Eritrea Economic Outlook
- Real GDP growth slowed down to 3.8% in 2016 from 4.8% in 2015, reflecting challenges in the business and investment environment and capacity gaps in government institutions.
- The government’s decision to access supplemental-support resources from the AfDB’s Transition Support Facility (TSF) to scale up investments in agriculture should strengthen resilience and improve livelihoods for the majority of the rural population.
- Eritrea’s rich entrepreneurial tradition, despite constraints including the energysupply deficit, skills mismatch and poor telecommunication infrastructure, provides opportunities for private-sector growth and industrialisation.
Real gross domestic product (GDP) growth is projected to decline slightly from 4.8% in 2015 to 3.8% in 2016 reflecting weak capacity in government institutions and a weak export sector. Growth will reduce also in 2017 to 3.4%. Over the medium term, the government sees further prospects in improved trade with Middle-Eastern and Asian countries, additional mining activities, growth in food production and fisheries development. Eritrea remains a country of immense economic potential but economic and policy reforms are necessary for growth to rebound. The GDP is heavily based on services (59%), with a very small manufacturing sector (5.9%). Agriculture, hunting, forestry and fisheries constitute 17.2% of GDP.
The budget deficit declined slightly to 13.9% of GDP in 2015/16 from 14.2% in 2014/15. This trend will continue to 12.7% in 2016/17 because of access to more grants and concessional resources, increasing revenue from mining projects and control of unproductive expenditures. Inflation remained at 8.9% in 2016 mainly because of food-supply insufficiency and scarce foreign currency to finance imports of essential goods. Although no official statistics have been provided, food-crop production in 2016 would appear to be slightly above its 2015 level. Depressed commodity and oil prices in 2015 and 2016 should also contribute to keeping 2015/16 inflation at an annual average of 12%. In spite of adverse conditions, the authorities have endeavoured to protect the most vulnerable segments of the population and to implement their long-term development policies. They maintain an extensive social safety net, and are investing in three priority areas: i) food security and agricultural production; ii) infrastructure development; and iii) human-resources development.
The growth of exports in 2015/16 is expected to have been driven by the expansion of mineral production at the Asmara Mining project and gold extraction by the Zara Mining Share Company. The current account deficit is forecast to decline to 0.1% of GDP in 2016 from 2.2% of GDP in 2015 and will become a slight surplus in 2017 despite the slowdown in export growth, reduced remittances and a drop in revenue from the 2% tax, commonly referred to as “development and recovery tax”, levied on Eritreans in the diaspora. Supplemental-support resources under Pillar 1 of the AfDB’s Transitional Support Facility (TSF) will support increasing agricultural productivity and improving food security through implementation of the government’s minimum integrated agricultural programme designed to benefit the rural population and, especially, female-headed households. This programme will also generate socio-economic data on welfare levels of the population. The government has concluded a strategic partnership co-operation framework with the United Nations that will run from 2017 until 2021. The framework has four pillars: basic social services; resilience and disaster-risk management; public-sector capacity development; and food security and sustainable livelihoods. These interventions will strengthen resilience, improve the export base and strengthen food security.
In addition to its efforts to strengthen food security, the AfDB has provided resources to support the Ministry of Lands, Water and Environment through a ground-water assessment and mapping project. This project will lead to the design of others that will help mitigate the effects of climate change and promote resilience in the rural economy. The AfDB-funded Public Financial Management and Statistics Project is under implementation and will introduce efficiency and effectiveness into Treasury management and budgeting, while generating fiscal data vital for the overall planning and budgeting process. Technical support and training from the IMF is being co-ordinated with other stakeholders and delivered through a dedicated multi-year, fiscal and financial capacity-building programme. Support under this programme is expected to focus particularly on the macroeconomic framework, fiscal management, revenue administration, public financial management, monetary operations, risk-based banking supervision and macroeconomic statistics. The industrial sector in Eritrea is still small and entrepreneurship is stagnant because of lack of basic infrastructure and an unconducive business and investment environment. Going forward, the government should work to provide the necessary infrastructure and undertake major institutional reforms to attract foreign capital flows.