Eritrea
Authors: Magidu Nyende, Luka Okumu
23.09.2014
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* Economic growth is estimated to have fallen sharply to 1.1% in 2013
from 7% the previous year and is projected to progress slightly to 1.9% in
2014, reflecting shrinkage of economic activities in many sectors, except in
mining.
* Improvements are under way in the education and health sectors
thanks to increased investments in those sectors, but significant challenges
remain, especially with respect to creating an enabling business
environment.
* Eritrea is currently not well-integrated into global value chains,
but there is potential for an increased internationalisation of production
and trade for mineral and agrofood exports.
Eritrea has faced considerable challenges over the years, including variable
climate conditions. This has been compounded by restrictive economic
policies, political isolation, a significant decline in remittances and
scarcity of foreign exchange. Reflecting these factors, estimated real GDP
growth for 2013 fell sharply to 1.1% from 7% the previous year and is
projected to increase marginally to 1.9% in 2014. This growth will largely
be driven by: copper production at the Bishamine; the start of gold
production at the Zara mining project in 2014; and continued exploration
activity and investment in the mining sector. In the medium term, Eritrea
sees further prospects in oil production, fisheries and tourism.
The budget deficit improved to an estimated 10.3% of GDP in 2013 from 15.5%
in 2010, and is projected to narrowly improve as a result of higher mineral
revenues.
Exports are projected to grow in 2014, driven by the onset of copper and
gold mining at three mines. This may be offset by growth in imports as
investments in mining boost demand for imported capital goods. Remittances
from the Eritrean diaspora declined significantly, reflecting the impact of
the 2011 United Nations Security Council sanctions restraining UN member
countries from facilitating transfer of the 2% "recovery and development
tax" paid by Eritreans living abroad. Taking these factors into
consideration, the current account is projected to deteriorate from an
estimated 0.3% of GDP in 2013 to -0.3% of GDP in 2014.
Eritrea has considerable potential to generate growth in agricultural
production and agro processing, livestock production, fisheries and fish
processing, and mining, as well as through the development of small and
medium-sized enterprises, tourism and related hospitality services and
infrastructure. The country is currently focusing on developing its tourism
industry around the Red Sea port of Massawa and the export potential of its
mineral reserves. There is already one active mine, and two more mines are
in advanced stages of development. In addition, geological studies have
confirmed the presence of oil and natural-gas reserves in commercial
quantities.
A number of factors will influence Eritrea's medium-term economic prospects:
i) regional insecurity, especially related to the unresolved issues between
Eritrea and Ethiopia; ii) enforcement of UNSC sanctions; iii) recent
confirmation that the country will participate in the AfDB's Drought
Resilience and Sustainable Livelihoods Program; iv) discovery of substantial
mineral deposits in parts of the country and large foreign investments for
their exploitation; and v) the country's growing commercial relationship
with Russia, the United Kingdom, China, India and South Africa.
Table 1: Macroeconomic indicators
2012
2013(e)
2014(p)
2015(p)
Real GDP growth
7
1.1
1.9
2.2
Real GDP per capita growth
3.7
-2.1
-1.3
-0.9
CPI inflation
12.3
12.3
12.3
12.3
Budget balance % GDP
-10.3
-10.3
-10.7
-9.4
Current account balance % GDP
2.3
0.3
-0.3
-1.5
Source: Data from domestic authorities; estimates (e) and projections (p)
based on authors' calculations.
Received on Tue Sep 23 2014 - 06:47:30 EDT