Eritrea: Proposal for an Adb Grant of Ua 2 Million Under the Africa Food Crisis Response
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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.