As much as 20 per cent of Yemen's total foreign currency deposits were held in Lebanon's banks as of October 2019, and are now trapped, new research by the Sana'a Centre for Strategic Studies says.
Lebanon's banks have banned all foreign transfers abroad since November 2019, in an attempt to prevent rapid capital flight as the country faces its worst economic and financial crises in 30 years.
Yemen, meanwhile, is engulfed in a civil war. The country's banks, just like Lebanese account holders, have been unable to access their deposits – "the equivalent of $240 million in foreign currency" – held in Lebanon's reserves.
According to the analysis, Lebanese banks became a hub of Yemeni deposits after a high-risk designation by the Financial Action Task Force (FATF) in 2015 caused several Western European and Canadian banks to wind up their business with Yemen.
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Yemeni banks hold foreign currency accounts in Lebanon, so that traders and importers – the majority of banking clients in Yemen – who operate in dollars, do not have to pay additional conversion rates.
As a result, the financial crisis in Lebanon, and subsequent freezing of Yemeni deposits has caused far-reaching and potentially long-term damages to trade, the paper says.
"As Lebanon experiences its own slow-motion financial collapse today, the Yemeni economy, already in dire straits, is being placed under further strain."
Yemen imports up to 90 per cent of its supplies but having foreign currency deposits stuck in Lebanese banks negatively "impacts Yemeni banks' ability to facilitate the purchase of essential commodities that directly contribute to alleviating the humanitarian situation and famine in the country".
The organisation's research says approximately 30 Yemeni traders have had a Lebanese bank refuse a transfer payment, with exporters calling in debts or refusing credit notes underwritten by Saudi Arabian aid as a result of the instability.
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Talks between banking officials from Lebanon and Yemen took place in January and February this year but yielded nothing.
The Lebanese government, however, has today started negotiations with the International Monetary Fund (IMF) on a $10 billion bailout and the group's research suggests "concessions related to Yemeni funds could be tied to any deal with the IMF".
Lebanon's bloated banking sector, however, which is sitting on an estimated $70 billion worth of financial losses, is in desperate need of reforms which are likely to take precedence over the release of international deposits in any IMF deal.
The paper, meanwhile, calls on Yemeni banks to explore other international banking options, including Turkey and the United Arab Emirates, despite the added complication of exchanging deposits to local currency.