Country Brief

Political background Country Brief last updated September 2009

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. During 1993-97, the economy grew at an average annual rate o f 10.9 %. 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 g overnment at this stage.

Economy

Eritrea is one of the poorest countries in the world, with an average annual per capita income of US$270 in 2008, and ranked 164th out of 179 countries in the 2008 Human Development Index.  The population is estimated to be about 4.8 million, of whom an estimated two- thirds live in rural areas. . The Eritrean d iaspora 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 (GDP) growth averaged 1.2 % between 2005 and 2008. 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 le d 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 % in 2007, and is reported to be on a downward trend. In the longer term, sustained real economic growth of 7 % 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 % 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, making Eritrea one of the poorest countries in the world.  Inflation remains in the double digits, but has decelerated from 18.5 % at end- 2005 to an estimated 12.3 % at end- 2007.  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 to 70 % 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 s ub-Saharan African neighbors, and are improving faster, although up- t o- date comprehensive data on outcomes has been a challenge. Based on recent MDG i ndicators, infant mortality rate decreased from 55 in 2000 to 47 deaths per 1,000 in 2007, under-five mortality rate dropped from 83 deaths per 1000 in 2000 to 68 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 is particularly impressive. For example, with support from World Bank-funded projects, malaria morbidity and mortality has dropped over 80 % since 1999, making Eritrea one of only a few countries in s ub-Saharan Africa to meet the Abuja "Roll Back Malaria" targets. 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 % of the adult population in 2007 compared to the sub-Saharan African average of 5 %. Life expectancy was estimated to be 58 years of age in 2007, 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 % of the population were estimated to be undernourished in 2002, and 40 % of children were found to be underweight for their age. Around 37 % of women have a low body mass index. Although it has declined very sharply in the past 10 years, the m aternal m ortality r atio 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 e lementary school gross enrollment ratio stands at only 72 %, lower than the low-income countries and the s ub-Saharan African averages of 92 %. With a 2005-06 enrollment of only 44% 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 % 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.

Government strategy

The government’s 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. The Bank’s Board in June 2008 endorsed an Interim Strategy Note (ISN), for Eritrea for the period June 2008-2010. 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 g overnment and development partners;
• And possibly expanded open, reliable Internet access.

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. 

As of August 2009, the Bank’s portfolio of lending in Eritrea consisted of five projects with a total commitment of US$178.8million in the areas of transport, energy, education, and health. The Eritrea portfolio is also complemented by 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 g overnment 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 g overnment 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  

Contacts

For contacts, click here.