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Eritrea N.Magidu@Afdb.Org 2018 African Economic Outlook Nyende MAGIDU Eritrea [email protected] • Growth is forecast to increase slightly from 3.4% in The budget deficit declined slightly to 13.8% of GDP in 2017 2017 to 3.7% in 2018, and 3.8% in 2019, underpinned by from 14.0% in 2016. The deficit is projected to decrease to expansion in many sectors, including agriculture, mining, 12.6% in 2018 and to remain constant in 2019 due to additional infrastructure construction, and services. grants and concessional resources aimed at increasing revenue from mining projects and foreign direct investment. Inflation is • The African Development Bank’s financial support to the estimated to average 9.0% in 2017 and 2018, slightly up from Government through the implementation of the minimum 8.9% in 2016, mainly because of food supply insufficiency and integrated agriculture package aims to increase invest- lack of foreign currency to import essential commodities. ments, achieve food security and improve nutrition as well as boost export earnings. Sustained and inclusive The growth of exports in 2017/18 has been driven by ores and growth should be a central part of the policy strategy. metals, manufacturing goods and agricultural raw materials. • Eritrea’s commitment to redevelop its infrastructure pro- The current account balance is then forecast to decrease to vides an opportunity to restore private sector-led growth 0.3% of GDP in 2018 from 0.7% in 2017. However, it is expected and industrialization. to become negative to 1.1% in 2019 because of an expected increase in machinery imports for the mining sector and infra- structure development. OVERVIEW The Government is committed to addressing development chal- lenges, and the African Development Bank has provided finan- Real gross domestic product (GDP) growth is projected to cial resources to develop education and agriculture, manage increase slightly from 3.4% in 2017 to 3.7% in 2018, mainly natural resources, and modernize the public financial manage- driven by investments in the mining sector, infrastructure devel- ment (PFM) and statistics systems. Eritrea is also participating opment and services. Government has prioritized investments in capacity building programmes at the International Monetary in agriculture, mining and fisheries to achieve inclusive and sus- Fund (IMF) Capacity Building Institute in Tanzania. The Govern- tainable growth. GDP is driven by services (59%), with a very ment continues to engage with the European Union under the small manufacturing sector (5.9%). Agriculture, hunting, forestry European Development Fund 11, and the UN system through a and fisheries constitute 17.2% of GDP. co-operation framework (2017-21) with a focus on supporting socio-economic development. Eritrea TABLE 1. Macroeconomic indicators 2016 2017(e) 2018(p) 2019(p) Real GDP growth 3.8 3.4 3.7 3.8 Real GDP per capita growth 1.5 1.1 1.4 1.5 CPI inflation 8.9 9.0 9.0 9.0 Budget balance (% of GDP) -14.0 -13.8 -12.6 -12.4 Current account (% of GDP) -0.1 0.7 0.3 -1.1 Source. Data from AfDB Statistics Department; estimates (e) and predictions (p) are based on AfDB staff calculations. RECENT DEVELOPMENTS In 2016, a new programme to scale up implementation of a AND PROSPECTS drought-resilience programme has been designed. Eritrea’s economic performance has been resilient despite a dif- Eritrea needs an improved institutional and policy environ- ficult external context, UN Security Council sanctions on remit- ment to attract more private investment and mobilize domes- tances and a weak business environment. These challenges tic resources to avoid debt distress. The country is also facing have contributed to slow economic growth of 3.4% in 2017, medium term structural challenges, including high youth unem- although it is projected to inch up to 3.7% in 2018 and 3.8% ployment, migration and environmental degradation, which is in 2019. Increased Government expenditure on infrastructure exacerbated by climate change. In this context, the country development has facilitated a slight growth in exports of agricul- requires coherent policy objectives and action on several fronts tural raw materials and manufactured goods. The Government to maintain momentum and achieve sustainable and inclusive has invested in integrated agriculture and infrastructure devel- economic growth. Promoting macroeconomic stability is also opment, particularly in energy and water, to support inclusive crucial, particularly because Eritrea was hit by commodity price and sustainable economic growth by generating employment falls. The weak business and investment regulatory frame- for youth and women. The economic outlook is favourable, but work, together with the energy-supply deficit, the scarcity of with challenges. The most immediate issue is maintaining gains foreign exchange, UN sanctions and inward-looking strategies made in managing the economy in a challenging environment have crippled private sector growth. Other challenges include while creating fiscal space to boost spending on infrastructure drought and geo-political discord in the Horn of Africa as well as and human development. In addition, the Government must sporadic terrorist incidents. The current stock of entrepreneurial create a favourable business climate to support investment, skills is under-utilized, and the manufacturing sector is operat- broad-based growth and job creation. ing below capacity. Job creation is slow, and the economy is unable to absorb the large number of young adults. Agriculture accounts for 17.2% of GDP and provides a livelihood for the majority of the population. The sector also accounts for The Government, however, is committed to creating a private about 44% of commodity exports, depending on external fac- sector-led economy. Partnering with the international commu- tors. For instance, merchandise exports declined in 2015 by nity, the authorities are creating a skills base among youth; pro- 24.7%, reflecting weakening export capacity. Agriculture’s low viding infrastructure, especially roads and renewable energy; performance is partly attributed to the arid or semi-arid climate. and dismantling internal controls. As part of financial sector Large fluctuations in rainfall reduced the output and availability reforms, Government is encouraging the business community of domestic food supplies. In an effort to diversify the econ- to use commercial banks to effect payments for goods and ser- omy and its export base, the authorities are seeking to scale vices. The Government continues to enjoy supportive engage- up interventions in areas with economic potential such as the ment from Middle Eastern countries, such as Saudi Arabia and eastern lowlands which offer significant scope for fishing and Qatar, and the Far East, as part of its strategy to create markets cultivating fresh flowers and vegetables for foreign markets. The for its goods. authorities have repeatedly affirmed a commitment to address challenges that impact heavily on attempts to relieve poverty. 2018 African Economic Outlook Country Note 2 Eritrea TABLE 2. GDP by sector (percentage of GDP) 2011 2015 Agriculture, forestry, fishing and hunting 17.0 17.2 of which fishing – – Mining and quarrying – – of which oil – – Manufacturing 6.1 6.0 Electricity, gas and water 1.8 1.8 Construction 16.2 15.7 Wholesale and retail trade; repair of vehicles; household goods; restaurants and hotels 19.1 19.2 of which restaurants and hotels – – Transport, storage and communication 12.2 12.3 Finance, real estate and business services 27.6 27.8 Public administration and defence, security – – Other services – – Gross domestic product at basic prices / factor cost 100.0 100.0 Source. Data from AfDB Statistics Department; estimates (e) and predictions (p) are based on AfDB staff calculations. Government is also increasingly looking to modernise agricul- mining and tax revenues, especially from big tax payers like the ture to provide the population with new and better opportuni- Asmara Brewery. Steps are being implemented to strengthen ties, particularly youth who consider migrating to Europe and tax revenue, including modernizing PFM and statistics with other countries in search of better living conditions. The coun- the aim of establishing a medium-term expenditure framework try needs proper regulatory institutional frameworks, especially (MTEF). The authorities are also strengthening capacity in the to support smallholder farmers, and a major injection of both mining sector through technical assistance from the African public and private finance into all stages of the agricultural value Legal Support Facility (ALSF). chain. This should include both small- and large-scale agribusi- nesses to ensure that agricultural development generates inclu- Tax revenue, excluding grants, is estimated to have increased sive growth. slightly to 8.9 of GDP in 2016/17, up from 8.2% in 2015/16, but it is projected to remain at 8.8% in 2017/18. The authorities are focusing on increasing the taxation base through private sector MACROECONOMIC POLICY development and modernization of agriculture. Despite these efforts, UN Security Council sanctions continue to force the Fiscal policy country to operate below its potential because it remains chal- The fiscal system is still being developed, and unpredictable lenging to facilitate remittance of the 2% recovery and devel- financial flows have influenced the contractionary fiscal policy opment tax. In the past, Eritrea benefited substantially from stance adopted by the Government. Furthermore,
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