi control weakened the latter’s ability to exploit the currency as an economic weapon. This, in turn, represented a strategic advantage for the government by curbing the financial resources the Houthis had been able to derive from this divergence.

Conversely, this improvement came at a tangible cost for other segments of society. Families dependent on remittances from expatriates—which constitute a significant proportion of the population—were adversely affected by the decline in the value of dollars transferred into the country, as they now equated to fewer rials, directly reducing their purchasing power. Moreover, most employees and those dealing primarily in the local currency did not benefit from the rial’s recovery to the extent anticipated, as the prices of many goods remained high, driven by the greed of certain traders and the weakness of regulatory enforcement.

At the level of public finance, the stronger rial led to a decline in revenues denominated in the local currency. Any government resources in foreign exchange—whether from aid or limited oil sales—became less valuable once converted into rials than they had been previously. This dynamic exacerbates the budget deficit and further constrains the state’s capacity for public expenditure.

This divergence between the improvement in the currency’s value and its limited impact on actual prices revealed that monetary stability alone is insufficient to deliver tangible social gains. Ensuring that citizens benefit from such improvements requires strict and effective market oversight to prevent monopolistic profiteering by certain traders and to guarantee that the advantages are passed directly to consumers.

Third: Challenges and Threats

Despite the rapid improvement in the rial’s exchange rate and the gains it has brought, the sustainability of this stability remains fragile and encircled by a host of challenges and threats exerting pressure on the monetary market from multiple directions:

1. Structural Challenges to the Economy:

The continued suspension of oil and gas exports—the principal source of hard currency—has deprived the economy of its most vital external revenue stream. Without the resumption of regular foreign exchange inflows through exports or substantial external support, the rial will remain exposed to prolonged pressures. This is compounded by a chronic government fiscal deficit caused by falling revenues and rising expenditures, which undermines the authorities’ ability to support the currency. Moreover, the limited foreign reserves held by the Central Bank in Aden (225 million dollars as of mid-2025(5), sufficient for only a few weeks of imports, render official interventions short-lived and leave the door open for speculators to re-emerge whenever external support or new deposits are absent.

2. Institutional and Regulatory Challenges:

Despite the recent clampdown on exchange companies and outlets, dozens of unlicensed or inadequately regulated entities remain active, alongside networks of vested interests that link prominent traders and influential actors to speculative activity. Any slackening in the completion of financial reforms or in strengthening oversight mechanisms could enable these actors to circumvent regulations or devise new methods to distort the market(6).

3. Political Challenges and the Currency War:

The monetary division between Sana’a and Aden entrenches a dual currency system and creates a broad scope for speculation between the two markets(7). The Houthi militias—who regarded the rial’s recovery as a setback—may resort to retaliatory measures to disrupt the market in government-controlled areas, such as tightening restrictions on the movement of money and goods or creatingliquidity crises. Indeed, at the end of August, the Houthis orchestrated a counter-speculation effort, exploiting cash shortages to fabricate an artificial rise in the rial’s value, with the Saudi riyal in Aden briefly dropping to around 250 rials before the Central Bank intervened swiftly to contain the situation. This incident highlights the fragility of current stability and the ease with which it can be disrupted by any political or external breach of the regulatory framework.

4. Seasonal and External Challenges:

Seasonal factors—such as the heightened demand for foreign currency during Ramadan and the Eid holidays, due to increased import bills—periodically strain the market. External factors pose an even greater threat: rising global oil prices, or higher shipping and insurance costs resulting from regional tensions (such as attacks on navigation in the Red Sea and the Gulf of Aden), all deplete hard currency reserves and intensify pressures.

The convergence of these structural, institutional, political, and external challenges renders the current monetary stability temporary and vulnerable to relapse, unless pre-emptive strategies and comprehensive measures are adopted to strengthen the capacity of the economy and the Central Bank to absorb shocks.

Fourth: Possible Scenarios

Based on current conditions, four main trajectories can be anticipated for the Yemeni rial’s exchange rate over the coming months and into the medium term:

1. Scenario of Relative Stability (Most Likely in the Short Term):

The current band (425–428 rials per Saudi riyal) remains defensible if coordination between the Central Bank and the Import Regulation Committee continues, coupled with strict enforcement of regulatory measures. This range reflects a level close to the equilibrium rate at which actual supply and demand forces converge. While it may experience minor fluctuations linked to seasonal factors, it is likely to remain within manageable bounds as long as political support for the reforms persists.

2. Scenario of Further Appreciation (Best but Least Likely):

This scenario would materialise if oil and gas exports were resumed and direct external resources—such as deposits, grants, or concessional loans—were injected, thereby strengthening the Central Bank’s reserves and increasing the supply of hard currency. Under such conditions, the exchange rate could fall below 400 rials per Saudi riyal, approaching 1,500 rials per US dollar. However, the realisation of this trajectory also hinges on the presence of political and security stability conducive to the return of investment and capital flows—factors that render it an unlikely prospect under current circumstances.

3. Scenario of Gradual Decline (Likely in the Longer Term):

In the absence of structural reforms or sustained external support, and with ongoing structural pressures, the recent gains will likely erode over time. Once the impact of the latest measures subsides, demand for the dollar is expected to rise again, driven by the trade deficit and weak domestic production. This would push the rate towards around 500 and then 600 rials per Saudi riyal over the next two years. This scenario does not envisage a rapid collapse, but it does signal a gradual return to instability if structural imbalances are not addressed at an early stage.

4. Scenario of Gradual Decline (Likely in the Longer Term):

This trajectory represents the possibility of a major shock—whether political, security-related, or financial—that could wipe out the gains achieved. Such a shock might take the form of military escalation, a sudden halt in external support, or the government’s abandonment of reform measures under pressure from vested interests. In this case, the exchange rate could surge once again to 700–800 rials per Saudi riyal, or worse, fuelled by speculation and disorder. The recent episode at the end of August highlighted the market’s susceptibility to such tremors, which were only averted by the Central Bank’s swift intervention.

In the near term, the most realistic outcome appears to be a combination of relative stability with a gradual downward drift, unless a significant economic or political breakthrough occurs. Policymakers must therefore adopt a flexible approach—prepared for the worst while building on the best—to maintain monetary stability and prevent a relapse.

Findings and Recommendations

The experience of August 2025 demonstrated that political will and decisive measures can curb the currency’s decline and restore a degree of stability to the market. The coordinated action of the government and the Central Bank played a pivotal role in deflating the speculative balloon and rebuilding confidence. Anchoring the exchange rate within a relatively fixed band (425–428 rials per Saudi riyal) and ending the state of unrestricted flotation also reflects the adoption of a new, more realistic and controlled approach to managing monetary policy.

At the same time, the experience underscored that the current stability remains fragile and vulnerable to relapse if not accompanied by broader structural reforms. In this context, the researcher puts forward the following recommendations for policymakers:

1. Institutionalising Precautionary Measures: Transform regulatory interventions in the exchange market into permanent policies, with harsher penalties for violators and guaranteed continuous inspections. This should build on the successful experience at the end of August, when speculative currencies were confiscated during two days of turmoil—a clear deterrent message to the market;
2. Strengthening Reserves and Developing Monetary Instruments: Prioritise the resumption of oil and gas exports through political and security arrangements, while actively seeking deposits and external financial support to offset the shortage of hard currency. In parallel, activate domestic instruments such as certificates of deposit and government bonds to absorb local liquidity and raise the cost of speculation;
3. Implementing Structural Economic Reforms: Curb unproductive expenditure, control the wage and benefits bill (particularly those denominated in foreign currency), improve tax and customs collection, and stimulate investment in productive sectors such as agriculture and light industry to generate sustainable sources of hard currency. In addition, reforming the electricity sector and adopting equitable subsidy policies would help ease pressure on public finances;
4. International Coordination and Neutralising the Economic War: Intensify engagement with regional and international partners to secure financial and technical support, while exerting pressure on the Houthis to cease exploiting the currency as an economic weapon. Cooperation with the IMF and the World Bank should also be expanded to obtain emergency financing for essential imports; and
5. Addressing Social Impacts: Introduce mitigation policies to protect groups adversely affected by the currency’s appreciation, particularly households reliant on remittances. This could be achieved through partial salary adjustments in foreign currency or by providing direct food assistance to the most vulnerable, thereby ensuring social balance and preventing the emergence of public discontent towards monetary stabilisation policies.

Conclusion

The recent appreciation of the rial offers a rare opportunity to reorganise the economic sphere. Yet, it places the authorities before a formidable test: transforming this tactical success into long-term strategic stability. Transparency, sustained reform, and the strengthening of trust between state and society constitute the keys to reaching financial safety. Without fundamental remedies to structural economic imbalances, the recovery will remain temporary and prone to relapse.