Eritrea has an estimated population of about 4.9 million (2007) and is ranked 157th in the 2005 Human Development Index out of the 177 countries surveyed. The country's poverty situation has been compounded by recurrent droughts and the impact of the border conflict with neighboring Ethiopia, which displaced farmers and households. Frequent droughts have also reduced the availability of water for human consumption and livestock production. The problem of food security has exacerbated malnutrition, affecting more than 40 percent of under-five children in some regions. The depth and extent of poverty is worse in the arid areas.

Despite this challenges, Eritrea happens to be one of the only three sub-Saharan countries that are on track to meet “Millennium Development Goal 4” child survival targets and one of the seven countries to have managed to reduce child mortality by more than 50%. According to the 2003 Demographic and Health Survey (DHS), infant mortality rate decreased from 72 to 48 deaths per 1,000 and under-five mortality rate dropped from 136 to 93 deaths per 1,000 between 1995 and 2002. In addition, the country has been able to reduce overall malaria morbidity by more than 86% and mortality due to malaria by more than 82%, making it one of the few countries in Sub-Saharan Africa to have met the Abuja "Roll Back Malaria" targets.

Low agricultural productivity has been largely attributed to severe shortages of manpower, recurrent droughts and the problem of land mines, and as such the country continues to face chronic food insecurity. Existing structural fiscal deficits continue to exert negative pressures on the public debt, external current account and inflation. The average inflation rate, which had decelerated significantly from 15.1% in 2006, to 9.3% in 2007, is estimated to have accelerated slightly to 11% in 2008, triggered largely by the rise in world food prices. Uncertainty of peace and security has also contributed to low levels of investments, both foreign and domestic investments. Although the external current account deficit continued to remain in deficit, it registered a slight improvement from 3.7% of GDP in 2007 to 3.0% of GDP, with investment at 10.9% of GDP and domestic savings at -16% of GDP. Trade balance is reported to have improved from -27.2% of GDP in 2007 to -24.6% of GDP in 2008. Price controls and regulations (including restrictive trade and financial policies) also continue to depress domestic savings, hinder private investments and discourage private capital inflows. According to the 2007 IMF/WB Debt Sustainability Analysis, Eritrea has a high risk of debt distress, with most of its debt indicators above the HIPC threshold.

Development Policy

The country’s policy aims at attaining rapid, widely shared, sectorally and regionally balanced economic growth with macro-economic stability and sustainable poverty reduction. Since the country is still operating in an emergency mode, with a short-term focus, it has not yet come up with its development strategy to chart out its medium and long term path towards poverty eradication and the achievement of the Millennium Development Goals. The government's priority areas include food security and cash crop development, physical and social infrastructure and human capital development. Existing national policy framework guiding the government’s response to food security is the Food Security Strategy (FSS), which aims at making “food of sufficient quantity and acceptable quality readily available to all at an affordable price at any time and place within the country.”

Bank Group Programme

The Bank Group started operations in Eritrea in 1995 and has since approved nine operations comprising seven projects and two studies. Bank Group operations in Eritrea have been geared towards assisting the country address challenges in the areas of reconstruction and poverty reduction. The last strategy, 2002-2004 Country Strategy Paper (CSP), approved by the Board in 2004, which aimed at contributing to post-conflict reconstruction and rehabilitation for long-term sustainable development and poverty reduction, focused on human resources development and was implemented during the 2004-2006 period. The government was not able to agree on the Interim Country Strategy Paper under ADF X and as a result of this decision, Eritrea lost its ADF X allocation of about UA14.3 million. Discussions with the Bank Group are, however, ongoing on the strategic framework for the utilization of ADF XI allocation of UA13.3 million

In July 2008, cumulative Bank Group commitments net of cancellation amounted to UA 76.5 million, comprising UA 68.7 million from ADF resources and UA 7.8 million from TAF resources. Currently, there is only one ongoing project, the Support to the Education Sector Development Programme- ESDP (UA18.6 million), whose implementation has been slowed down due to lack of progress in construction works following the temporary suspension of private sector construction activities since 2006. The disbursement remains rather low for the ESDP. Total disbursement, as at end July 2008, was UA61.1 million, which is about 80% of cumulative net commitments.