Eritrea Economic Outlook
- Eritrea’s economy grew by 8.7% in 2011 owing to the commencement of full operations in the gold and silver Bisha mine and to the production of cement from the cement factory in Massawa; GDP is estimated to have contracted sharply to 5.5% in 2012 because of an unanticipated drop in production at Bisha mine, a fall in remittances and a decline in the price of gold over 2011- 12; the economy is expected to improve to 7% in 2013 and to grow by 6.5% in 2014, driven by gold production in the Koka and Zara mines and by copper production in the Bisha mine.
- Domestic and foreign private investment is largely constrained by macroeconomic and structural constraints relating to fiscal management, state intervention and controls in foreign trade and exchange, weak and uncompetitive financial institutions, weak infrastructure and general shortages in skilled manpower.
- The main driving force for economic growth in recent years has been the strong performance in the mining sector; the contribution of agriculture to the economy is minimal, though the sector engages about 80% of the workforce; therefore, policy and institutional reforms and the development of the mining sector are prerequisites to unlock Eritrea’s economic potential.
Infrastructural bottlenecks, weak foreign investment (especially in the non-mining sector) and dwindling aid inflows have remained the critical constraints to Eritrea’s economic performance since its independence in 1993. Nevertheless, the economy grew by 8.7% in 2011 thanks to the commencement of full operations in the gold and silver Bisha mine and to the production of cement from the cement factory in Massawa. Growth in gross domestic product (GDP) is estimated to have fallen sharply to 5.5% in 2012 due to an unanticipated drop in production at the Bisha mine. The decline in GDP might also be attributed to a reduction in remittances from Eritreans in the Diaspora and to the fall in the price of gold in 2011-12. Growth is expected to improve to 7% in 2013 and then decrease slightly to 6.5% in 2014, driven by gold production in the Koka and Zara mines and by copper production in the Bisha mine. Although Eritrea is on track to achieve the Millennium Development Goals (MDGs) on child health, HIV/AIDS, malaria and access to safe drinking water, slow progress has been made in eradicating extreme poverty and the achievement of universal primary education.
Attracted by an anticipated reduction in production costs and the subsequent impacts on their respective economies, especially on the fiscal and balance-of-payment positions, the governments of Eritrea and Sudan have signed a Memorandum of Understanding for partnership and co-operation in the mining sector. The deal will allow for the processing of Eritrea’s gold and silver in Sudan’s new gold refinery, officially opened in September 2012. Consequently, production costs for Eritrean gold and silver will decrease drastically compared to the previous practice of shipping to Europe and India for refining at a considerably higher cost. Furthermore, the government has put machinery in motion to privatise 32 state-owned manufacturing firms. This intention will not only provide fiscal space but also open up the economy.
The government of Eritrea has also amended the Mining Law, which sets the government’s share at a non-participatory 10% with an option to buy a further 30% of shares. The amendment gives the government the flexibility of considering its stake in any mining project on a case-by-case basis. In February 2013, the government adopted the liberalisation of foreign currency in order to ease the foreign-exchange shortage. This proclamation allows institutions and individuals to open foreign-currency deposits and to use foreign exchange for international transactions without limitations. Meanwhile, the attempted military coup in January 2013 appears to have been quickly put down.
The country’s sole political party, the People’s Front for Democracy and Justice (PFDJ), and the President, Isaias Afewerki, remain firmly in control of the country’s political and economic machinery, but threats to them are growing.
Eritrean growth in recent years has been driven by mineral resources, especially with the commencement in February 2011 of commercial mining and exports of gold and silver at the Bisha mine. Other notable mineral deposits in Eritrea include copper, zinc, nickel and chromite. By 2016, the Colluli Potash Project is expected to be up and running. The contribution of agriculture to the economy is minimal, though the sector engages about 80% of the workforce. In addition, Eritrea’s suitable endowments in fisheries and livestock development have been underutilised. Amongst the overall concerns, the following stand out: unlimited and underpaid national service; use of forced labour; drought and other natural disasters; persistent hostilities with two of its neighbouring countries over unsettled border disputes; a misalignment of the exchange rate resulting in foreignexchange shortages; and an unfavourable investment environment. The government has recognised some of these impediments and has implemented piecemeal reforms since 2008 to address the issues, including the of establishment a free-trade zone in Massawa and the implementation of the ASYCUDA ++ system, the initiation of a privatization programme. Overall, the introduction of macroeconomic policy and institutional reforms directed to promoting the role of the private sector and to the development of human skills is a prerequisite to unlock Eritrea’s economic potential.