Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports

24 Pages Posted: 19 Jan 2007

See all articles by Saade Chami

Saade Chami

International Monetary Fund (IMF)

Faisal Ahmed

International Monetary Fund (IMF) - African Department

Nabil Ben Ltaifa

International Monetary Fund (IMF)

Todd Schneider

International Monetary Fund (IMF)

Date Written: Janurary 2007

Abstract

This paper investigates the likely implications of declining oil production on Yemen's equilibrium exchange rate, and discusses policy options to ensure a smooth transition to a nonoil economy. The empirical results suggest that, as oil production and foreign exchange earnings fall, the Yemeni rial will have to adjust downward in real effective terms to keep pace with the equilibrium exchange rate. In light of strong pass-through from exchange rate depreciation to domestic inflation, this could entail a substantial depreciation in nominal terms. Given the nature of the adjustment, a floating exchange rate regime appears to be the best option, if supported by appropriate macroeconomic policies. However, given public fixation on a exchange rate stability, a softly managed float would be a better option for Yemen whereby the central bank may have to lead the market toward the equilibrium exchange rate.

Keywords: Exchange rate policy, Yemen, Republic of, Oil exports

JEL Classification: F31, E52, E58

Suggested Citation

Chami, Saade and Ahmed, Faisal and Ltaifa, Nabil Ben and Schneider, Todd, Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports (Janurary 2007). IMF Working Paper No. 07/5. Available at SSRN: https://ssrn.com/abstract=958168

Saade Chami (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Faisal Ahmed

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Nabil Ben Ltaifa

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Todd Schneider

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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