Eritrea Economic Outlook
Real GDP growth was an estimated 4.2% in 2018, down slightly from 5.0% in 2017, driven mainly by increased investment in the mining and housing construction sectors. The service sector’s growth was estimated at 2.3% in 2018, down slightly from 2.7% in 2017, while industry grew by 1.0% in 2018 and agriculture by 0.9%. Investment in infrastructure development, notably in roads, energy, and irrigation facilities, supported growth.
The fiscal deficit declined to an estimated 12.6% of GDP in 2018 from 13.8% in 2017. The country is in debt distress. Total external debt was an estimated 20.1% of GDP in 2018. The bulk of the debt was domestic, with external debt accounting for only 20% of GDP.
Monetary policy is geared toward price stability. Broad money supply declined from 119% of GDP in 2011 and 2012 to 14.3% in 2014. The reduction was due to a shift from expansionary to tight monetary policy by the central bank that included fiscal consolidation. Inflation was an estimated 9.0% in 2018, mainly because of insufficient food supply and scarce foreign currency— vital for importing essential commodities. To contain inflation, the money supply was tightened through reduced government borrowing and spending.
The current account surplus declined from 0.7% of GDP in 2017 to an estimated 0.3% in 2018 as the economy continued to face fluctuating commodity prices for its traditional exports— gold and copper. Gross foreign reserves continued to improve, increasing from 5.1 months of imports in 2017 to 7.3 months in 2018 due to increased mining sector revenue.
Tailwinds and headwinds
Growth is projected to slow to 3.8% in 2019 due to energy shortages, reduced remittances, foreign exchange shortages, a weak business environment, and low human and institutional capacity. But growth is projected to increase to 4.1% in 2020, due to increased foreign investment in the country’s extractive sector and to benefits from the Eritrea–Ethiopia peace accord. Tourism is another possible source for sustainable development.
Normalized relations with Ethiopia are expected to bring a substantial peace dividend. The cessation of hostilities and the removal of UN sanctions will facilitate Horn of Africa stability and open economic opportunities between the two countries, their neighbors, and the international community. Anecdotal evidence already suggests that trade has begun to thrive between Eritrea and Ethiopia and that investors are flocking to Eritrea looking for opportunities. Ethiopia’s use of the Eritrean ports of Assab and Massawa will relax the foreign exchange constraints Eritrea faces. The peace dividend also includes the release of a large number of conscripts for productive activity in labor-intensive sectors such as services, construction, and agriculture.
Downside risks include Eritrea’s vulnerability to climate shocks because of its heavy dependence on rainfed agriculture and its vulnerability to global shocks due to its narrow export base and dependence on imports. Institutional weaknesses include deficient infrastructure for agriculture and water and sanitation, as well as a lack of reliable statistics to guide planning, decisionmaking, program implementation, and monitoring and evaluation. And the nascent private sector confronts restrictive economic and financial policies, skills gaps and mismatches, and other challenges
Finally, Eritrea’s isolation and the lingering effects of international sanctions constrain development. Fragile neighbors generate spillovers such as refugee influxes, creating humanitarian challenges for the country.