Economy

Eritrea is one of the poorest countries in the world, with an average annual per capita income of US$336 in 2009, and ranked 165th out of 179 countries in the 2009 Human Development Index.  Its Gross Domestic Product (GDP) was estimated at US$1.65 billion in 2009, for a population of about 4.9 million, of whom an estimated two-thirds live in rural areas. The Eritrean Diaspora is large and increasing. Rain-fed agriculture, the predominant economic activity for more than half of the population, is a very risky enterprise and food security remains one of the government’s main concerns. Economic conditions have not improved and real gross domestic product growth averaged 1.2 percent between 2005 and 2008; in 2009 GDP growth was estimated at 2.0 percent. Favorable rains and rehabilitation of rural infrastructure have led to improved agricultural performance and food security in the last three years, following the droughts witnessed in 2002 and 2003. However, non-agricultural growth remains weak. Large fiscal and trade deficits are managed through price, exchange rate and interest rate controls, which have led to a shortage of foreign exchange (two weeks of imports) and a fall in private sector activity. The size of the public debt in proportion to GDP is a concern, although Eritrea remains current on debt payments. The official annual inflation rate was 12.6 percent in 2007, and is reported to be on a downward trend. In the longer term, sustained real economic growth of 7 percent or more will be required for Eritrea to reach the Millennium Development Goal (MDG) of halving the proportion of people living in extreme poverty by 2015. Like many small, low- income states with a trade imbalance, Eritrea is extremely vulnerable to rising international fuel and food prices. Eritrean authorities have indicated that they are using careful management of domestic food stocks and selectively passing on fuel price increases to the consumer to manage the impact, but there are shortages of both food and fuel products and supply is rationed.

Economic conditions remain challenging as a result of the external environment, macroeconomic situation and limited physical and human capital.  Although there has been significant fiscal consolidation since the end of the border war, the fiscal deficit is still high at 10 percent of GDP, and resulting macroeconomic imbalances continue to be managed through regulations and price controls.  Annual per capita growth has been negative since the border war, reversing gains made between 1993 and 1997, and returning real per capita incomes to pre-independence levels.  Inflation remains in the double digits. After decelerating from 18.5 percent at the end of 2005 to an estimated 12.3 percent at the end of 2007, it increased to 20.55 percent according to the April 2010 International Monetary Fund outlook.  The risk of macroeconomic instability, the use of price controls, regulations and rationing, particularly of foreign exchange, create an unfavorable business environment.

Social development

Situated in the Sahel, Eritrea suffers periodic droughts and chronic food shortages. Even in times of good rainfall domestic food production is estimated to meet 60 percent to 70 percent of the population’s needs. The last household survey and Participatory Poverty Assessment undertaken in 2003 estimated around two-thirds of the population were living below the poverty line. The current applicability of the estimate is questionable since 2003 followed a particularly bad drought year and agricultural production has been favorable since then. However, at the same time, economic growth has slumped and per capita incomes have been in decline. 

The general health status of Eritrea greatly improved after independence. Many health outcome indicators compare favorably with sub-Saharan African neighbors, and are improving faster, although up- to- date comprehensive data on outcomes has been a challenge. Based on recent MDG indicators, infant mortality rate decreased from 55 deaths per 1,000 in 2000 to 40.8 deaths per 1,000 in 2008, under-five mortality rate dropped from 83 deaths per 1,000 in 2000 to 68 deaths per 1,000 in 2007 , and the total fertility rate decreased from 6.1 to 4.8 births per woman on average. Success in some disease control programs, supported by the World Bank and other partners, is particularly impressive.  While most other sub-Saharan African countries suffer from an increasing HIV epidemic, HIV prevalence in Eritrea is estimated to be low and under control at 1.3 percent of the adult population in 2009 compared to the sub-Saharan African average of 5 percent. Life expectancy was estimated to be 59 years of age in 2009, compared to the sub-Saharan Africa average of 51 years. Nevertheless, important challenges remain. Rural households suffer worse health outcomes, and improvements are coming more slowly. Malnutrition is of particular concern among women and children. An estimated 46 percent of the population were estimated to be undernourished in 2002, and 40 percent of children were found to be underweight for their age. Around 37 percent of women have a low body mass index. Although it has declined very sharply in the past 10 years, the maternal mortality ratio in Eritrea is estimated at 752 per 100,000 live births. 

Despite expanding schooling opportunities, Eritrea faces significant challenges in enrollment and completion of elementary school. The elementary school gross enrollment ratio stands at only 72 percent, lower than the low-income countries and the sub-Saharan African averages of 92 percent. With a 2005 to 2006 enrollment of only 44 percent for girls, gender equity in schools remains a concern. Additional challenges lie in the high repetition and dropout rates, and the resulting elementary completion rates of 50 percent on average. Coming from such a low starting point, well-targeted public investments in human capital as well as physical capital are critical to improved well-being for Eritreans.

Political background

Eritrea is a young nation-state. After a 30-year war with Ethiopia, Eritrea attained de facto independence in May 1991 and de jure independence two years later. The initial years of independence were marked by impressive progress in rehabilitating basic economic and social infrastructure, improving social indicators, macroeconomic stability and economic growth. From 1993 to 1997, the economy grew at an average annual rate o f 10.9 percent. These development gains were interrupted when a border dispute with Ethiopia erupted into renewed conflict in May 1998. A Temporary Security Zone monitored by a United Nations (UN) peace keeping force was established in accordance with the Peace Agreement signed in 2000.The Ethiopia-Eritrea Boundary Commission (EEBC) made a final “virtual” demarcation of the boundary at the end of 2007. This has been accepted by Eritrea but was rejected by Ethiopia. Tensions between the two countries remain high and both have troops positioned alongside the border. In January 2008 the UN Security Council extended the United Nations Mission in Ethiopia and Eritrea (UNMEE) mandate until July 2008. In February 2008, UNMEE commenced plans to relocate personnel and equipment from the Temporary Security Zone in response to interruptions to regular supplies. In a situation that has been described as "no war, no peace", Eritrea's government has remained in a state of heightened mobilization and some 200,000 are estimated to be mobilized. As such, tackling the underlying imbalances in the economy is not a priority for the government at this stage.

 

The World Bank Group’s strategy is to support Eritrea’s government priorities are to (i) ensure security – including food security; (ii) develop human resources and (iii) develop physical infrastructure. The government has a Food Security Strategy developed in 2003 and updated in 2006 to make “food of sufficient quantity and acceptable quality readily accessible to all at an affordable price at any time and place within the country.” The government’s economic strategy is to manage the macroeconomic imbalances using price controls and regulations until such time as the security situation allows a transition to a more market-based economy. In the meantime, in order to encourage new inward investment, the government has established the Free Zone at Massawa port. Economic growth prospects have improved with the progress made in establishing a joint mining venture at Bisha (gold and copper deposits). The Bisha feasibility study showed the project to be financially robust with gold extraction expected to commence in 2010.

 

The World Bank’s activities in Eritrea date back to 1992, supporting the country’s efforts towards broad-based economic growth, improve education and nutrition for Eritrean children, and implement critical economic and governance reforms. The Bank’s credits and grants of US$67.5 million for Eritrea’s Power Distribution and Rural Electrification Project have since 2004 enabled the country to rehabilitate its electricity distribution network and generation plants. The key components of this project include rehabilitation and expansion of electricity distribution system in Asmara, Eritrea’s capital, rural electrification in four areas of the country, and a program for power sector reform and the building of related institutional capacity to increase efficiency in electricity sector operations. Bank support for Port Rehabilitation has contributed to increased productivity and capacity of Eritrea’s two ports of Massawa and Assab.

The Bank’s intervention through the Integrated Early Childhood Development Project which the Bank has financed since July 2000 has supported the government’s efforts to improve health, nutrition and access to pre-school education of Eritrean children aged six years and under in targeted project villages. Moreover, Bank-funding has enabled Eritrea achieve a significant drop of over 80 percent in malaria morbidity and mortality, making the country one of only a few countries in sub-Saharan Africa to meet the Abuja "Roll Back Malaria" targets. The Bank’s support for HIV/AIDS programs continues to keep the pandemic in check.

Majority of these projects have now closed and as of September 2010, the Bank’s portfolio of lending in Eritrea consisted of two active projects in education and transport with a total commitment of US$75.3 million. 

The Interim Strategy Note (ISN) for Eritrea for the period June 2008 to 2010 which the Bank Board of Executive Directors endorsed in June 2008 will strengthen the Bank’s engagement with the government and the people of Eritrea by building on the knowledge base knowledge base for analytical and advisory activities. The objective of this ISN is to support the government to deliver improved human development and infrastructure services. Specific results anticipated during the ISN period are:

• Expanded access to, and completion of primary school education;
• Reduced incidence of communicative disease and improved reproductive health care provided;
• Improved child health and education outcomes;
• Improved power generation capacity and electrification in rural areas;
• Improved knowledge base through analytic work with the government and development partners;
• And possibly expanded open, reliable Internet access.

The ISN will also create avenues for the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), to improve the business climate and to support prospects in the mining sector. The Bank will also investigate additional entry points to contribute to the government’s current economic growth strategy by exploring ways to contribute to plans to develop Eritrea’s mining, tourism, and commercial fishing sectors, and the network of economic free zones.  However, the ISN is not currently being implemented based on government decision.

For more information on World Bank assistance to Eritrea including a list of the World Bank assisted projects, refer to Projects and Programs.

The International Finance Corporation (IFC) has not made any new investment in Eritrea since 1997. The border conflict with Ethiopia shifted IFC’s focus to providing technical assistance in the fish, marble and granite, and banking industries. In line with IFC’s new Strategic Initiative for Africa, activities in Eritrea are in support of improving the investment climate, for example in working with government to develop and attract investors to the mining sector. IFC will look at improving investment climate conditions and investment opportunities in industries with a comparative advantage and export potential, such as tourism, fishery, marble and granite, mining, aquaculture and horticulture. Furthermore, IFC will look to assist the government with its privatization program through financing and technical assistance. 

Although the Multilateral Investment Guarantee Agency (MIGA) does not have an active program in Eritrea, it remains a priority country due to its International Development Association (IDA) and conflict-affected status. With progress in the peace process, opportunities could emerge for MIGA to support foreign involvement in Eritrea.

The World Bank Group activities in Eritrea involve partnerships with the government, the local communities and other development partners. These include the United Nations Children’s Fund (UNICEF) and the World Health Organization and the United States Agency for International Development (USAID), which are involved in health, nutrition and childhood development programs. Other development partners involved include the Danish International Development Agency, UN Food and Agriculture Organization and World Food Program.