Editor's note: This blog was originally posted by The International Growth Centre, which AidData partnered with for this research.
In fragile and conflict-affected economies, remittances are not simply financial transfers – they are a core mechanism of household survival. In Yemen, this has been especially true since the collapse of oil exports following the outbreak of civil war. Before 2015, oil revenues generated an estimated USD 2-3 billion annually. As these revenues declined, remittances emerged as Yemen’s most consistent source of external finance.
Formal remittance flows are estimated to be USD 4-6 billion, accounting for close to 20% of GDP. When informal transfers are included, total inflows may reach as high as USD 10 billion – nearly double the volume received through formal channels. These flows now exceed foreign aid and foreign direct investment, making remittances the single largest external financial lifeline for Yemeni households.
What makes Yemen’s remittance systems resilient to economic shocks?
Despite ongoing conflict, economic fragmentation, and international financial restrictions, Yemen’s remittance systems have demonstrated remarkable resilience. Two factors explain this durability. First, informal transfer mechanisms, particularly hawala networks, have adapted to operate across frontlines and in areas with limited financial infrastructure. Second, remittance channels have adjusted to shifting regulatory and economic conditions, allowing funds to continue flowing even as formal banking systems deteriorated.
Yet, resilience does not automatically translate into development.
With unemployment exceeding 17% and nearly three-quarters of Yemen’s population living in poverty, remittances are overwhelmingly used to meet immediate consumption needs. Approximately 75% of remittance income is spent on food, rent, healthcare, and basic education. This pattern reflects not short-sighted household behaviour, but structural constraints. High inflation, currency instability, limited access to banking services, and the absence of secure savings or investments leave households little room to allocate remittances toward longer-term economic activities.
Internal constraints on remittance flows
Yemen’s remittance landscape is shaped by internal challenges. Informal hawala, operated by a network of brokers, dominates in part because formal financial services have deteriorated. Banks frequently face liquidity shortages, withdrawal freezes, and operational disruptions, eroding public trust. As a result, many Yemenis perceive formal banking as a risk and not as a safeguard.
The fragmentation of Yemen’s financial governance has further compounded these challenges. Following the outbreak of war, Yemen’s Central Bank split into two rival entities in 2016 - the Government Central Bank of Yemen operating under the Internationally Recognised Government from Aden (CBY-Aden), and the Central Bank based in Sana’a under the De Facto Authorities. These competing authorities administer parallel monetary and regulatory systems, resulting in dual exchange rates, fragmented oversight, and inconsistent banking regulations. This bifurcation has increased transaction costs, reduced the predictability of remittance values, and weakened confidence in formal financial channels, encouraging greater reliance on informal mechanisms.
External pressures and disconnection from global finance
External factors have further shaped Yemen’s remittance system. Since the early 2010s, sanctions, anti-money laundering, and counter-terrorism financing regulations have led many international banks to sever correspondent banking relationships with Yemeni institutions. This process of de-risking has restricted access to global financial networks, increased compliance costs, and narrowed the range of formal remittance options available to Yemeni migrants.
Paradoxically, Yemen remains one of the least expensive destinations globally for sending remittances. As of the second quarter of 2024, the average cost of sending USD 200 to Yemen was 3.74%, well below the global average of 6.62%. The Kingdom of Saudi Arabia-Yemen corridor, which accounts for over 60% of formally recorded remittance flows, averaged a cost of just 2.55%, outperforming the UN Sustainable Development Goal (SDG) target of keeping remittance costs below 3%.
However, low average costs mask significant variation across corridors. Transfers from the United States and the United Arab Emirates through formal banking channels often remain substantially more expensive and less accessible, particularly for migrants facing residency or documentation constraints.
What can Yemen learn from other remittance-receiving countries?
Yemen’s experience is not unique. Other fragile and developing economies have faced similar challenges and offer useful lessons:
- Somalia and Pakistan have formalised remittance flows through targeted regulatory reforms and partnerships with money transfer operators.
- Kenya and India have leveraged mobile banking and fintech innovations to expand access and reduce reliance on cash-based transfers.
- Sri Lanka has promoted financial literacy, enabling households to shift remittances from consumption to savings, education, and small-business investment, and make more informed decisions about household financial management.
- Rwanda has introduced diaspora investment schemes to channel remittances into national development priorities.
Improving remittance systems and financial inclusion in Yemen
In recent years, the CBY-Aden has taken steps to strengthen Yemen’s remittance system, including regulatory reforms, engagement with regional payment platforms, activation of IBAN, and participation in the regional Buna payment system. Building on these efforts, our new report outlines six priority reforms:
- Strengthening the role of the CBY-Aden by enhancing international partnerships to restore global banking relationships and expand remittance corridors, and rebuilding correspondent banking relationships to improve liquidity and reduce reliance on informal networks.
- Developing telecommunications infrastructure to support mobile banking and digital remittance services, and partnering with fintech companies to develop secure, low-cost digital remittance solutions that reach rural areas and enable digital financial inclusion.
- Enabling digital and financial innovation by reducing bureaucratic barriers for expatriates opening bank accounts, streamlining Know Your Customer (KYC) requirements, and supporting the adoption of digital wallets and mobile payment platforms to improve accessibility and lower costs.
- Enhancing financial inclusion and literacy through targeted programmes for both remittance recipients in Yemen and expatriates abroad, and expanding rural banking services to reduce dependence on informal money transfer networks.
- Establishing an expatriate investment fund to channel remittances into small and medium enterprises (SMEs) and infrastructure projects, and providing tax incentives and concessional loans to encourage expatriates to invest in Yemen’s economic recovery.
- Rebuilding public trust in the financial system through transparency, solvency disclosures, and public engagement to restore confidence in formal banking.
The role of remittances in Yemen’s recovery
Remittances alone cannot drive economic transformation in Yemen. But ensuring that they flow safely, efficiently, and affordably can stabilise household livelihoods, support foreign exchange availability, and reduce reliance on crisis-driven coping mechanisms. In a context of constrained aid and fragmented governance, remittances remain one of the few predictable external financial flows.
Designing reforms that preserve accessibility while strengthening institutions is essential. With sustained engagement from Yemeni authorities, financial institutions, and international partners, remittances can serve not as a substitute for peace or development, but as a critical complement to Yemen’s long-term economic recovery.
