Economy of Eritrea

Economy of Eritrea
Eritrean nakfa
Rank	153rd
Currency	1 nakfa (ERN) = 100 cent
Fiscal year	Calendar year
Trade organisations	IMF
Statistics
GDP	$4.154bn (2004 est.)
GDP growth	3.6 (2009 est.)
GDP per capita	$900 (2004 est.)
GDP by sector	agriculture (12.4%), industry (25.9%), services (61.7%) (2004 est.)
Inflation (CPI)	10% (2004 est.)
Population below poverty line	50% (2004 est.)
Labour force by occupation	agriculture (80%) services (20%)
Unemployment	unknown
Main industries	salt, cement, commercial ship repair
Ease of Doing Business Rank	180th[1]
External
Exports	$64.44 million free on basis. (2004 est.)
Main export partners	Malaysia 54.7%, Italy 8.8%, France 3.7% (2004)
Imports	$622 million free on basis. (2004 est.)
Main import partners	U.S. 32.3%, Italy 15.5%, Turkey 5.5%, UK 4.6%, Russia 4.4%, Italy 6.4% (2004)
Public finances
Public debt	$635 million (2004 est.)
Revenues	235.5 million (2004 est.)
Expenses	$373.2million including capital expenditure (2004 est.)
Economic aid	recipient: $77 million (1999)
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars

The Economy of Eritrea has experienced modest growth in recent years, indicated by an improvement in Gross domestic product (GDP) in 2004 of 2.5% over 2003. However, worker remittances from abroad are estimated to account for 32 percent of gross domestic product.^[2]

Economic history

In the early 1950s, when Eritrea was awarded to Ethiopia, it possessed a far more sophisticated urban and industrial infrastructure than Ethiopia. Eritrean critics said industrialization in the years since then focused on other parts of Ethiopia. But the then-province of Eritrea was the second highest recipient of Ethiopia's budget and development, only preceded by the province of Shewa. By the time of its independence from Ethiopia in 1993, Eritrea’s economy had been destroyed by war and was dependent on income from ports and its small agricultural base. The onset of conflict with Ethiopia, which lasted from 1998 to 2000, 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. GDP growth fell to zero in 1999 and to -1% in 2000.^[3] Planting of crops was prevented in Eritrea's most productive western region, causing food production to drop by 62%.^{[citation needed]} Damage to public buildings is estimated at US$24 million.^[2] The end of hostilities with Ethiopia was followed by consecutive years of drought, which together have crippled the agricultural base ^[2]

Gross domestic product (GDP)

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). 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. 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. 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.^[2]

Industries

Agriculture, Forestry, and Fishing

See also: Agriculture in Eritrea

In 2003 agriculture employed nearly 80 percent of the population but accounted for only 12.4 percent of gross domestic product (GDP) in Eritrea. The agricultural sector is hampered by the absence of modern farming equipment and techniques, erratic rainfall, exhausted soils, and lack of financial services and investment. Major agricultural products are barley, beans and lentils, dairy products, meat, millet, skins, sorghum, teff, and wheat. The displacement of 1 million Eritreans as a result of the war with Ethiopia, multi-year drought, and the widespread presence of land mines all have played a role in the declining productivity of the agricultural sector. Currently, almost a quarter of the country’s most productive land remains unoccupied because of the lingering effects of the 1998–2000 war with Ethiopia. In 2005 domestic food production is expected to provide for less than 20 percent of domestic demand and will leave between 1.7 and 2.2 million people dependent on humanitarian assistance to meet basic food needs.^[2]

Farmers are largely dependent on rain-fed agriculture, and growth in this and other sectors is hampered by lack of rain and inadequate water storage.^{[citation needed]} Erratic rainfall and the delayed demobilization of agriculturalists from the military kept cereal production well below normal, holding down growth in 2002-2004.^{[citation needed]}

Although forestry is not a significant economic activity in Eritrea, its forested area covers 1,585,000 hectares (3,916,000 acres), or 13.5 percent of the total land area. Total roundwood production in 2004 was 1,266,000 cubic meters, nearly all of it used for fuel. Since 1993, the Eritrean People’s Liberation Front army has been involved in tree planting; the annual average rate of deforestation during 1990–2000 was 0.3 percent.

Reliable figures on the extent and value of the fishing industry in Eritrea are difficult to obtain. However, Eritrea’s long coastline clearly offers the opportunity for significant expansion of the fishing industry from its current, largely artisanal, stage. Eritrea exports fish and sea cucumbers from the Red Sea to markets in Europe and Asia, and there is hope that the construction of a new, jet-capable airport in Massawa, as well as rehabilitation of the port there, may support increased exports of high-value seafood. In 2002 exports were about 14,000 tons, but the maximum stable yield is thought to be nearly 80,000 tons. Italian and Dutch investors built a fish processing plant in 1998 that now exports 150 tons of frozen fish every month to markets in Britain, Germany, and the Netherlands. Tensions with Yemen over fishing rights in the Red Sea flared up in 1995 and again in 2002, and Eritrea’s difficult relations with other nations could hamper further development of the industry.^[2]

Animal husbandry

Sheep, goats, cattle (especially zebu), and camels make up the majority of Eritrea’s livestock. In 2001, Eritrea had 2,100,000 sheep, 1,700,000 goats, 1,950,000 head of cattle, 75,000 camels, and 1.4 million chickens. Total meat production that year was 30,900 tons; cow’s milk, 39,200 tons; and eggs, 2,000 tons. The government is emphasizing development of agriculture and animal husbandry in order to decrease the reliance on international relief, caused by war and drought.

Mining and minerals

Eritrea’s substantial mineral deposits are largely unexplored as a consequence of the long standing colonial period . According to the Eritrean government, artisanal mining in 1998 collected 573.4 kilograms of gold. Eritrea is estimated to have some unknown kilograms of total gold reserves. Western observers also have noted Eritrea’s excellent potential for quarrying ornamental marble and granite. As of 2001, some 10 mining companies (including Canadian and South African firms) had obtained licenses to prospect for different minerals in Eritrea. The government of Eritrea reportedly is in the process of conducting a geological survey for use by potential investors in the mining sector. The presence of hundreds of thousands of land mines in Eritrea, particularly along the border with Ethiopia, presents a serious impediment to future development of the mining sector.^[2]

Nevsun completed its Bisha mining project in early 2011. Estimated production will be 350,000 ounces of gold per year until the gold runs out, at which point the mine will produce copper and zinc.^[4]

Industry and Manufacturing

Ethiopia nationalized Eritrea’s 42 largest factories and systematically dismantled the Eritrean industrial sector during the protracted civil war. By the end of the civil war, however, all production had stopped. Plants were generally inefficient, and most of these industries required significant investment to achieve productivity. Manufactured items in 2002 included beverages, processed foods, tobacco, leather, textiles, metal products, chemicals, printing, nonmetallic minerals, construction materials, salt, paper, and matches. The government sought privatization of these industries, and issued incentives such as exemptions from income tax, preferential treatment in allocation of foreign exchange for imports, and provisions for remittance of foreign exchange abroad. In 2002, there were approximately 2,000 manufacturing companies operating in the country.

The oil industry has potential, as major oil deposits are believed to lie under the Red Sea. In 2001, the United States firm CMS Energy entered into an exploration agreement with Eritrea for exploration in the Dismin Block in northeastern Eritrea. Due to high operating costs, the country’s sole oil refinery, at Assab, was closed in 1997. It had a crude refining capacity of 18,000 barrels per day (2,900 m³/d). The construction industry is growing, as projects range from the construction and expansion of power plants; road, airport, and dam construction; upgrading sea ports; and the construction of schools and hospitals.

In 2005, industry had a 26.3% share of the GDP; services were the largest sector with a 65% participation in the economy; agriculture was least economically important sector (with only an 8.7% share in the GDP), but was by far the largest employer (80% of the total labor force). Recent industries include food processing, beverages, clothing and textiles, salt, cement, and commercial ship repair.^[2]

Energy

Households consume more than 80 percent of total energy production. Electricity production in 2001 was estimated at 220.5 million kilowatt-hours. Consumption for that year was estimated at 205.1-kilowatt hours. An 88-megawatt electricity plant funded by Saudi Arabia, Kuwait, and Abu Dhabi was completed just south of Massawa in 2003, its completion delayed nearly three years by the war with Ethiopia. Annual consumption of petroleum in 2001 was estimated at 370,000 tons. Eritrea has no domestic petroleum production; the Eritrean Petroleum Corporation conducts purchases through international competitive tender. According to the U.S. Department of Commerce, opportunities exist for both on- and offshore oil and natural gas exploration; however, these prospects have yet to come to fruition. The Eritrean government has expressed interest in developing alternative energy sources, including geothermal, solar, and wind power.^[2]

Services

In 2003 services accounted for 62.4 percent of gross domestic product. Financial services, the bulk of the services sector, are principally rendered by the National Bank of Eritrea (the nation’s central bank), the Commercial Bank of Eritrea, the Housing and Commerce Bank of Eritrea, the Agricultural and Industrial Bank of Eritrea, the Eritrean Investment and Development Bank, and the National Insurance Corporation of Eritrea, all majority owned by the government and ruling party.^[2]

Tourism

Eritrea’s poverty, the presence of large numbers of land mines, and the continued tensions that flare up between Eritrea and its neighbors have deterred the development of a tourist industry in Eritrea. According to the World Tourism Organization, international tourism receipts in 2002 were only US$73 million (compared with US$730 million for Tanzania).^[2]

Banking and Finance

Main article: Banking in Eritrea

According to the International Monetary Fund, commercial banks in Eritrea—all government owned and operated—appear to be in compliance with prudent regulations. Although the commercial banking sector is largely profitable, mostly owing to income from foreign exchange transactions, the sector is burdened by a high proportion of non-performing loans. Core lending activities do not generate sufficient income to cover operating costs at most commercial banks.^[2]

Labor

Agriculture employs about 80 percent of the population in Eritrea, and the remaining 20 percent are employed in industry and services. Although information is scarce, unemployment is reported to be high.^[2] Mean wages were $0.36 per manhour in 2009.

National service

Eritrea makes extensive use of compulsory labour through "national service". After a 6-month period of military training, persons may work on government projects or with private enterprises, with the private company paying a charge to the government but the worker only receiving standard national service wages.

See the decision of the United Kingdom Asylum and Immigration Tribunal inMA (CG).

Currency, exchange rate, and inflation

The official currency is the Eritrean nakfa (ERN), introduced in November 1997. In early 2005, likely in an effort to increase foreign capital reserves, the Eritrean government decreed that all transactions in Eritrea must be conducted in nakfa. In April it became illegal for individuals to hold and exchange foreign currency. As of January 1, 2005, the government set the foreign exchange rate at US$1=ERN15.^[2]

Inflation continues to be a problem in Eritrea, particularly as years of drought push grain prices higher and defense expenditures remain high. The International Monetary Fund estimates that in 2003 (the most recent year for which figures are available) average inflation reached 23 percent.^[2]

Government Budget

Eritrea does not publish a budget, making its fiscal condition difficult to assess. According to the International Monetary Fund, the overall fiscal deficit in 2003 was 17 percent of gross domestic product (GDP). Government expenditures for that year were estimated to be US$375 million, with revenues of only US$235.7 million. In 2002 the fiscal deficit was 32 percent of GDP. Current expenditures continue to exceed budgeted spending, particularly in defense and other discretionary expenditures. Monetary policy remains subservient to the financing demands of the government, and debt is unsustainably high. This situation is not likely to change until demobilization of the military occurs.^[2]

Foreign economic relations

See also: Foreign aid to Eritrea

China, South Korea, Italy, South Africa, and Germany are aggressively pursuing market opportunities in Eritrea. There is growing interest in U.S. products and services in Eritrea, although U.S. investment in Eritrea is still small.^[2]

In 2002 Eritrea imported goods worth US$533 million, including food, military matériel, fuel, manufactured goods, machinery, and transportation equipment. Eritrea’s main suppliers were the United Arab Emirates, Saudi Arabia, Italy, Germany, and Belgium. In January 2005, all imports by private businesses and individuals were temporarily suspended because of the country’s shortfall in foreign currency. In 2002 exports from Eritrea were valued at US$52 million, and the bulk were skins, meat, live sheep and cattle, and gum arabic. The major markets for Eritrean goods were Sudan, followed by Italy, Djibouti, and Germany. More recently, fish, flowers, salt, and textiles have joined the list of exports, and Sudan is no longer a major trading partner. In 2002 imports worth US$533 million far exceeded exports at US$52 million.^[2]

Asmara’s poor relations with neighboring countries have had a profoundly negative impact on the economy, one reason for the dire balance of payments situation. Exports declined significantly during the border conflict with Ethiopia, a decline exacerbated by a subsequent break in trade relations with Sudan. At the same time, imports—mostly of food aid, manufactures, and transportation equipment—continue to rise, and foreign reserves have declined to precarious levels. According to the International Monetary Fund, in 2003 foreign reserves were just US$17.2 million, sufficient to cover only two weeks of imports. The balance of payments in 2000 was negative US$44.7 million; by 2003 it had improved to negative US$16.4 million. Remittances from Eritreans abroad and foreign aid form a significant portion of Eritrea’s income. Of the two, remittances far exceed foreign aid and are estimated to have reached US$400 million per year in 1999, the last year for which figures are available. In January 2005, the government halted all imports by businesses and the private sector because of the country’s shortfall in foreign currency.^[2]

In 1997 external debt totaled US$75.5 million. By 2001, that figure had grown to US$409.6 million.^[2] A 2005 US House hearing on the horn of Africa described that "nearly 80 percent" Eritreans of receiving food aid.^[5]

Foreign investment, although ostensibly favored by the Eritrean government, is nonetheless hindered by government regulations that seek to protect domestic industries from foreign competition and by a generally unfavorable investment climate. Major foreign investors in Eritrea include China, South Korea, Italy, South Africa, and Germany, as well as the World Bank.^[2]

In 1998 net official development assistance was US$135.8 million; in 2002 it reached US$217.6 million. The government prefers private-sector investment to official aid programs, and its relations with aid-dispensing nations and international institutions have often been difficult.^[2] Despite claims of self-reliance, Eritrea has been one of the highest recipients of food aid in the world. In 2006, Eritrea was the fifth most food aid recipient in the world, taking in 272,042 metric tons of food according to UN's World Food Programme (WFP).^[6] However per capita, Eritrea was arguably the most food aid dependent nation.

See also

• Eritrea
• Banking in Eritrea

References

1. ^ "Doing Business in Eritrea 2012". World Bank. http://www.doingbusiness.org/data/exploreeconomies/eritrea/. Retrieved 2011-11-18. 
2. ^ ^{a b c d e f g h i j k l m n o p q r s t u v} Eritrea country profile. Library of Congress Federal Research Division (September 2005). This article incorporates text from this source, which is in the public domain.
3. ^ http://www.countryfacts.com/eritrea/economy/
4. ^ http://www.nevsun.com/projects/bisha-main/
5. ^ ETHIOPIA AND ERITREA: PROMOTING STABILITY, DEMOCRACY AND HUMAN RIGHTS
6. ^ major food aid recipients in Africa

 This article incorporates public domain material from websites or documents of the CIA World Factbook.

External links

• Economy of Eritrea at the Open Directory Project
• Eritrea latest trade data on ITC Trade Map
• IMF Executive Board Concludes Consultation with Eritrea February 2005