Experts point to decreased interest rates as sign of 'green shoots' for Yemen's economy

Yemeni Central Bank’s interest rates on certificates of deposits (CDs) have reached an unprecedented low  of 15 percent this week. The rate was set in December 2012 at 18 percent and is a substantial decrease from 2011 when it reached its highest at 20 percent. 

The decrease in interest rates is widely viewed by economists as a way to discourage banks from freezing their money in the Central Bank. 

The move comes after the government encouraged banks to invest in the Central Bank in 2011 in an attempt to provide the state with increased liquidity to pay the salaries of public sector workers and cover state expenses during the political turmoil.

Prior to 2011, the interest rate had stabilized around 11 percent, however political instability caused the Central Bank to significantly increase it in order to save the national economy from collapsing.

According to the Central Bank’s governor Mohammed Awadh bin Humam, the recent decrease is a sign that the economy has stabilized, with the government confident that it can create its own revenues without depending on banks. 

It is hoped that the decreased interest rate will positively impact the economy by forcing banks to invest their money in projects that create jobs. 

The decrease was appreciated by both commercial and Islamic banking sectors.

“We expect the interest rate to fall to 10 percent this year so that it allows individuals to take loans from banks without fear of a high interest rate. When more capital is accessible to potential entrepreneurs this means more business and automatically a better economy,” said Abbas Naser, assistant manager of the Yemen and Bahrain Bank.

He added that the average credits banks used to give out fell from 40 percent of the certificate of deposits in 2010 to less than 25 percent today because of the high interest rate.

According to officials at the Central Bank, the move will be the beginning of a continued decrease in interest rates, bolstered by the donor pledge of $8 billion to support Yemen through its transitional period.

Bin Humam said that decision was also supported by the increase in Yemen’s foreign reserves from $4.5 billion in 2011 to $6.2 billion at the end of last year.

Economic analyst Ahmed Said Shammakh said the increase in foreign reserves is due to the strengthening of local currency compared to the U.S. dollar.  

Moreover, according to the expert, the banks’ expected future investments will help stabilize the economy, in turn further strengthening the local currency.

The Director of the Economic Media Studies Center, Mustafa Naser, welcomed the news, saying that the International Monetary Fund recommended this decrease at the end of last year, but he said further decreases are still needed.

“Banks would still be tempted to invest in the Central Bank rather than real investments in the country unless the interest rate drops significantly,” he said. 

He recommended that it drop to 10 percent, and then gradually to a much lower value in accordance with international markets where interest rates in banks currently stand at less than one percent.