Eritrea Economic Outlook

  • Growth is projected at 0.3% in 2015, from 1.7% in 2014 and 1.3% in 2013, reflecting challenges in the business and investment environment, and a poor global economic environment.
  • The government’s commitment to strengthening public financial management and natural-resource management through the African Development Bank’s technical assistance has helped to create favourable medium-term prospects.
  • Eritrea has been promoting urbanisation but this is limited by financial capacity and a shortage of urban housing.

In the 22 years since independence in 1993, the Government of the State of Eritrea (GoSE) has prioritised investments in infrastructure (communication networks, energy, and water facilities); agriculture (mainly for food security); marine resources; social and other services; and manufacturing. In 2016, GoSE priorities are human-resource development; investment in machinery and equipment; transport and communication facilities; water supply; energy; and essential social services. The government is also creating an attractive environment for the active participation of local and foreign private investors. However, these efforts are being severely curtailed by unresolved border issues, the government’s relatively substantial spending on security, the UN sanctions and macroeconomic instability. Real gross domestic product (GDP) growth is projected to slow from 1.7% in 2014 to 0.3% in 2015 because of slower economic activity and increasing challenges in the global market. However growth should recover in 2016 to 2.2%. Over the medium term, the government sees further prospects in improved trade with Middle-Eastern and Asian countries, additional mining activities, growth in the food sector, and the development of tourism. The GDP is heavily based on services (59.2%), with a very small manufacturing sector (6%). Agriculture, hunting, forestry and fisheries constitute 17.2% of GDP.

The budget deficit declined slightly to 10.3% of GDP in FY 2015/16 from 10.7% in 2014/15, and this trend will continue to 9.9% in 2016/17 as a result of increasing revenue from mining projects, access to more grant resources, and a reduction in unproductive expenditures. Inflation remained at 12.5% in 2015 mainly because of food-supply shocks and high foreign exchange demand. Foodcrop production in 2015 was only about 50% of its 2014 level. Lower international food and oil prices in 2015 and 2016 should contain 2015/16 inflation below 12.5%.

Exports are expected to have grown in 2014-15 due to the start of mineral production at the Asmara project and gold extraction by the Zara Mining Share Company. The current account deficit is forecast to increase to 3.4% of GDP in 2015 from 2.4% of GDP in 2014 and this trend will continue in 2016 despite rising levels of both remittances and the “development and recovery tax” (a 2% tax levied on the Eritrean Diaspora). Eritrea has continued to benefit from the IMF’s capacitybuilding institute, the East African Regional Technical Assistance Centre (E-Afritac), located in Tanzania. Moreover, Eritrea will be able to access the resources of the AfDB’s Transition Support Facility (TSF), a component of the Bank’s Pillar I grants window, which will further strengthen natural-resource governance, public-finance management, and data collection and analysis.

In addition to capacity-building support, the AfDB will help to strengthen institutional governance, especially in the Ministries of Finance and National Development because of their critical roles in ensuring macroeconomic stability and growth. Two projects are in preparation to support reform within the Ministry of Finance to improve public-finance management and tax and customs administration. The Drought Resilience Livelihood Support Program (DRLSP) II aims at integrating private-sector involvement into Bank projects and at developing the private sector in a decentralised environment as key components in skills development and the promotion of employment and entrepreneurship.