Population 5.659 million
GDP 3.108 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
2.2 |
8.7 |
7.5 |
3.4 |
|
Inflation (yearly average) (%)
|
12.7 |
13.3 |
12.2 |
12.3 |
|
Budget balance (% GDP) *
|
-16.1 |
-16.2 |
-13.5 |
-12.5 |
|
Current account balance (% GDP)
|
-5.6 |
0.5 |
2.1 |
1.9 |
|
Public debt (% GDP)
|
144.8 |
133.8 |
125.8 |
123.7 |
| (e) Estimate (f) Forecast * grants excluded | ||||
STRENGTHS
- Considerable mining resources (gold, copper, potassium)
- Strategic position along the Red Sea
WEAKNESSES
- Insufficient foreign exchange reserves
- Small part of public spending devoted to education (2.5%)
- High level of youth emigration
- Remittances from expatriates, main financial resource
- Crushing burden of military spending
- High risk of cross-border conflicts
Risk assessment
Investments in mining and infrastructures sustain activity
In 2012 growth was boosted by the start of operations at new mines (copper and gold). The mining sector will continue to drive the economy in 2013 thanks to output from the Bisha gold mine, operated by the Canadian company, Nevsun Resources, and the state-owned enterprise, Eritrean National Mining Corporation. Meanwhile, the signing of an agreement in principle with Sudan in October 2012, allowing Eritrea to have its gold refined in a Sudanese unit rather than only in Europe or India will reduced transport costs and accordingly the costs of transforming gold.
Investments in mining, but also in transport infrastructures (ports of Massawa and Assab, roads, railway) will sustain construction. Agriculture and livestock farming, which employ 80% of the economically active population but account for only 14% of GDP, are expected to benefit from improved weather conditions following the severe drought of 2011. Output remains very weak, however, Meanwhile, private consumption growth will be hit by the moderation in remittances from expatriates (working mostly in the Arab countries and North America), due to the world economic slowdown which will also affect investments (excluding the mining sector). The price of gold and other raw materials produced in Eritrea (silver, copper, zinc) are unlikely to rise at the same pace as in 2012, limiting the positive impact on the economy. In this context, growth will be more modest in 2013.
Heavy dependence on remittances from emigrant workers
According to IMF estimates regarding the budget (Eritrea does not publish any fiscal information) point to stabilisation of the deficit, albeit at a high level. Fiscal revenues will be sustained by the mining sector, thanks to taxes but also the State’s participating interest in the Bisha and Koka gold mines (40%). Military spending (25% of the budget) will remain a heavy burden and the government is committed to maintaining high levels of social spending (health, education). The government will inevitably have to increase money supply to finance its needs, keeping inflation above 10%. A slowdown in the progression of imported goods prices (oil, food products) should nonetheless contribute to limiting price spikes. Public debt levels are a source of great concern and difficult relations with its financial backers prevent the country from benefiting from the debt relief it would be entitled to.
Renewed export dynamism (gold, copper) will allow the current account to stabilise, despite accelerated imports of foodstuffs and goods needed for the numerous investments. The import of services linked to mining operations and slower expatriate remittances will contribute to a continuing current account deficit (excluding grants). Only emergency international humanitarian aid (as international sanctions limit the intervention of donors) enables a current account surplus to be achieved.
Hardening political and diplomatic tensions
President Issayas Afeworki, at the head of the country since 1993 and his party, the People’s Front for Democracy and Justice (PFDJ), will continue to dominate the political stage, with the support of the army leaving very little room for the opposition to make itself heard. Relations with Ethiopia and Djibouti remain very tense and the United Nations has strengthened its sanctions against Eritrea which it accuses of supporting armed rebel groups and destabilising the region.
This political insecurity considerably weakens the country’s economic development, especially since the business environment is particularly difficult (corruption, arbitrary judicial system, poorly qualified workforce …). Eritrea has one of worst ratings according to the World Bank Governance Indicators: out of 212 countries rated, it is in 211th place for political freedom, 207th for regulatory quality and 128th for control of corruption.
