Sadly, you may be correct with that one - his problems stem back to his treatment by England two winters back, when he was basically carted around as a drinks waiter for six months whilst his action was remodelled, and his confidence seemed to be badly affected as a result. The talent is still there, but he needs a vote of confidence.
As for Yorkshire, I don't think it is that they have lost faith in him per se, as much as that Rafiiq played alongside him on a couple of spinning decks and bowled beautifully. Given both are excellent fielders and decent with the willow, when there was room for only one spinner Dilly lost out.