Eritrea - Economy

Eritrea continues to maintain an informal economy controlled by the People’s Front for Democracy and Justice (PFDJ) involving hard currency transactions through an obscure, non-transparent network of business entities that are owned by the State and managed by senior officials of the Government, PFDJ and the military, just as most companies in Eritrea. While in the past the Government of Eritrea stated that it was committed to a market economy and privatization, the government and the ruling PFDJ party maintain complete control of the economy. The government has imposed an arbitrary and complex set of regulatory requirements that discourage investment from both foreign and domestic sources, and it often reclaims successful private enterprises and property.

Eritrea remains a strict command economy, with government activities crowding out most private investment. Investors in Eritrea face significant risks, including: lack of transparency in the regulatory process, severe limits on the possession and exchange of foreign currency, lack of objective dispute settlement mechanisms, difficulty in obtaining licenses, and infrastructure challenges such as high fuel prices and unreliable provision of electricity and water.

The Heritage Foundation's 2014 Index of Economic Freedom termed the Eritrean economy "repressed," assigning it a ranking of 175 out of 179 countries, with an overall score of 38.5. This score represents a slight improvement over Eritrea’s 2013 ranking (36.2) due to progress in terms of control of public spending, labor freedom and monetary freedom, offsetting a small decline in freedom from corruption. Heritage ranked Eritrea 45 out of 46 countries in the sub-Sahara Africa region.

Agriculture contributed 24% to GDP as of 2007, and it employed about 17% of the work force in 2009. Agricultural exports include cotton, fruits and vegetables, hides, and meat, but farmers are largely dependent on rain-fed agriculture, and growth in this and other sectors is hampered by lack of a dependable water supply. Worker remittances and other private transfers from abroad contribute about 32% of GDP.

Around 80% of Eritreans live on farms or in small villages. Many are only marginally involved in the monetized economy and produce part of what their families need to survive. Governmental benign neglect would be a positive and welcome change. The regime's practice of seizing crops or forcing farmers to sell grain at below-market prices has caused families to attempt to withdraw from the monetized economy, at least in part, although the Isaias regime is very good at controlling nearly all aspects of Eritrean society. Eritrean farmers have long lived a knife-edge existence due to marginal rainfall, decades of war and brigandage, and the use of Dark Age technology.

Growth in 1999 was flat at 0.3 percent growth. Between 1994 and 1997, when relations with Ethiopia and the rest of the world were stable, GDP growth averaged 7 percent. After a rapid economic development, averaging an annual growth of gross domestic product (GDP) of 7 per cent in the years following independence, the Eritrean economy registered a significant slowdown as a consequence of the border war with Ethiopia. Although in 2001 GDP grew by 10.2 percent, this increase came on the heels of 2000, when, as a consequence of war with Ethiopia, GDP contracted by a staggering 13.2 percent.

In 2003 GDP was estimated to have grown by 2 percent, a slight improvement over 2002, the last year for which firm figures are available, when GDP expanded by 1.8 percent in real terms to about US$600 million. Despite the growth, GDP per capita declined in 2003 by 10 percent in real terms, according to the International Monetary Fund (IMF).

In 2004, according to IMF estimates, GDP per capita in Eritrea was only US$130. Breakdowns of the Eritrean economy by sector are not readily available; however, according to some estimates, in 2003 services accounted for 62.4 percent of GDP, industry for 25.3 percent, and agriculture for the remaining 12.4 percent.

GDP dropped to an estimated one to two per cent growth for the 2007-2008 period. The downward trend of GDP performance was reversed in the following years thanks to surging profits in the mining sector. GDP growth was of 2.2 per cent for 2010, peaking at 8.2 per cent in 2011 and slowing down to 6.3 per cent in 2012 because of falling mineral prices. Financial institutions forecasted real GDP growth to pick up from 3.5 per cent in 2013 to an annual average of 8.2 per cent in 2014-2015.

Since its independence, Eritrea has faced chronic fiscal deficits impacting on economic performance. The average deficit was eighteen per cent of GDP in the 2000-2010 period. The Nakfa has been pegged to the dollar (USD) at Nakfa 15.38/USD 1, since 2005. Over this period the Nakfa has become severely overvalued because of high inflation and large current-account deficits. The misaligned exchange rate has resulted in foreign-exchange shortages. The Eritrean Government substantially liberalised foreign currency transactions in early 2013 to adjust the Nakfa’s rate against the USD and bring it closer to the market rate. According to the African Development Bank Group (AfDB), the fiscal deficit of Eritrea is expected to decrease from an estimated 11.7 per cent of GDP in 2013 to 10.3 per cent of GDP in 2014 and 9.08 per cent of GDP in 2015, on account of the growth in revenues from mining.

In the early 1950s, when Eritrea was awarded to Ethiopia, it possessed a far more sophisticated urban and industrial infrastructure than Ethiopia. Industrialization in the years since then focused on Ethiopia, however, at the expense of further development in Eritrea. By the time of its independence from Ethiopia in 1993, Eritrea’s economy had been destroyed by war and Ethiopia in 1998 halted all bilateral trade, severely reducing port activity and income in Eritrea. According to World Bank estimates, Eritrea lost US$225 million worth of livestock and 55,000 homes during the war. Damage to public buildings is estimated at US$24 million.

The end of hostilities with Ethiopia was followed by consecutive years of drought, which together crippled the agricultural base. The impact of these problems is softened only by remittances from abroad, which are estimated to account for 32 percent of gross domestic product (GDP). As of 2005, Eritrea is one of the poorest countries in the world. More than half of the population lives on less than US$1 per day, and about one-third lives in extreme poverty (defined as subsisting on less than 2,000 calories per day). Although the Eritrean government has stated its commitment to adoption of market-based economic policies in the long run, authorities are increasingly reliant on centrally planned economic management. In general, the government produces few consistent and reliable statistics on economic activity.

The nation’s most successful economic sector is mining. A number of reputable international firms are present in Eritrea either conducting exploration or mining for copper, gold, silver, zinc, potash or other minerals. Through these partnerships, Eritrea has the potential to develop an industry that will provide not only direct economic benefits but also skill enhancement and supply chain expansion. At least 24 small and mid-size mining companies have signed license agreements with the GSE, although a few curtailed operations in 2013 or merged with larger firms due to the international economic downturn that put special pressure on speculative industries not yet in the production phase. There is a good network of paved roads connecting Asmara with the major regional centres of Keren, Massawa, Adi Quala and Barentu. A paved road is under construction along the coast from Massawa to Assab. Power generation from the Hirgigo diesel plant near Massawa supplies electrical power to Asmara and other major regional centres. Landline telephone service is available from larger towns and cellular service has recently become available in Asmara and surrounding towns; including Keren.

In Eritrea, as in many Sub-Saharan African countries, energy services are a large part of both the monetary and non-monetary economies. It is possible that in Eritrea, as much as 20% of total expenditures, effort, and socioeconomic costs are related to energy services. Basic energy statistics for Eritrea as of around 2000 were that 20% of households had access to electricity, 66.3% of primary energy consumption is supplied by biomass, and the major consumers of energy are households (68.3%), public/commercial (16%), transport (13%), and industry (3%).

Eritrea's electrical system provided remarkable electricity availability to communities connected to the main grid for several years. Without expensive overhauls of the seven main heavy fuel oil (HFO) fired generators, however, Eritrea could expect brownouts and blackouts in 2009 and complete system collapse by 2011. The Eritrean Electric Company (EEC) must also curtail future expansion for the time being, upgrade its operational capacity, and begin charging customers market rates for the system to survive. By 2008 the World Bank (WB) engaged the Eritrean Ministry of Energy and Mines (MEM) to fund the necessary upgrades to keep Eritrea's electrical system running.

The Government of Eritrea sponsors a national program called Maetot, under which children in grades nine through eleven are required to engage in team-building through public works projects in agriculture, environmental protection, or hygiene during their summer holidays, in some cases for as long as two months. Government declarations indicate that the purpose of Maetot is to instill in adolescents a proper work ethic and expose them to persons of other ethnic backgrounds in the aim of fostering appreciation for diverse cultures and strengthening national unity through cooperation and self-reliance. Adolescents may be asked to dig irrigation ditches or canals or maintain agricultural terracing.