Yemen: Tariff Hike Signals ROYG Reform Resolve; Will Face Pushback

What happened: As part of a series of major economic reforms, the Yemeni government liberalized the customs dollar used to calculate import duties, effectively doubling tariffs on non-essential goods.

Why it matters: The measure, which comes amid a major deficit and liquidity crisis, both nets needed revenue and signals the ROYG’s willingness to confront powerful interests in pursuing structural reforms.

What happens next: We expect significant pushback, which the ROYG is well-positioned to ride out, with sustained reform positively affecting the long term. However, the ROYG's fiscal challenges and obstacles to hydrocarbon investment will remain until a Saudi-Houthi deal is reached.

On 19 May, the Yemeni government (ROYG) approved a raft of economic measures to bolster state revenues and improve economic conditions. Most controversially, it liberalized the ROYG customs dollar, effectively doubling tariffs on non-essential imports.

Coming as the ROYG struggles to cover its deficits and address a liquidity crisis, the measures meaningfully build on the government’s economic reform efforts since July 2025. In particular, the customs dollar liberalization both nets the ROYG much-needed revenue and signals its willingness to take on powerful, entrenched interests.

These measures are sure to generate intense political opposition, including from powerful merchant interests. The potential contribution to inflation will likely fuel protests. However, we foresee the ROYG riding this opposition out with united leadership and firm Saudi backing.

If sustained, the reforms will be positive for long-term investment. While customs liberalization will increase operational costs, this will be more than outweighed by a functioning ROYG financial system. However, we expect the ROYG’s fiscal problems and obstacles to hydrocarbon investment to persist until a Saudi-Houthi deal permits resumed exports.

On the Right but Wobbly Track

The decisions were only the latest in a series of ROYG economic reforms since July 2025. Spearheaded by Central Bank of Yemen in Aden (CBY-Aden) Gov. Ahmad al-Maabaqi (see Featured Personality) and including the imposition of an official exchange rate and the consolidation of foreign exchange reserves, these reforms have stabilized the riyal and equipped the ROYG with important policy tools.

However, a lack of oil exports, the concentration of most of Yemen’s liquidity in informal exchange companies outside the banking sector, and these exchanges’ speculative hoarding of ROYG riyals have contributed to the ROYG’s large, persistent deficits and an unprecedented liquidity crisis in ROYG-held areas in recent months.

The Customs Dollar

The decision to liberalize the customs dollar was both a continuation of the ROYG’s reform program and a response to this crisis. Allowing the YER/USD conversion rate used to calculate imports to float with market rates (~1,550 YER/USD), rather than pegging it at 750 YER/USD, effectively doubled the tariff rate on non-essential goods.

This is expected to generate substantial — albeit still insufficient — funds for the cash-strapped ROYG at a moment when its forex reserves are dangerously low. More importantly, though, it demonstrates the ROYG’s continued willingness to take on vested interests in pursuit of reform. During the years the customs dollar was pegged, unregulated importers (often financed by informal exchanges) often kept their prices at market rates and pocketed the difference.

In this context, the ROYG’s willingness to finally liberalize the customs dollar represents a substantive attack on a profit source for Aden’s politically connected mercantile interests in the name of genuine reform. Building on previous measures taken by Maabaqi to reassert control over the financial sector, the move indicates that the ROYG is still willing to make the hard decisions necessary to reestablish a functioning financial system.

Weathering the Storm

Of course, such a move is guaranteed to invite pushback. In addition to opposition from importers, potential inflation from the customs dollar liberalization and a 24% hike in fuel prices in the hours following its 19 May decisions are likely to add to protests — even though the cabinet also approved a 20% cost-of-living allowance to all state employees.

However, we see the ROYG as relatively well-prepared to ride out this storm. With ROYG leadership appearing firmly behind Maabaqi’s reforms and Saudi-backed forces exercising security control over most of southern Yemen, the ROYG is better positioned than ever to contain popular discontent and crack down on those attempting to evade the CBY-Aden’s writ.

The continuation of Maabaqi’s reform project will likely see the ROYG take harsher measures against the unregulated exchange sector. Conversely, if Maabaqi is removed, it would be a sign that the entrenched interests have won.

If sustained, we view these reforms as a long-term positive for investors. While customs dollar liberalization will increase the cost of importing equipment, a functioning ROYG financial system capable of regulating Aden’s shady financial sector would greatly improve Yemen’s investment environment.

However, the reforms by themselves are unlikely to resolve the ROYG’s fiscal problems. With the ROYG’s forex reserves near empty, the CBY-Aden will soon require another Saudi deposit — a tougher sell amid the economic uncertainty around the Iran War. Even in that case, its structural deficit and the Houthi blockade, which is the main obstacle to hydrocarbon investment, will remain unresolved.