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

Author/Editor:

Todd Schneider ; Nabil Ben Ltaifa ; Faisal Ahmed ; Saade Chami

Publication Date:

January 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 07/5

Subject:

Adjustment process Central banks and their policies Exchange rate policy Exchange rates Foreign exchange Monetary policy Oil Oil exports Yemen Yemen, Republic of

English

Publication Date:

January 1, 2007

ISBN/ISSN:

9781451865691/1018-5941

Stock No:

WPIEA2007005

Format:

Paper

Pages:

22

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