The government of Yemen, recognized internationally yet territorially and institutionally fragmented, faces one of the gravest fiscal crises in its modern history. Following Houthi attacks on oil export infrastructure in southern Yemen in 2022, hydrocarbon revenues – once the backbone of state finance – have declined by nearly 70 per cent. A further precipitous drop in 2024 has rendered existing revenue levels unsustainable. Some of the civilian employees of the state have already not been paid for years. Students and diplomats abroad have not been paid their allowances for more than a year. Meanwhile, the Yemeni Rial has lost 33.7 per cent of its value in the first half of 2025 alone. In the interim capital of Aden – one of the hottest cities in the Arabian Peninsula – daily power outages of up to 20 hours underscore the broader collapse of state service provision.
Without urgent and credible steps to mobilize domestic resources, better leveraged financial inflows from the diaspora and more effective means of accessing climate financing mechanisms, the government risks burning its remaining legitimacy. The Yemeni Rial will continue losing its value, making the monthly salaries of those few being paid in the government-controlled area worthless, and local authorities unable to deliver daily services. The protests in Aden, Taiz, and Mukalla over the last weeks are likely to expand and worsen. Perhaps most worryingly, the government’s soldiers on the front line are yet to be paid and lack basic equipment.
The recent appointment of a new prime minister in April 2025 presents a potential inflection point. However, the new cabinet must move to diversify and expand its non-oil revenue base in the face of mounting internal instability and receding external assistance. Failure to do so will lead to the government’s fall, and potential further Houthi territorial expansion.
The waning of external financial support
Historically, Yemen’s fiscal viability has hinged on substantial external financial support, particularly from Gulf Cooperation Council (GCC) states. Since the formation of the Presidential Leadership Council in 2022, Saudi Arabia and the UAE have provided intermittent financial lifelines with more than two billion dollars pledged and paid as bank deposit and budget support, according to a senior source in the Yemeni Economic Team. However, donor fatigue has intensified amid growing perceptions that Yemen represents a fiscal sinkhole with limited accountability or structural reform.
Compounding this fatigue is the reorientation of Gulf strategic priorities. With the collapse of the Assad regime in Syria and Hezbollah’s diminishing role in Lebanon, Riyadh and Abu Dhabi are recalibrating their regional engagements. Yemen, once viewed as a front-line concern, now competes for attention and funding with other flashpoints. In this shifting landscape, budgetary support is no longer guaranteed. Saudi Arabia has imposed conditionalities such as more transparency, allocation and approval of governmental budget, and cuts in unnecessary spending and matters related to institutional reforms. More tellingly, even relatively stable regional allies such as Jordan and Egypt have seen reductions in Gulf budgetary assistance – signalling a broader systemic realignment by Gulf countries to wean regional allies off budget and/or cash support.
Western donors, too, are undertaking a parallel reassessment. Competing global crises – Ukraine, Syria, Sudan, and, more recently, Gaza – have strained development and humanitarian budgets. US assistance, including USAID programming, has been significantly closed since the return of the Trump administration. Sweden and other traditionally supportive European partners have suspended or reduced aid, while technical assistance from Western institutions has been paused pending further clarity on the trajectory of Yemen’s new cabinet.
The strategic case for domestic revenue generation
Given the volatility of external assistance, Yemen must now pivot decisively towards domestic resource mobilization. This is not simply a matter of fiscal prudence; it is also a political necessity.
A starting point is to consolidate public revenues across the governorates under government control. Several resource-rich regions – Marib, Al-Mahra and parts of Hadhramaut – currently retain revenue streams at the local level, bypassing the central government entirely. Even in Aden, key revenue-generating bodies such as the Port of Aden which is only a few kilometres from both the Presidential Palace and Central Bank, operate with limited oversight, undermining fiscal cohesion.
With the right commitment and processes from the central government, even rich oil governorates would be willing to insert themselves into such a system, since they can’t export oil on their own. To do so and gain the trust of the local authorities, the government should fully commit to the 20 per cent policy, — which mandates central government to allocate 20 per cent of the revenues of any province that has natural resources for the province development — that such governorates enjoy for development from their oil and gas revenue.
Reforming Yemen’s tax and customs systems must be given top priority. Taxes and customs duties were once among the main sources of state revenue after oil and gas, but they have declined significantly in recent years. The current prime minister previously led the Customs Authority and continues to serve as Minister of Finance. This provides him a rare opportunity, but also a dual responsibility, to advance reforms in revenue and fiscal policies. While this can carry some political risk, the biggest beneficiary of the current taxation and customs evasion are wealthy businessmen. Hence, this is a step that actually might not just win more international support, especially for Gulf donors, but also would be a popular decision among ordinary Yemenis.
Yet mobilizing revenue without ensuring transparency and accountability risks reinforcing public cynicism. Yemen has functioned without a national budget for over four years, impeding both fiscal planning and public trust. Reinstating a formal budget process and ensuring public reporting of expenditures will be critical steps towards rebuilding state credibility.
Leveraging the Yemeni diaspora and non-state financial channels
In light of diminishing state-to-state assistance, Yemen must explore alternative financial flows. The diaspora remains an underutilized but vital economic actor: In 2023, remittances were estimated at $6.7 billion, with $2.5 billion originating in Saudi Arabia according to officials at Yemen’s Central Bank in Aden. Following the halt in oil exports, remittances now constitute Yemen’s biggest external income stream.
To better channel these flows, the government should prioritize the reactivation of domestic financial infrastructure, particularly the overseas branches of the Yemen Bank for Reconstruction and Development. As the first bank in the history of the Republic of Yemen, YBRD played a significant role easing diaspora remittances to Yemen via allowing people to deposit them in its branching abroad and their families – or businesses back home – to withdraw them in Yemen relatively quickly and with low cost. This would also help mitigate compliance and transaction challenges that have intensified following the US decision to re-designate the Houthis as a Foreign Terrorist Organization. While those branches would still follow the regulation of their hosting country, they – unlike foreign banks – can take a risk by wiring to Yemen. Most international banks avoid making wire transfers to Yemen because the risk is high versus the benefit. Furthermore, this money abroad can be used effectively in a transactional matter by allowing Yemeni businessmen to use it to import wheat, medicine, etc without them needing to wire it from Yemen.
The untapped potential of climate finance
Looking beyond traditional aid models, Yemen may find opportunity mainly, if not perhaps solely, in emerging climate finance instruments. Commitments under COP28 and the forthcoming COP30 offer a potential entry point – but again, only if the government can meet minimum transparency and governance benchmarks.
Towards fiscal sovereignty
Yemen’s fiscal model, dependent on volatile oil revenues and external bailouts, is no longer viable. The government must move towards a model of fiscal self-reliance that prioritizes domestic resource mobilization, transparency and financial diversification.
Rebuilding the state’s financial foundations from within is not only the most realistic path forward – it is the only one available. Absent meaningful reform, the government risks further marginalization and the hollowing out of its institutional capacity, a situation that the Houthis could further exploit.
