ERITREA: PROPOSAL FOR AN ADB GRANT OF UA 2 MILLION UNDER THE AFRICA FOOD CRISIS RESPONSE

TABLE OF CONTENTS

Page 1. Introduction 1

2. Country and socio-economic context 2.1 Social Context 1 2.2 Economic Performance 1

3. Food Security Situation and Prospects 3.1 Current food security Situation 2 3.2 Impact of rising World Prices on macro-economic stability 2

4. Response to the food crisis 4.1 Government’s response 3 4.2 Donors’ response 3 4.3 Proposed Bank Group’s response 3 4.4 Procurement of goods and services 4

5. Legal instrument 5.1 The grant instrument will be the Protocol of Agreement 5 5.2 Conditions precedent to entry into force 5 5.3 Conditions precedent to disbursement 5 5.4 Conformity with the Bank’s Policy 5

6. Conclusion and recommendation 5

LIST OF ANNEXES

Annex 1 ERITREA – Action Plan for the Africa Food Crisis Response Annex 2 ERITREA – Results Based Logical Framework Annex 3 ERITREA – Food Import Requirements Annex 4 ERITREA – Procurement Plan Annex 5 ERITREA – Donor’s Response to the Food Crisis

CURRENCY EQUIVALENTS

January 2009 Currency Unit = Eritrean Nakfa (ERN) 1 UA = 22.8775 ERN 1 UA = 1.5403 US$ 1 US$ = 14.85 ERN

FINANCIAL YEAR

January to December

WEIGHTS AND MEASURES

Metric System

1 Kilogramme (kg) = 2.2 pounds (lbs) 1 metric tonne (MT) = 2.205 lbs

LIST OF ABBREVIATIONS

ADB African Development Bank ADF African Development Fund AFCR Africa Food Crisis Response BOP Balance of Payment CSP Country Strategy Paper CERF UN Central Emergency Response Fund FAO Food and Agricultural Organization FDI Foreign Direct Investment FSS Food Security Strategy GDP Gross Domestic Product GNI Gross National Income GoSE Government of the State of Eritrea HDI Human Development Index ICSP Interim Country Strategy Paper IDPs Internally Displaced Persons IMF International Monetary Fund IPRSP Interim Poverty Reduction Strategy Paper MDGs Millennium Development Goals MOA Ministry of Agriculture UNDP United Nations Development Program UNICEF United Nations Children’s Fund UNFPA United Nations Population Fund UNHCR United Nations Refugees Agency USD United States Dollar WB World Bank WFP World Food Program 1 1. Introduction

1.1 The Board of Directors approved in July 2008 the Africa Food Crisis Response (AFCR), through its resolution B/BD/2008/14 Rev.1 – F/BD/2008/09/Rev.1, which is the Bank’s framework for accelerated support to Regional Member Countries (RMCs) negatively affected by the increase in global food prices. Eritrea happens to be among the countries hardest hit by the food crisis because of its high dependence on food imports and is also among countries experiencing a substantial weakening of its balance of payments (BOP) and acceleration of inflationary pressures with a very weak reserve position. Even in good years Eritrea is only able to produce about 70% of its national food requirements.1 In 2008, a combination of poor rains (resulting in a lower food production) and knock-on effects of increased global prices have adversely affected vulnerable groups, whose ability to access food has been reduced.

1.2 In its bid to respond to this crisis, the Government of the State of Eritrea (GoSE) has taken some measures to mitigate these food shortages and has also approached some donors including the Bank for assistance in the purchase of the much needed farm inputs including (i) seeds and pesticides with the objective of improving productivity of food crops and (ii) poultry farming inputs with the objective of increasing productivity of poultry farming. The GoSE’s request has largely been motivated by the fact that the inadequate and untimely supply of quality farm inputs has been one of the main factors affecting food production in the country. This document therefore presents a proposal for consideration of the Board of Directors to allocate UA 2.0 million as a grant from the Bank’s surplus account to the GoSE for the purchase of farm inputs to increase food production and productivity.

2. Country and Socio-economic Context2

2.1 Social Context

Eritrea is located in one of the driest parts of Africa and has consistently been affected by severe droughts. On average, once every 10 years, the country is threatened by famine. The 30 years of debilitating war and the eight-year long unresolved border dispute with Ethiopia have had a devastating impact on the country’s socio-economic development, destroying the country’s economic, social and physical infrastructure and reversing gains made in the immediate years after independence. Eritrea also happens to be one of the poorest countries in the world, with a GNI per capita of US$ 220 and a Human Development Index (HDI) ranking of 157th out of 177 countries surveyed in 2005. According to the Household and Living Standards Measurement Survey of 2003, the incidence of poverty is estimated at 66 per cent and 37 per cent are categorised as being extremely poor, meaning that they have access to less than 2,000 calories per day. Access to water is also very poor with only 32 per cent of the population having access to safe water and with little water available for livestock.

2.2 Economic Performance

Real GDP growth continues to remain sluggish, affected mainly by persistent macroeconomic imbalances, poor agricultural sector performance and low investments. Real GDP growth has averaged at about 1.0 per cent between 2005 and 2008, partly because of shortages of foreign exchange, recurrent droughts and the rise in world food and fuel prices. Although the fiscal position has dramatically improved from a deficit of 45 per cent of GDP in

1 Eritrea happens to be one of the most food insecure countries in the world since it is drought prone and remains vulnerable to periodic and widespread crop failure. 2 Paucity of data makes it difficult to present adequate assessment of the actual on the ground since the Government of the State of Eritrea does not publish economic data or budget.

2 2000, to a deficit of 8.3 per cent of GDP in 2008 (achieved through major cuts in defence spending and scaling down of capital projects and externally financed programmes), it continues to remain unsustainable and a source of imbalances in the balance of payments. With the rise in world food prices, the average inflation rate is projected to accelerate from 9.3 per cent in 2007 to 11 per cent in 2008, with its income eroding effect especially on the poor. The country’s reserves also remain precariously low, equivalent to one month of imports and the value of food imports as a share of foreign exchange reserves is estimated at 20. Although there has been a reduction in transfers (private and official) and imports due to foreign exchange and trade restrictions, external current account deficit continues to remain in deficit, projected increase slightly to a deficit of 5.1 per cent in 2008 from a deficit of 4.7 per cent of GDP in 2007.

3. Food Security Situation and Prospects

3.1 Current food security situation

The food security situation has considerably deteriorated in 2008 and food prices have increased dramatically in Eritrea, far above the world market prices, despite a relatively good harvest in 2007. Evidently, prices of commodities like wheat are reported to have already tripled while the price of maize has increased even more sharply, by 145 percent, from May 2007, making it difficult for the majority poor to afford. Currently, Teff3 is being sold at 5,000 Nakfa per quintal (100 kilos) and Meshala is being sold at 1,500 Nakfa per quintal, close to double last year’s price. As a result of these food shortages, the ration for a family of five has been reduced to 10 kilos per month and 15 kilos for families more than five, but the minimum a modest family needs is 25 kilos per month. As such, about 1.7 million Eritreans are said to have been affected (see annex 2), with about 75 per cent of the population suffering from under nourishment.4 Though Eritrea has been able to somewhat expand cultivation of sorghum, a staple crop, the country imports 88 percent of its cereals for consumption.5 With an estimate of 200,000 metric tons of cereal production in 2008, the country is certainly in urgent need of support to meet its immediate food needs as well as boost its productive capacity to enhance its chances of being able to meet its food requirements. With expected reduced food aid ration size, current Eritrean stock together with expected arrival of around 47,000 tons of food aid are expected to last until the end of December 2008. Prospects for a good harvest in 2009 depend on adequate labour, seed stocks and rainfall, none of which are certain right now.

3.2 Impact of rising World Food prices on macroeconomic stability

Eritrea is among the countries with the largest negative terms of trade impact from the high food prices. According to the IMF, the impact of higher oil and food prices on the BOP is considerable and could amount to around 8.5 per cent of GDP (driven largely by fuel prices as reflected in table 1). The country’s fiscal vulnerability to food price shock is estimated to be high at 10 per cent (value measured by increase in cereal import bill (as a percentage of Government Revenue) to fiscal vulnerability). However, the impact on the fiscal balance is said to be unclear, as policies that may affect domestic food and fuel prices (in the case of Eritrea) are largely off- budget. The Government has been using price controls and subsidies, as well as food for work and school feeding activities in response to the crisis. The price controls have minimized the pass- through effect on inflation, although prices of commodities like wheat are reported to have tripled.

3 Teff is the most common cereal crop used to make engera. 4 FAO, April 2008, Soaring Food Prices: Facts, Perspectives, Impacts and Action Required. 5 FAO website

3 Table 1: Impact of 2008 Food and Fuel Price Increases in Eritrea BOP impact6 2008 Zimbabwe Ethiopia Food -2.4 -0.4 -0.8 Oil -6.1 -1.7 -2.6 Food & Oil shocks -8.5 -2.0 -3.4 Other commodities -0.1 0.8 0.4 Total shock -8.6 -1.3 -3.0 Food & oil BoP impact/Reserves (per cent) -407.7 -116.6 -71.7 Source: UN Comtrade; IMF, World Economic Outlook and IMF staff estimates

4. Response to the Food Crisis

4.1 Government’s Response

In Eritrea, the food outlook remains bleak with the unresolved border conflict and the recurrent drought situation. Given the country’s high import dependency, it also remains vulnerable to external shocks. Eritrea’s food security strategy is part and parcel of the overall development strategy and focuses on the development of infrastructure, soil conservation and environmental protection, efficient harvesting and management of water resources, improved seeds, fertilizers and pesticides; mobilization of the population to achieve food security; fostering industriousness, learning culture and creating employment; and introduction of modern irrigation methods.7 In the current context, the authorities have tried to mitigate food shortages through public procurement of food through a state-controlled enterprise, without a direct fiscal cost. However, as the importer benefits from priority foreign exchange allocations, there is an implicit cost as foreign exchange is rationed and the priority allocations crowd out other sectors.8 Efforts have also been made to enable efficient utilization of the crops harvested in 2008 to minimize unnecessary waste. The objective is to ensure equitable distribution of the crop output to all sections of the society. 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.

4.2 Donors’ Response

Donors’ response has so far been positive, with a show of support from the UN System, the EU and the AfDB (for details see annex 5).

4.3 Proposed Bank Group’s Response

4.3.1 In response to the Government’s request for the purchase of agricultural inputs, the Bank aims to provide a grant of UA 2.0 million to help the country meet its current shortages in the much needed area of agricultural inputs. This request is in line with the Bank’s AFCR and the GoSE’s own priorities as set out in the 2003 Food Security Strategy (FSS) and its 2008–2010 Agricultural Development Programme (ADP) goals of increasing soil fertility and food productivity. The Bank’s intention is to give the country the much needed financial relief by reducing some of the pressures being exerted on the balance of payments from the rise in global food prices and to help minimize the impact on the poor.

6 The BOP impact has been calculated as the trade balance change resulting from changes in the terms of trade for each low-income country in SSA. It measures the effect of the expected increase in prices of exports and imports in 2008 compared to 2007, taken as given the 2007 volumes of trade, as a share of GDP. The oil prices used in the calculations are US$71.1/barrel in 2007 and US$112/barrel in 2008 (IMF June 30, 2008: The Balance of Payments Impact of the Food and Fuel Price Shocks on Low-Income African Countries: A country-by-country Assessment) 7 This has been articulated in the Government’s Food Security Strategy (FSS), developed in 2003 and updated in 2006, which aims 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.” 8 IMF Policy Paper June 2008

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4.3.2 Specifically, the objective of the Bank’s assistance is to improve food security and food productivity in the agriculture sector through the provision of affordable agricultural inputs for crop and poultry farming. This proposed intervention aimed at ensuring timely availability of agricultural inputs at affordable prices, is geared to contribute towards addressing the current production and supply constraints in the agriculture sector and making “food of sufficient quantity and acceptable quality readily available to all at an affordable price at any time and place within the country.” This intervention will enable the country’s farmers get immediate access to improved seeds (maize and tomato), pesticides (fungicides and insecticides) and chicken farming supplies, which will reinforce support already provided by FAO and other donors. The increased efficiency in the use of seeds and pesticides is expected to contribute to the increase in food productivity as well as farm incomes. Whereas improving poultry farming conditions is also expected to increase incomes at household level through increase in eggs and poultry meat production. The Bank’s support is expected to therefore contribute to the process of enhancing food security and the achievement of food self-sufficiency at the national and household levels.

4.3.3 Institutional Arrangements: The proposed operation will be implemented by the Ministry of Agriculture. Monitoring and evaluation will be conducted on the basis of progress reports, to be submitted by the Ministry of Agriculture (MoA) on a regular basis, and supervision missions. Given the urgent nature of the response it has not been possible for the Bank to come up with an established set of baseline indicators; nevertheless a series of indicators indicated in the action plan (Annex 1 & 2) will be used for monitoring purposes.9 In addition, an audit will also be conducted after closure of the program (within the time frame of 6 months after closure) in order for the Bank to verify the use of the resources granted.

4.3.4 Environmental and Other Safeguards: Major environmental concerns associated with the improper use of the pesticides, which is not foreseen for this operation given its relative small size and the measures currently undertaken by the GoSE to protect the environment, including the use of environmentally accepted pesticides. It is expected that the storage and dosage of pesticides used will strictly be as per recommendations of the Ministry of Agriculture and the disposal of empty pesticide containers, pesticides and vaccines would also be guided by MOA guidelines. The Bank will also monitor the process in line with its existing Environmental Guidelines. It is being envisaged that all imported pesticides will be used immediately leaving no stockpiles.

4.3.5 Risks: One of the main risks is that of recurrent drought and other external shocks. The government has intensified its soil and water conservation activities and improved farming methods will help minimize the impact on the food security and reduce the need to import food. Moreover, the inputs selected will help to lessen the effects of harsh weather conditions on food crops.

4.4 Procurement of goods and services

4.4.1 Goods and services will be procured in accordance with the Bank’s AFCR procedures as stated in its resolution ADB/BD/WP/2008/113/Add.1/Rev.1 - DB/BD/WP/2008/64/Add.1/Rev.1 approved by the Board of Directors on July 28 2008 as well as the new Bank Procurement rules and procedures, which became effective on November 1, 2008.

9 Farmers would be selected by the village administration and then approved by kebabi and sub-zoba administration and the beneficiaries will be from six zobas (regions). The focus would be on the poor and farmers would not be required to pay for the inputs. These activities would be monitored by sub-zoba administration.

5 4.4.2 The items to be purchased are specified in the Action Plan in annex 1. The procurement modes are indicated in the Procurement Plan in annex 4.

5. Legal instrument

5.1 The grant instrument will be the Protocol of Agreement

5.2 Conditions precedent to entry into force

Entry into force of the grant agreement shall be subject to signature of the Recipient and the Bank.

5.3 Conditions precedent to disbursement

The grant resources will be disbursed in one tranche upon fulfilment by the Recipient of the following condition:

(1) The Government will open a special account in foreign currency for the Public Treasury at the National Bank of Eritrea into which the Bank’s resources from the Bank’s Surplus Account will be deposited.

5.4 Conformity with the Bank’s policies

This proposal is in conformity to the policies of the Bank regarding food security and in particular with the Africa Food Crisis Response (Ref. Report N°ADB/BD/WP/2008/113/Add.1/Rev.1-ADF/BD/WP/2008/64/Add.1/Rev.1 and Resolution B/BD/2008/14/Rev.1-F/BD/2008/09/Rev.1).

6. Conclusion and recommendation

The Board of Directors is therefore being invited to examine the proposal for the allocation of UA 2.0 million from the Bank’s Response Surplus Account to Eritrea for the purchase of agricultural inputs.

ANNEX 1

A. ERITREA - ACTION PLAN for the AFRICA FOOD CRISIS RESPONSE Goal Challenge Beneficiaries Deadline Performance indicators Risks Partners/Other donors Contribute to achieving Chronic food insecurity The population of 2015 1/ Decrease in the cost of 1/ Vulnerability to external FAO, UNICEF, WFP, universal food security, problem. Eritrea the food expenditure shocks. UNDP, EU, WB poverty alleviation and basket for all farmers and the economic viability of 2/ reduction in incidence farming of malnutrition.

Objectives Challenge Beneficiaries Deadline Performance indicators Risks Partners/Other donors Increase productivity in • Recurrent The vulnerable groups 2009 1/ Increased food 1/ Fiduciary risks; the agriculture sector drought, production and reduction 2/ Vulnerability to external environmental in the price of basic food shocks. degradation and items deforestation. • Poor quality 2/ reduction in incidence seeds of malnutrition. • shortages of labour • weak institutional support Proposed program Implementing agency Beneficiaries Deadline Performance indicators Risks Partners/Other donors Food Crisis Support of Ministry of Agriculture 63,400 farmers April 2009 1/ 2% increase in maize 1/ Fiduciary risks UA 2 million from the production Mitigation measures: Bank’s Surplus Account Risks are currently dealt with to Eritrea for the 2/ 5% increase in usage of by continuing dialogue purchase of agricultural pesticides and improved between the Government and inputs quality seeds the IMF. 2/ Vulnerability to external 2/ 5% increase in chicken shocks farming related outputs Mitigation measures: (eggs and meat) Risks are mitigated by increasing agriculture productivity through water/soil conservation activities and improved quality inputs

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B. Eritrea: Action Plan for the Food Crisis Response Activities and Description Quantity Cost in FC in UA Beneficiaries Timeline Implementing Expected Assumption/Risk Other Objectives Structures Outcomes Partners involved Supply of Inputs Increase Maize Seeds 400 tons 950,000 15,000 farmers 2% increase in • Sufficient rains productivity maize of food crops production • Farmers’ buy-in

Tomato seeds 500 kg 51,000 2800 farmers 2% increase in tomato production Fungicides 6000kg 75,000 6000 farmers 5% increase in usage of pesticides

Insecticides 6000kg 53,000 6000 farmers September Ministry of UNDP/FAO 2009 Agriculture /World Bank/EU Increase Sorghum feed 1500 ton 655,000 4800 farmers 5% increase in productivity eggs of chicken production farming Super Layer 1000 kg 14,000 4800 farmers 5% increase in chicken meat production Erythromycine 500 kg 5,000 4800 farmers Oxytetracycline 1000 kg 17,000 4800 farmers Amprolium 1500 kg 11,000 4800 farmers Flumequin 2000 kg 34,000 4800 farmers Vaccines 200000 kg 135,000 4800 farmers September Ministry of UNDP/FAO 2009 Agriculture /World Bank/EU Total Cost: UA 2,000,000

Annex 2 RESULTS BASED LOGICAL FRAMEWORK

HIERARCHY OF OBJECTIVES EXPECTED RESULTS REACH PERFORMANCE INDICATIVE TARGETS TIMEFRAME/ Existence ASSUMPTIONS AND

AND THEME (TARGET INDICATORS of RISKS POPULATION) Baseline Target Goal: Impacts Assumption: To contribute to the achievement of food self- Food security improved among Targeted groups in the Proportion of households Over 60 percent of Reduce incidence of food sufficiency at the household and national targeted areas and groups in the country reporting food deficits in households in targeted areas insecurity to 30 percent of Continued political levels country targeted area are food insecure households by end of 2009 leadership in supporting the food security activities Project Purpose: Project Outcomes Risks To improve food security and food Farmers enhance local production, 22,600 Farm Households Food self sufficiency Food self sufficiency for the Food self sufficiency for productivity in the agriculture sector for own consumption and markets in targeted areas target households is 40 the target households is Instruments, mechanisms, percent increased to 60 percent by and strategies for rapid end of 2009 response may not be adequate Activities Project Outputs Input subsidy operations Procurement and distribution of inputs for could negatively affect the food crop production Production and yield of maize 17,800 households benefit Yield of maize and tomato Average maize yield is Average maize yield is private sector market (400 mt of maize, 500kg of tomato seeds, 6 increases as farmers receive from improved diet increased 0.57t/ha 0.66t/ha) by end of 2009 operations for agricultural mt of fungicides, 6 mt of insecticides) incremental inputs, on time, and at Average tomato yield is Average tomato yield is inputs affordable prices 17t/ha 22.44t/ha by end of 2009 Chemical pesticides might have negative effects on Procurement and distribution of inputs Production and yield of eggs and 4,800 households benefit Production of eggs and Average production per layer Average production per environment poultry production poultry meat increases as farmers from poultry feed and poultry meat increased is 75% layer is 95% by end of (1500 mt of sorghum feed, 10 mt super layer, receive incremental inputs, on time, vaccines 2009 Mitigation Measures. 205,000 dosage of vaccines. and at affordable prices for poultry Average weight per bird is farming 0.9 kg Average weight per bird is For quick action, the GoSE 1.2 kg by end of 2009 will use either the National Shopping or International Shopping mode of procurement

The proposed subsidy Input Resources: (UA million) operation will be small and in ADB Grant 2.0 million remote areas with low private sector presence.

Environmentally accepted pesticides will be used The extension service will provide appropriate advice on dosage and disposal of containers to the farmers as a means of safeguarding the environment.

ANNEX 3

Eritrea: Food Import Requirements 2008 Estimated Number of Affected population 1.7 million Cereal Imports as share of total imports 19.8% Increase in cereal import bill (as a % of Govt Rev) 10 fiscal vulnerability to food prices shock very high Imports of petroleum products (expected increase in import bill) 10% Imports USD million 392.7 foreign reserves 0 Estimated Financing Gap US$6.3 million Sources: World Bank/UN

ANNEX 4 Proposed Procurement Plan

Procurement Activities Mode of Procurement Amount (UA) TIMELINE Goods Maize seeds Shopping 950,000 March to May 2009- Tomato Shopping 51,000 March to May 2009 Fungicides Shopping 75,000 March to May 2009 Insecticides Shopping 53,000 March to May 2009 Sorghum Shopping 655,000 March to May 2009 Supper Layer Shopping 14,000 March to May 2009 Erythromycine Shopping 5,000 March to May 2009 Oxytetracyclin Shopping 17,000 March to May 2009 Amprolium Shopping 11,000 March to May 2009 Flumequin Shopping 34,000 March to May 2009 Vaccines Shopping 135,000 March to May 2009 Total 2,000,000

ANNEX 5

Eritrea: Donors’ Response To the Food Crisis Organization/Institution Funding (Total Activities (on-going and planned) Amount) UN Central Emergency US$ 2 million UN Agencies Involved: Response Fund (CERF) UNICEF: Expansion of community-based therapeutic feeding centres from 39 sites in 2007 to 61 as of mid-2008. FAO: Provision of seeds (seed potato), tools and fertilizer to approximately 26,000 farmers. UNDP: Supply of farming hand tools and distribution of seeds as well as assistance in ploughing and planting crops to IDPs and refugees. WHO: Scaling up of existing programmes addressing malnutrition in Eritrea to aid nearly 120,000 children under five years of age. European Commission € 4 million Targeting vulnerable people in rural areas around the country.