COUNTRY REPORT

Ethiopia Eritrea Somalia Djibouti

December 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Contents

3 Summary

Ethiopia

5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2002-03 8 Political outlook 9 Economic policy outlook 10 Economic forecast 11 The political scene 14 Economic policy and the economy

Eritrea

17 Political structure 18 Economic structure 18 Annual indicators 19 Outlook 2002-03 20 The political scene 23 Economic policy and the economy

Somalia

25 Political structure 26 Economic structure 26 Annual indicators 27 Outlook for 2002-03 28 The political scene 31 Economic policy and the economy 33 News from the Somaliland Republic 33 The political scene 34 Economic policy and the economy

Djibouti

36 Political structure 37 Economic structure 37 Annual indicators 38 Quarterly indicators

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 2

39 Outlook for 2002-03 40 The political scene 41 Economic policy and the economy

List of tables

10 Ethiopia: forecast summary 15 Ethiopia: effects of debt relief on external debt and debt service 21 Eritrea: signatories of a letter criticising Mr Isaias 34 Somaliland: licensed political parties, Oct 2001

List of figures

10 Ethiopia: gross domestic product 20 Eritrea: gross domestic product 40 Djibouti: gross domestic product 42 Djibouti: trade with Ethiopia 42 Djibouti: money supply

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 3

Summary

December 2001

Ethiopia

Outlook for 2002-03 The government appears to have weathered the political disruptions within the TPLF party earlier in 2001, and is expected to move ahead with economic liberalisation and poverty reduction. However, disagreements over a number of issues, such as what attitude to adopt towards Eritrea, economic reform and government corruption, will continue to cause political tension. Despite the current optimism among both Ethiopian leaders and foreign donors, the Economist Intelligence Unit believes that these will remain significant political factors in 2002-03. The restoration of external lending, and reductions in military spending, will improve economic prospects, and we expect real GDP growth of around 7-8% per year in 2002-03.

The political scene The prime minister, Meles Zenawi, has restructured his cabinet, and expanded it from 15 to 18 posts. Most ministers were replaced. It is unclear whether the newly created federal agencies will be reproduced at the regional level. A new national security council has been established by the Council of People’s Representatives. It includes the prime minister, the ministers of foreign affairs and defence, and the chief of staff of the armed forces.

Economic policy and the Delayed and patchy rain in central and southern grain-producing regions has economy lowered crop estimates, but grain production is likely to be around average. Minimum wages for civil servants have doubled. Ethiopia has abolished its wholesale foreign-exchange auctions. Ethiopia has qualified for HIPC debt relief.

Eritrea

Outlook 2002-03 If elections planned for December 2001 are not held, they are likely to be held before mid-2002. Either way, President Isaias Afewerki and the PFDJ party are expected to remain in power. Disputes with Ethiopia, resulting from the work of the UN Border Commission and Claims Commission, are likely to continue into 2003. The government clampdown on free speech could lead to a freezing of donor funds. In this case real GDP in 2002-03 is expected to growth by 3-4% per year. If funding is unaffected, real GDP growth of 7-8% is more likely. Both forecasts assume normal weather patterns.

The political scene In mid-September 11 members of the PFDJ who had signed an open letter criticising the president were arrested. All private newspapers in Eritrea have been closed. The Italian ambassador has been expelled. Ambassadors from the EU countries returned in November after being (temporarily) called home.

Economic policy and the The crackdown on dissidents has led to concern that donors will freeze economy development funding. Defence spending dropped from 38% of GDP in 2000 to

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15% of GDP in 2001. International donors have pledged US$132m for demobilisation. UN reconstruction work near the Ethiopian border has begun.

Somalia

Outlook for 2002-03 High-level national reconciliation talks are possible, but are unlikely to be successful. The transitional government is not expected to gain control over the entire country. Lack of central authority will nullify Central Bank attempts to control inflation and the exchange rate. The closure of the country’s largest money transfer company and a poor harvest will worsen the humanitarian crisis. Elections in Somaliland are unlikely to proceed according to schedule.

The political scene A no confidence motion has been passed in the Transitional National Assembly, forcing the dismissal of the government. Hassan Abshir Farah has been appointed the new prime minister. President Abdikassim Salat Hassan and representatives of the opposition Somali Reconciliation and Restoration Council have attended reconciliation talks in Kenya. An Islamist group, Al- Ittihad, has been targeted in America’s “war against terrorism”.

Economic policy and A leading money transfer company, Al-Barakat, has had its assets seized by the the economy US. The Somalia shilling has fallen further against the US dollar. The refusal of some businesses to accept SoSh500 notes has caused violent protests.

News from the Somaliland Seven political parties have been officially recognised. The government and republic opposition have started talks about election issues. The border with Djibouti has been reopened, and an agreement to end hostilities has been signed.

Djibouti

Outlook for 2002-03 President Ismael Omar Guelleh will seek to exploit American concerns over terrorism and Djibouti’s role in the Somali peace process to win financing and improve his international standing. Concessions by Mr Guelleh may allow opposition groups representation in parliament at the 2002 election, but real power will continue to reside in the presidency. Progress on economic reform will be slow and growth will be sluggish.

The political scene Despite speculation to the contrary, Djiboutian military facilities have not been used in the military action against Afghanistan. An anti-terrorism committee has been established. Relations with Somaliland have improved.

Economic policy and the Mr Guelleh has stressed the importance of development outside the capital. A economy mobile phone network has been agreed. An Ethiopian delegation has discussed trade tensions. New economic data indicate the weakness of the economy.

Editors: Christopher Eads; Paul Gamble (editor); David Cowan (consulting editor) Editorial closing date: November 20th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Ethiopia 5

Ethiopia

Political structure

Official name Federal Democratic Republic of Ethiopia

Form of state Federal republic

Legal system The federal constitution was promulgated by the transitional authorities in December 1994. In May 1995 representatives were elected to the institutions of the new republic, which formally came into being in August 1995

National legislature The federal assembly consists of the Council of People’s Representatives (lower house; 548 members) and the Council of the Federation (upper house; 108 members). The nine regional state councils have limited powers, including that of selecting members of the Council of the Federation

National elections National elections: May 2000 (federal and regional); next elections due in May 2005

Head of state President, currently Girma Wolde-Giorgis, who has a largely ceremonial role and is appointed by the Council of Peoples’ Representatives (appointed October 2001)

National government The prime minister and his cabinet (Council of Ministers), appointed in October 2001

Main political parties The Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) evolved from the coalition of armed groups that seized power in May 1991. It includes the Tigray People’s Liberation Front and the Amhara National Democratic Movement, formerly the Ethiopian Peoples’ Democratic Movement. Several small parties exist. Having boycotted the 1995 elections, some participated in the 2000 poll, but won only a handful of seats.

Prime minister Meles Zenawi Deputy prime minister & minister for rural development Addisu Legesse

Key ministers Agriculture Mulatu Teshome Capacity building co-ordination Tefera Walwa Education Genet Zewde Federal affairs Abbay Tsehaye Finance & economic development Sufian Ahmed Foreign affairs Seyoum Mesfin Health Kebede Tadesse Information Bereket Simon Infrastructure development Kassu Illala Labour & social affairs Hassan Abddella Mines Mohamed Dirir Defence Abdula Gemeda Revenue & income Getachew Belai Trade & industry Girma Birru Water resources Shifera Jarso Youth, sports & culture Teshome Toga

Central Bank governor Teklewold Atnafu

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Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP (at current market prices)a (Birr bn) 37.9 41.4 45.0 48.4 51.4b Real GDP growtha (%) 10.6 5.2 –1.4 6.2 4.5b Consumer price inflationc (av; %) –5.1 –3.8 8.3 4.8 5.0d Population (m) 56.4 58.1 59.9 61.4 63.4 Exports fob (US$ m) 418 588 560 467 486 Imports fob (US$ m) 1,002 1,002 1,310 1,387 1,131 Current-account balance (US$ m) 80.3 –40.2 –266 –465 16 Reserves excl gold (year-end; US$ m) 732 501 511 459 306 Total external debta (US$ bn) 10.1 10.1 10.3 5.5 5.5e External debt service, paida (% of exports) 42.2 9.6 11.3 16.8 17.0b Coffee productiona (‘000 tonnes) 196b 175b 165b 210 220 Exchange rate Birr:US$ (av) 6.35 6.71 7.12 7.94 8.21

November 19th 2001 Birr8.4:US$1

Origins of gross domestic product 1998/99a % Components of gross domestic product 1998/99a % Agriculture 44.8 Private consumption 81.3 Industry 11.7 Government consumption 16.4 Manufacturing 4.6 Gross fixed capital formation 18.2 Distribution services 14.8 Exports of goods & services 14.4 Other services 28.7 Imports of goods & services –30.3 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports fob 1999/2000a US$ m Principal imports cif 1996/97a US$ m Coffee 259 Machinery 81 Qat 70 Vehicles 75 Oilseeds 29 Metal & metal products 74 Pulses 10 Electrical products 39

Main destinations of exports 2000f % of total Main origins of imports 2000f % of total Germany 17.8 Saudi Arabia 25.0 Japan 10.8 US 8.8 Djibouti 10.5 Italy 6.7 Saudi Arabia 7.7 Russia 3.5 a Fiscal years ending Jul 7th. b EIU estimates. c Addis Ababa retail index. d Official estimate. e IMF-World Bank estimate. f Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices Addis Ababa (1995=100) 111.0 105.3 106.0 109.2 105.7 98.8 94.6 93.3 % change, year on year 8.7 4.6 4.0 1.1 –4.8 –6.2 –10.8 –14.6 Financial indicators Exchange rate Birr:US$ (av) 8.12 8.13 8.15 8.20 8.24 8.28 8.36 8.43 Birr:US$ (end-period) 8.12 8.13 8.17 8.22 8.25 8.31 8.40 8.47 Interest rates (av; %) Deposit 6.47 6.67 6.70 6.70 6.70 6.62 7.04 n/a Lending 10.50 10.83 10.99 10.99 10.78 10.81 10.86 n/a Treasury bill 3.25 3.10 3.33 3.17 2.75 1.69 3.94 n/a M1 (end-period; Birr m) 9,991 10,270 11,603 11,395 12,292 11,409 11,509 n/a % change, year on year 7.3 12.3 26.3 17.7 23.0 11.1 –0.9 n/a M2 (end-period; Birr m) 18,309 18,745 20,229 20,560 22,017 21,411 21,774 n/a % change, year on year 3.0 6.7 20.0 15.8 20.3 14.2 7.6 n/a Sectoral trends (annual totals; ‘000 tonnes) Coffee productiona ( 2 3 2 ) ( 2 3 0 ) ( n / a ) Foreign tradeb (US$ m) Exports fob 136.6 104.0 119.1 132.7 130.0 121.1 113.3 141.0 Imports cif –429.6 –443.2 –423.8 –446.6 –403.8 –419.6 –407.0 –443.5 Trade balance –293.0 –339.2 –304.7 –313.9 –273.8 –298.5 –293.7 –302.5 Balance of payments (US$ m) Merchandise trade balance fob-fob –260.1 –227.2 –143.8 –142.7 –156.8 –202.2 n/a n/a Services balance –11.5 17.3 12.2 4.9 2.0 –3.6 n/a n/a Income balance –9.9 –13.3 –8.8 –9.1 –9.8 –6.5 n/a n/a Net transfer payments 140.3 146.5 127.7 175.5 195.4 181.6 n/a n/a Current-account balance –141.3 –76.7 –12.6 28.6 30.9 –30.7 n/a n/a Reserves excl gold (end-period) 509.9 458.5 384.1 346.8 299.6 306.3 298.9 n/a a Estimates. b DOTS estimates.

Sources: UN Food and Agriculture Organisation; IMF, International Financial Statistics; Direction of Trade Statistics; Financial Times.

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Outlook for 2002-03

Political outlook

Domestic politics The prime minister, Meles Zenawi, shows every sign of having successfully navigated the political crisis, which split the Tigray Peoples’ Liberation Front (TPLF; the ruling party) earlier in 2001 and threatened government’s ability to implement policy. Nevertheless, October’s reform of government ministries, the appointment of a new cabinet and new leaders to head the TPLF’s fragile affiliates in the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF), coupled with the adoption of the improbable new slogan of “free markets and revolutionary democracy”, does not mean that the crisis is over. In the short- term, Mr Meles’s control of the intelligence service, the military and the police is sound. Yet the current corruption trials against former TPLF loyalists, coupled with the purges and arrests of business people, will have long-term and complex political repercussions, which could further erode the executive’s legitimacy, particularly in its heartland of Tigray.

Meles Zenawi and his loyal foreign minister, Seyoum Mesfin, will continue to tell journalists and diplomats that the problems at the heart of government are over, and that their priority is now the war against poverty. However, this ignores the fact that the core issues that split the government remain unresolved. Four interlinked issues were behind the schism: differing opinion within the TPLF on the attitude to adopt towards Eritrea; hardline versus liberal views on how to react to foreign pressure to normalise relations with Eritrea without falling foul of Western governments and donors; disagreement over economic ideology and IMF/World Bank policy advice and the difficulties of cleaning up government corruption; and changing TPLF party procedures to prevent party conflicts from breaking out in public without warning. Despite the current optimism among both Ethiopian leaders and foreign donors, the Economist Intelligence Unit believes that all these will remain significant political factors in 2002-03, as many of these differing interests are deeply entrenched within the system and will not be easily ignored.

International relations The government appears well placed to improve its relations with the United States, following the attacks of September 11th on the US, having intelligence about, and experience in combating, regional militant Islamist networks. Since 1996 Ethiopian forces have repeatedly attacked the Somali Al-Ittihad militant Islamist groups operating in south-western Somalia close to the Ethiopian border, with the aim of preventing the channelling of assistance to dissident Oromo and Somali factions fighting the EPRDF in the south of the country. EPRDF intelligence captured the Islamic militants that infiltrated from Sudan and attempted to assassinate the Egyptian president, Hosni Mubarak, in Addis Ababa in 1996, which caused a diplomatic rupture with Sudan’s Islamist authorities. Although links with the US and with regional allies were disrupted by splits within the EPRDF’s military and intelligence earlier in 2001, the government’s regional and international standing has improved since the September attacks. Ethiopia may repeat its crossborder operations against

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factions such as Al-Ittihad, but it will continue to support regional attempts to shore up the transitional Somali government.

In September the UN Security Council renewed for a further six months the mandate of the United Nation Mission in Ethiopia and Eritrea (UNMEE). However, given the lack of political and diplomatic reconciliation between the Eritrean and Ethiopian leaderships, UNMEE’s presence is likely to be needed for several years. The military aspect of the operation is perceived as successful, having maintained the ceasefire, established the temporary security zone, and overseen the withdrawal of forces and the return of some refugees. Despite bellicose statements from both sides, renewed war is very unlikely, as both governments are preoccupied with internal political problems.

The settlement of the conflict with Eritrea will continue to be a concern, but there is no likelihood of an imminent political rapprochement between the two governments. The three bodies established by the peace treaty—an OAU- supervised enquiry into the causes of the war, the Border Commission, set up to demarcate the border, and the Claims Commission, which will examine claims for civilian compensation, will all move slowly over the forecast period. In particular, negotiations over compensation for war damage and the treatment and repatriation of each other’s nationals appear impossible to resolve to the satisfaction of both sides, particularly since under the terms of the treaty the costs must be borne by the parties. The inevitable friction arising from the Claims Commission will postpone the debate over the nature of long- term political and economic relations between the two countries.

Economic policy outlook

Though internal political tensions will persist, Meles Zenawi and his ministers will redouble their efforts to portray the government’s principal policy goals as poverty reduction and securing the backing of international donors. In a speech to foreign diplomats on October 25th, the foreign minister, Mr Mesfin, stressed that the government was “back in business” after the splits and setbacks of the previous six months. Yet, though officials and donors portray the recent ministerial restructuring as streamlining and improving government efficiency, the changes could place additional strain on Ethiopia’s cumbersome and weak bureaucratic structures. In the past decade these have often lacked the administrative capacity to handle significant increases in expenditure, and there is a risk that in the short run the creation of new tiers of government may impede service delivery. Regional state administrations, in particular, will struggle to adapt to yet another series of structural reforms. The excluded minority faction (hardline elements of the TPLF) had openly criticised the calls for greater economic liberalisation and the role of external economic assistance and advice. Yet, despite Mr Meles’s renewed, explicit, commitment to free markets, it is not certain that their exclusion will result in an unambiguous commitment to faster economic reform. Political wrangling is likely to delay policy formulation and implementation, particularly over the privatisation of state-owned assets.

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A further review by the IMF of progress on the reform package supported by a poverty reduction and growth facility (PRGF), scheduled for December 2001, will be largely positive, as most of the structural benchmarks and criteria laid out in the government’s letter of intent in May have been fulfilled. World Bank senior vice-president, Nicholas Stern, praised Ethiopia’s reform process on a visit to Addis in October, highlighting the Bank’s long-term engagement with Ethiopia. Conditions for debt relief under the heavily indebted poor countries (HIPC) initiative were announced in November, and Ethiopia appears poised to again become a favourite of international donors, although progress with economic development and reform will be a challenge. As Mr Stern pointed out, Ethiopia simultaneously represents the greatest challenge and opportunity in Sub-Saharan Africa for donors wishing to demonstrate their commitment to the region.

Foreign financial support for post-war reconstruction and broader economic reform will continue to be linked throughout 2002-03. Specific policy indicators of most concern to donors remain the fiscal deficit, estimated to be around 13% of GDP in the 2000/01 fiscal year (July 8th-July 7th), and the rise in domestic borrowing due to the war. But the resumption of external lending, coupled with HIPC debt relief, will cause domestic borrowing to fall significantly in 2002-03. According to IMF figures published in November, expenditure on poverty reduction is scheduled to rise from just under 10% of GDP in 2000/01 to around 15% in 2002/03-2003/04. However, government budget data clearly indicate a slump in capital spending. Donors will therefore seek a renewed commitment to investment in roads, schools and other infrastructure as part of any post-war recovery lending over the forecast period.

Economic forecast

The economic outlook for 2002-03 remains promising: the IMF forecast real GDP growth rates of 7% in 2001, a figure which is likely to be met given strong agricultural growth. Growth in 2002-3 depends largely on the outcome of the main harvests. The restoration of external lending, coupled with the gradual reduction in military spending, will improve prospects for growth, and we expect real GDP to increase by around 6-7% per year in 2002-03. Assuming that the meher main crop harvests in late 2001 are at least average, agricultural production in 2002-03 should continue to grow; the increased production of textiles, and hides and skins will also fuel economic growth.

Ethiopia: forecast summary

2000a 2001a 2002b 2003b Real GDP (% change) 4.5 7.3c 6.8 6.8 Consumer price inflation (av; %) 5.0 –6.8 5.1 4.8 Exchange rate (av; Birr:US$) 8.21d 8.35 9.53 9.82 Total external debt (pre-HIPC)e 5.5 5.3 5.9 6.3

a EIU estimates b EIU forecasts. c Official estimate. d Actual. e IMF-World Bank estimates.

After a fall in consumer prices of nearly 7% in 2001 as a result of the recovery of the food and grain harvests, inflationary pressures will remain more

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consistent over the forecast period, with food prices remaining low, although high fuel prices and higher sales-taxes will create some upward pressure. The Ethiopian birr is expected to depreciate further in 2002-03, from an average of Birr8.35:US$1 in 2001 to Birr9.53:US$1 in 2002 and Birr9.82:US$1 in 2003, owing to low international prices for Ethiopia’s exports—coffee, hides and skins—and higher import costs resulting from reconstruction efforts.

The political scene

Mr Meles rebuilds the The prime minister, Meles Zenawi, announced a new cabinet and a significant government restructuring of ministerial responsibilities in mid-October, ending months of uncertainty. The cabinet has been expanded from 15 to 18 posts. Several portfolios have been amalgamated or renamed, resulting in six new ministries being created. Governmental responsibilities are to be regrouped hierarchically under five co-ordinating, umbrella bodies, called super-ministries by the Addis Ababa press. Mr Meles said that the restructuring was a key element in the renewed drive to improve government co-ordination and efficiency and to push ahead with economic development (see Outlook for 2002-03). However, the deep public schisms within the Tigray People’s Liberation Front (TPLF), the core of the ruling Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF), and the dismissal of key government and party members over the preceding six months are thought to be the main causes of this overhaul of the formal structures of government.

Addisu Legesse, a leading figure in the Amhara National Democratic Movement (ANDM), was appointed deputy prime minister with additional responsibility for rural affairs. Tefera Walwa, also of the ANDM, hitherto defence minister and one of two deputy prime ministers, now takes responsibility for the new umbrella Ministry of Capacity Building Co- ordination. Kassu Illala, also a former deputy prime minister, takes control of a similarly broad new co-ordinating umbrella Ministry of Infrastructure Development. The finance minister, Sufian Ahmed, now also has economic development combined with his portfolio, and the former minister of economic development, Girma Birru, moves to take on enlarged responsibilities at the Ministry of Trade and Industry. Seyoum Mesfin, remains at the Ministry of Foreign Affairs. As widely anticipated, Major-General, Abdula Gemeda, a leading Oromo, is defence minister.

In mid-November it was still unclear whether the new structures of the federal government were to be replicated at the regional and state level. Formally, under the 1995 constitution, each of Ethiopia’s nine regional states, plus the Addis Ababa and Dire Dawa municipal authorities, have their own tiers of government replicating the federal structures. The Oromo regional state administration announced new structures mirroring those of the federal government. Leaders of the Oromo People’s Democratic Organisation (OPDO) were the hardest hit by the recriminations and purges within the EPRDF during mid-2001 (September 2001, page 11). It is unclear whether the other states will emulate the new structures.

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A new security council The government restructuring was approved by the Council of People’s is established Representatives on October 15th, when it also passed legislation establishing a National Security Council (NSC); the NSC is to provide “additional guarantees against unforeseeable and potential threats and challenges to national security”. Its members include the prime minister, plus the ministers of foreign affairs, defence and the chief of staff of the armed forces.

An elderly ceremonial president is elected

On October 8th the Council of People’s Representatives elected the 77-year-old Girma Wolde-Giorgis as president of the republic. This was a surprise move, which took even many EPRDF members unawares; earlier the same day, the speaker of parliament had pushed through a package of proposals relating to the, largely ceremonial, post of president. These stipulated that the new president should not be affiliated to an established political party, and also that presidents engaging in political activism after leaving office would lose their pension and associated benefits. The latter was clearly designed to ensure the silence of the alienated, outgoing president, Negaso Gidada. As dissent within the EPRDF mounted during June 2001, Mr Negaso clashed with allies of Mr Meles; resulting in his leaving the party, while technically retaining the presidency (September 2001, page 11). The new president, like Mr Gidada, is a cosmopolitan urban Oromo. He has considerable political and professional experience, notably in the civil aviation industry and the Ethiopian Red Cross. He served as an elected politician under Haile Selassie, and re-entered politics recently as a spokesman for environmentalist interests. Speculation that he might use the post to criticise and curtail EPRDF dominance evaporated days after his appointment, when he was rushed to hospital in Saudi Arabia with an unspecified medical condition.

UNMEE holds the peace While the 4,200 members of the United Nations Mission in Ethiopia and despite problems Eritrea (UNMEE) ensure the ceasefire in the temporary security zone (TSZ) between the two countries, regular meetings between UN staff and Ethiopian and Eritrean officials have produced no breakthrough in reconciliation, a year after the peace agreement (March 2001, page 10). In September the UN Security Council renewed UNMEE’s mandate for a further six months. The Military Co-ordinating Commission meets regularly, the ninth meeting being held in Djibouti on October 29th. De-mining work continues in and around the TSZ, and Ethiopia has now provided more detailed maps of minefields, and the two sides have undertaken to remove human bodies from the battlefields. Nevertheless, problems remain:

• the UN has been unable to restore direct flights between Addis Ababa and Asmara;

• Eritrea refuses to sign a full status of forces agreement; and • disagreements persist over the precise borders of the TSZ.

The Border Commission has The Border Commission, sitting in The Hague, has yet to report, raising doubts yet to report about how long the UNMEE operation will last. UNMEE is concerned not only with the resettlement of refugees and internally displaced persons (of whom

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there are around 55,000 in camps in Eritrea) along the disputed border, but also the wider human rights implications of the mutual expulsions of citizens that occurred during the 1998-2000 conflict. On November 7th UNMEE officials met in Addis Ababa to discuss the consequences and aftermath of the expulsions policy with Ethiopia’s minister of state for foreign affairs, Tekeda Alemu. He stated that Ethiopia was undertaking a review of legislation relating to foreigners. Most of the estimated 60,000 people who were expelled from Ethiopia were full Ethiopian citizens with family ties to Eritrea. The criteria under which they were expelled, as well as the status of those still living in Ethiopia, remains unclear—and highly sensitive, as senior figures in the TPLF have family ties with Eritrea.

Corruption trials continue In late October, after months of doubt and legal delays, the government filed charges against some of the politicians and businessmen, that were arrested following the splits within the ruling party and the subsequent allegations of corruption levelled against senior figures linked to the dissidents. A former minister of defence, Siye Abreha, his brother, Assefa, and several other alleged family and business associates, have been charged with a series of crimes linked to the privatisation of state-owned breweries and hotels. Also arrested or charged was, Beshah Azmite, head of the Ethiopian Privatisation Agency until June 2001. Several other high-profile corruption cases are also under way, notably against the former vice-chairman of the TPLF, Tewolde Wolde-Mariam, and leading members of the Oromo People’s Democratic Organisation.

The recent spate of corruption charges have been filed by the Federal Ethics and Anti-Corruption Commission (FEACC), the body created by the prime minister’s office in May (September 2001, page 12). Tamrat Layne, prime minister in the 1991-95 transitional government, who was jailed for 18 years for corruption three years ago (2nd quarter 1998, page 10), appeared in court alongside Mr Siye and his co-defendants in October. FEACC’s lawyers sought to link Mr Tamrat’s blatant manipulation of import licences for coffee and sugar in the mid 1990s to the new charges against TPLF dissidents. In October Addis Ababa’s independent press published interviews with Mr Tamrat, in which he denounced attempts to get him to testify against Mr Siye. On November 5th all the defendants were refused bail.

The attempts of President Meles and his newly appointed ministers to defend the drive against corruption and favouritism were undermined during October by rumours about the influence of the prime minister’s wife, who has reportedly taken control of the Mega Corporation, one of the large conglomerates owned and controlled by the ruling party.

Trials of student rioters get In early November the government announced that 320 youths received jail under way sentences of between four and ten months for their part in the riots which wrecked several areas of central Addis Ababa in April (June 2001, page 12). Of over 1,100 youths held in prison since the disturbances, the majority are yet to be tried; 530 have been released on bail.

Somalia is now under Ethiopia is home to many thousands of refugees from Somalia, who have close closer scrutiny links to Ethiopia’s own Somali population. Ethiopia reacted cautiously to

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American allegations that Somali remittance agencies had acted as a conduit for Al-Qaida funds. On November 13th police in Addis Ababa reported that they had closed the offices of Al-Barakat bank. Diplomats quoted by the Washington Post said that Ethiopia was considering renewed action against Al- Ittihad in Somalia.

Economic policy and the economy

Forecasts for the harvest In August the outlook for an above average main-crop (meher) harvest— are lowered gathered in November and December in most parts of the country—appeared good (September 2001, page 14). However, delayed and patchy rains in central and southern grain-producing regions has tempered earlier optimism. In October Ethiopia Network on Food Security, a report compiled by the EU and the US Agency for International Development’s Famine Early Warning System from agency reports from around the country, suggested that production during the current growing season may be well below that of last year’s greatly improved harvest. Nevertheless, gain production is still likely to be around the average for the past five years, and the food shortages experienced in early 2000 should not be repeated.

One result of last year’s excellent main-crop harvest has been that grain prices are currently at historically low levels. Though benefiting urban consumers, this is a problem for the vast majority of Ethiopia’s peasant producers, whose terms of trade have declined significantly. During the 2000/01 crop cycle, the state-owned Ethiopian Grain Trading Enterprise (EGTE) attempted to shore-up rural incomes by bulk buying, but failed to raise farmgate prices significantly. Both domestic and foreign food security bodies are increasingly concerned that the government and foreign donors may have to co-ordinate and support intervention in grain markets to support rural incomes if grain prices remain depressed.

The minimum wage for On November 6th the Council of Peoples’ Representatives approved a bill civil servants is doubled raising the minimum wage for civil servants to Birr200 per month. Hitherto the lowest wage scale for state employees had started at Birr105. The new minimum wage will come into effect in January 2002. The additional cost to the government is put at Birr280m (US$33m), and parliament approved an additional supplementary budget to cover the additional expenditure for the current 2001/02 fiscal year (July 8th-July 7th).

Wholesale foreign- On October 24th Ethiopia’s gradual move towards a fully market-determined exchange auctions replaced foreign-exchange rate took a further step forward with the abolition of weekly wholesale auctions. The Ethiopian authorities had committed themselves to move to an interbank market by October in an undertaking signed agreed with the IMF in May. Exchange rates are now determined on a daily basis via interbank transactions, regulated by a foreign-exchange market intervention committee established by the National Bank of Ethiopia (the central bank). Since 1993 exchange rates have been determined by central bank auctions; although since the last significant financial sector reforms in September 1998,

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Ethiopia 15

retail banks have handled transactions under Birr500,000. In mid-November the Birr was trading at Birr8.55:US$1, with just five banks participating in the daily auctions, which are dominated by the state-owned Commercial Bank of Ethiopia (CBE). Private bankers interviewed by a weekly business newspaper, Capital, expressed reservations about the new system, saying that, as the central bank and the CBE were the only suppliers of foreign exchange, competition would remain limited.

Ethiopia qualifies for HIPC On November 12th the IMF announced that Ethiopia had become eligible for debt relief debt relief under the enhanced framework of the World Bank-IMF’s heavily indebted poor countries initiative (HIPC). The enhanced framework aims to limit net present value of a country’s debt to 150% of its export earnings, once other debt relief mechanisms are taken into account (such as Paris Club and other bilateral agreements). Ethiopia received supplementary debt relief from the Paris Club of official donors in March 2001 (June 2001, page 16). Lengthy and complex negotiations over the past five years also led to the write-off of Ethiopia’s rouble-denominated debt (valued at over US$5bn), a legacy of the pre-1991 communist regime’s ties with the Soviet Union. According to figures released in November, Ethiopia’s total external debt stock amounted to around US$5.36bn at end-2000/01.

The annual savings from debt relief will average US$96m a year over the next three decades. Debt service as a percentage of export earnings is expected to halve, from 16% to 7%, by 2003, falling to below 4% by the end of 2021. Over the next ten years, the debt service/government revenue ratio will fall to 7.8% and the debt service/GDP ratio will fall to 1.6%.

Ethiopia: effects of debt relief on external debt and debt service (US$ bn unless otherwise stated) 2000/01 2001/02 2002/03 2003/04 Before traditional debt reliefa Total debt stock 5.6 6.1 6.5 6.6 Net present value 3.3 3.5 3.6 3.7 Total debt service (US$ m) 222 163 162 182 After traditional debt reliefa Total debt stock 5.3 5.9 6.3 6.7 Net present value 2.7 2.9 3.0 3.2 Total debt service (US$ m) 189 158 164 176 After enhanced HIPC debt relief Total debt service (US$ m) – 105 74 85

a Traditional debt relief includes Paris Club rescheduling, bilateral and commercial institutions.

Source: IMF, Decision Point Document for the Enhanced Heavily Indebted Poor Countries Initiative (HIPC), October 2001.

Poverty reduction plans Estimates of the expected financial benefits of HIPC debt relief rest on two sets need to be refined of assumptions: that current forecasts of GDP, government revenue and export earnings for the coming years and decades are plausible; and that the objectives and policy conditions specified for HIPC are met. Reforms of public expenditure management, in particular the full consolidation of regional and federal budgets beginning in 2002/03, the introduction of VAT by January 2003, and financial sector reforms, including the delayed restructuring of the

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 16 Ethiopia

Commercial Bank of Ethiopia, are all conditions of HIPC debt relief, and could prove major challenges for the government’s institutional capacity.

After the government published a draft poverty reduction strategy paper (PRSP) in late 2000, Ethiopia’s multilateral donors requested a fuller document, making explicit recommendations and advising wider public consultation (June 2001, page 14). Ethiopia’s fledgling non-governmental sector has held a series of seminars and debates on the PRSP strategy in recent months; the Ethiopian Economics Association, women’s groups and other NGOs have commented on the draft. The HIPC agreement contains specific reference to higher social expenditure than envisaged in the PRSP; debt relief being the main means to increase spending on these areas. The IMF estimates that such poverty-targeted expenditure will increase from almost 11% of GDP in 2000/01, to an average of 15% in 2002/03-2003/04.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Eritrea 17

Eritrea

Political structure

Official name Eritrea

Form of state Unitary state

Legal system A new national constitution was formally proclaimed on May 24th 1997

National legislature Transitional National Assembly of 150, composed of members of the ruling People’s Front for Democracy and Justice

National elections Last election February 1987 (legislative, within Ethiopia); next election scheduled for December 2001

Head of state President, elected by the National Assembly

National government The president and the Council of Ministers, latest reshuffle August 2001

Main political parties The People’s Front for Democracy and Justice (PFDJ), which grew out of the Eritrean People’s Liberation Front, is the ruling and, in effect, the only legal party; its third congress in February 1994 confirmed the transition to a pluralist system by 1997, but a law on political parties has yet to be approved

President Isaias Afewerki

Key ministers Agriculture Arefaine Berhe Defence Sehat Ephrem Education Osman Saleh Energy & mines Tesfai Ghebreselassie Finance & development Berhane Abrehe Fisheries Ahmed Haji Ali Foreign affairs Ali Said Abdella Health Salh Meki Information Naizghi Kiflu Justice Fawzia Hashim Labour & welfare Askalu Menkerios Land, water & environment Weldenkeil Ghebremariam Local government vacant Public works Abraha Asfaha Tourism vacant Trade & industry Giorgis Teklemikael Transport & communications Andemichael Kassai

Central bank governor Tekie Beyene

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 18 Eritrea

Economic structure

Annual indicatorsa

1996 1997 1998 1999b 2000b GDP at market prices (Nfa bn) 5.1 6.0 5.9 6.8 7.6 Real GDP growth (%) 6.8 7.9 4.0 0.0 –1.0 Consumer price inflationc (end-period; %) 3.4 1.8 16.6 12.0 14.0 Population (m) 3.67 3.78 3.88 4.01 4.11 Exports fob (US$ m) 95 54 28 26 24 Imports cif (US$ m) 514 495 527 560 500 Current-account balance (US$ m) –131 –37 –238 –219 –195 Total external debt (US$ m; year-end) 44 76 142 147 281 Exchange rate Nfa:US$d (av) 6.35 7.05 7.30 8.50 9.70

November 19th 2001 Nfa13.50:US$1 (official rate)

Origins of gross domestic product 1999 % of total Agriculture 16.0 Industry 27.3 Manufacturing 9.9 Distribution services 31.6 Other services 25.0 GDP at factor cost 100.0

Principal exports fob 1998 US$ m Principal imports cif 1998 US$ m Crude materials 12 Machinery & transport equipment 141 Food & live animals 8 Manufactured goods 88 Manufactured goods 4 Food & live animals 63 Chemical & chemical products 21

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total Sudan 27.2 Italy 17.4 Ethiopia 26.5 UAE 16.2 Japan 13.2 Germany 5.7 UAE 7.3 UK 4.5 Italy 5.3 Korea 4.4 a All figures are estimates from official or other sources unless otherwise indicated; data on Eritrea should be treated with caution. b EIU estimates. c Asmara price index. d The nakfa replaced the Ethiopian birr as Eritrea’s national currency in November 1997 at Nfa1:Birr1.

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Outlook 2002-03

Domestic politics The political scene in Eritrea is currently focused on the forthcoming elections, scheduled for December 2001. These could be delayed as a result of the current political climate. However, the Economist Intelligence Unit expects them to go ahead, although they are unlikely to be viewed as legitimate by the international community, as a result of the crackdown on opponents of the regime in October. These elections, the first to take place in Eritrea following its independence from Ethiopia in 1994, will be for a new parliament of independents, for local government at communal and county levels, for mayorships and for the presidency. The most likely outcome at the national level is that the current People’s Front for Democracy and Justice (PFDJ) regime and its leader, Isaias Afewerki, will be re-elected. This outcome has become even more likely following the arrest of 11 members of the PFDJ’s central council, part of a group of 15 former senior officials of the ruling party, dubbed the G15, who signed an open letter criticising the president, Mr Isaias, and calling for greater transparency and democracy. The government’s determination to silence dissent—the country’s eight independent newspapers have been shut down, leaving the state-owned Hadas Eritrea as the only newspaper now being published—does not bode well for Eritrean democracy. Even when the law on political parties, currently before the National Assembly, is passed, the PFDJ is unlikely to face a credible opposition.

The aftermath of the war with Ethiopia will remain a dominant theme in Eritrean politics but, following the signing of the peace agreement on December 12th 2000, the emphasis will remain on questions of border demarcation, war compensation claims and the demobilisation of troops. Relations between Eritrea and Ethiopia are not expected to normalise during the forecast period; instead, offensive rhetoric and mutual mistrust are likely to last well into 2002.

International relations The most important of the three bodies established by the December peace agreement—the enquiry into the causes of the war supervised by the Organisation of African Unity; the Border Commission, whose task is to demarcate the border; and the Claims Commission, which will examine claims for civilian compensation—is the Border Commission. Its work will be the test of the two sides’ ability to compromise and to adhere to their undertaking to respect the boundaries that were established at the beginning of the 20th century. The United Nations Mission to Ethiopia and Eritrea (UNMEE), whose mandate was extended on September 14th for a further six months until March 15th 2002, will only leave the area when the work of the Boundary Commission, which is independent of the UN, is concluded. Its mandate is therefore likely to be extended further.

Good relations with the West, including the US and EU, suffered after the arrest of the 11 G15 members in September. Improvements in relations are likely to depend on the government’s attitude towards dissent and the handling of the December elections. Overall, Eritrean relations with the West are expected to remain tenuous into 2002.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 20 Eritrea

Economic forecast As repression in Eritrea mounts despite widespread condemnation, the international community may have no alternative but to suspend its aid for a wide variety of desperately needed reconstruction and development projects. The implications for the economy, already severely damaged by war and recurrent drought, will be serious. Under these circumstances, the government’s forecast of a GDP growth rate of 11% in 2002 looks optimistic. We envisage a worst-case scenario of real GDP growth of 3-5% per year in 2002-03 if donor funds are withheld, but real GDP growth of 7-8% per year in 2002-03 if donor funding is unaffected. Although the government’s projected sharp fall in defence spending to around 9% of GDP in 2002-03, from a current level of 21% of GDP, (it reached 38% of GDP during the conflict with Ethiopia) is reasonable, this peace dividend will be offset if project funds for improving infrastructure, rebuilding hospitals and schools, and providing technical support for various government agencies are withheld. In addition, remittances from Eritreans living abroad—the largest source of current transfer inflows in the balance of payments—may also decline if they begin to think of their government as undemocratic. Inflation, which reached 27% in 2000, has declined to 15% and is projected to fall further to around 5% in 2002-03, as food-crop harvests improve with better rainfall and no wartime disruption.

The political scene

Mr Isaias cracks down on A crackdown on political reformists and journalists was launched in mid- dissenters September, when the Eritrean authorities arrested 11 of the 15 members of the ruling political party, the People’s Front for Democracy and Justice (PFDJ)— widely referred to as the ‘Group of 15’ or G15—that wrote an open letter in March criticising the president, Isaias Afewerki, and calling for greater democracy (September 2001, page 20). On September 18th, six of these members of the PFDJ’s central council, who are also members of Eritrea’s national assembly, were detained as the government announced that it was suspending independent newspapers, saying that they had broken press laws and “put at risk the unity and best interests of the country”. The following day five more leaders of the country’s reform movement were detained. Three of the other critics were outside the country at the time but had their diplomatic passports revoked, and another publicly apologised for his criticism. Up to nine independent journalists were also arrested the following week and are believed to be performing obligatory national service. The 11 arrested PFDJ members potentially face the death sentence for treason.

The move to silence dissenters came in the wake of vigorous public debate about the future of the PFDJ, sparked by the leak of the G15’s letter to the press. The letter caused shock waves in Eritrea, where the government is rarely criticised in public. Several university student leaders are also reported to have been detained, following the arrest of their union president, Semere Kesete, on July 31st for criticising the government for interfering in university affairs. He was protesting about an obligatory summer work programme in Eritrea’s eastern desert. Ten days later, an estimated 2,700 students were rounded up

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Eritrea 21

and sent to the desert, where two died of heat stroke. Five Asmara University students were reported to be still held in a work camp at the end of October.

Eritrea: signatories of a letter criticising Mr Isaias

Name Former position Status Petrus Solomon Fisheries minister Detained Ogbe Abraaha Labour minister Detained Haile Woldetensae Trade & industry minister Detained Mohamed Ahmad Sherifo Local government minister Detained Saleh Idris Kekia Transport minister Detained Beraki Gebreselassie Information minister Detained Berhane Gebrezgiabher PFDJ central committee member Detained Aster Fisehatsion PFDJ central committee member Detained Hamid Himid Foreign ministry official Detained Estifanos Seyoum Finance ministry official Detained Germano Nati PFDJ central committee member Detained Gabriel Fasil Economic advisor in the presidential office Apologised Haile Menkarios Permanent representative to the UN Overseas Mesfin Hagos Defence minister Overseas Adhanom Gebremariam Ambassador to Nigeria Overseas Source: Local and international news sources.

The Italian ambassador is The crackdown on reformers was widely condemned by foreign governments expelled and human rights groups, many of whom noted that coming so soon after the terrorist attacks in the US on September 11th the timing appeared to reflect a hope that the international community might not react too strongly. In mid- October EU countries said that they would recall their ambassadors from Asmara for consultations, in protest at the deterioration in human rights. This followed the expulsion of the Italian ambassador, who was also acting head of the EU delegation, on September 28th after he protested on behalf of the EU against the government’s treatment of its critics. Italy responded on October 2nd by ordering the Eritrean ambassador to leave Italy within 72 hours. Five EU ambassadors had returned to Eritrea by November 9th.

On October 1st, the Eritrean foreign ministry announced that its ambassador to the EU, Tesfai Ghermazien, who was accused of acting against the government, had resigned and fled to the US. The government has reacted angrily to Western countries’ censure. On October 11th, the day the US government criticised the Eritrean government for its measures against the opposition, the authorities arrested two local employees of the US embassy in Asmara and accused them of spying for the US. Several foreign governments are reported to be considering a suspension of development aid to Eritrea.

UNMEE’s mandate is The United Nations Security Council voted unanimously on September 14th to extended extend the mandate of the UN Mission to Ethiopia and Eritrea (UNMEE), with unchanged numbers of troops and military observers, for a further six months until March 15th, 2002. Although UNMEE has a strong presence in the temporary security zone (TSZ), the UN continues to be hindered by Eritrea and

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 22 Eritrea

Ethiopia in some elements of its work, including the establishment of an air corridor between Addis Ababa and Asmara, which was to be operational in early November. Both sides agreed to give free access to the UN’s Radio UNMEE, but transmission of UNMEE’s weekly programme, which has been broadcast on Radio Eritrea since January, was suspended on October 24th, while the Ethiopian authorities have so far not given Radio UNMEE access to their airwaves.

UNMEE’s military The ninth meeting of the Military Co-ordination Commission (MCC) of commission meets again UNMEE, the only regularly scheduled face-to-face contact between representatives of Ethiopia and Eritrea, was held on October 29th in Djibouti. The two sides agreed on a new procedure for the recovery, identification and repatriation of unburied remains in areas on either side of the southern boundary of the TSZ, and appoint officials for this purpose within two weeks. The rotting remains around the former front line have become a health hazard to peacekeepers patrolling the 25-km-wide TSZ between the two countries. The tenth session of the MCC will be held on November 28th at the Mereb River bridge between the two countries.

The exchange of nationals The exchange of nationals between the two countries has been hampered by a with Ethiopia stumbles on number of outstanding issues: the whereabouts of an Ethiopian pilot missing since his plane was shot down over Eritrea in June 1998; the location of 36 police and militiamen taken prisoner by Eritrea in May and June 1998; and why the Ethiopian foreign ministry suspended the repatriation of Eritrean prisoners of war in August (September 2001, page 22). On October 11th, following the release of 24 Ethiopian POWs by Eritrea, Ethiopia again demanded that the pilot be released before it was willing to hand over Eritreans it was holding. However, the Ethiopian defence ministry announced on October 31st that it had decided to release 23 Eritrean POWs for health reasons. The repatriations are being conducted under the auspices of the International Committee of the Red Cross, which announced on November 2nd that since the signing of the Algiers peace accord in December 2000, Ethiopia had released a total of 879 of the 2,600 Eritrean POWs it was holding when the war ended. Eritrea, for its part, had released 653 of its 1,000 Ethiopian POWs.

Eritrean refugees return The voluntary repatriation of refugees from Sudan resumed on October 20th, from Sudan when 433 Eritreans returned home. The operation, which started in May, was suspended in early July (September 2001, page 22) owing to heavy rain, by which time nearly 21,000 refugees had returned home. The return of these long-term exiles, some of whom have lived outside Eritrea for decades, is planned to continue until December 2002 with the aim of repatriating a total of 160,000 refugees.

A regional co-operation Officials of the Gash Barka region and Sudan’s Kassala state signed an agreement is signed agreement on November 4th for bilateral co-operation between their two regions. The agreement, which was signed by the Kassala governor, Adam Hamid Mussa, and the governor of Barka, Mustafa al-Nour Hussein, provides

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Eritrea 23

for the creation of joint committees on economic, political-security and cultural-social co-operation.

Economic policy and the economy

The improving economy The government’s repression of dissidents could have a significant economic could suffer impact if, as some observers predict, donors freeze development funding and Eritreans living abroad limit their remittances because of the government’s action. This possibility stands in sharp contrast to a statement from the government, made just before the arrests, that GDP was expected to grow by 7% during 2001 and by 11% in 2002, after a three-year decline. A significant factor in the economic upturn is the sharp fall in defence spending, which had risen from 13% of GDP in 1997 to 38% during the conflict with Ethiopia. It currently stands at 21%, and is projected to decline further in 2002-03. Other contributing factors are increased spending on reconstruction, the easing of labour constraints following the end of the Ethiopian conflict and renewed private investment. Agricultural production was expected to triple in 2001, but this forecast was revised downward in late October when the Ministry of Agriculture announced that it expected crop production in 2001 to be twice that of 2000.

Mining projects come back Maiden Gold NL (Australia) and Africa Wide Resources (British Virgin Islands) on line have concluded a preliminary agreement to acquire concessions held by Phelps Dodge Exploration (US) in Eritrea. The partnership will be making a formal agreement with the Ministry of Energy and Mines for exploration permits for the Debarwa, Medrizien, and Adi Nefas properties, all of which are expected to yield positive results for gold, copper, zinc and lead.

Eritrea receives pledges to The government’s economic data were presented at the three-day development help with demobilisation partners’ conference officially opened by the president, Isaias Afewerki, in Asmara on September 11th. At the conference, donors pledged US$132m towards the demobilisation of 200,000 soldiers, a programme estimated to require a total of US$197m. The major contributors will be the World Bank, the EU, Denmark, the Netherlands, Norway and the UN, which is providing technical assistance to the reintegration part of the programme. Other donors who have expressed interest in contributing to demobilisation include Italy, the US, the African Development Bank and the Arab Bank for Economic Development in Africa. Eritrea announced that 80,000 soldiers would be demobilised by the end of 2001.

The UN helps with The reconstruction of houses has been taking place in recent months reconstruction throughout the temporary security zone (TSZ). In addition to work done by individuals, the UN Development Programme’s post-war emergency rehabilitation programme had completed 1,900 of 2,000 planned houses in Tserona and half of a planned 1,000 houses in Senafe, according to a report from the UN Mission to Ethiopia and Eritrea (UNMEE) on November 2nd. The rehabilitation programme also plans for repairing 2,400 houses in Gash Barka

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region. A total of 57 projects, most in water and sanitation, with a value of about US$600,000, have been approved under the UNMEE’s quick impact projects (QIPs), small-scale schemes designed to address immediate needs in the TSZ and adjacent areas. Implementing partners for the QIPs include local and international NGOs, local administrations, UN agencies and, in a few cases, UNMEE itself.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Somalia 25

Somalia

Political structure

Official name Somali Democratic Republic

Form of state In theory, a unitary republic; in May 1991 the Somali National Movement (SNM) unilaterally declared the creation of an independent state in the north, the Somaliland Republic; the rest of the country remains divided between rival armed factions

Legal system In theory, based on the 1960 constitution; in practice, local authorities or elders enforce laws based on custom; in some areas the influence of Islamic courts is growing, and they have begun to implement Islamic law

National legislature The People’s Assembly has not been active since 1991; a Transitional National Assembly was elected in August 2000 in Djibouti

National elections Last elections 1967 (presidential), 1969 (legislative); next elections are scheduled for 2003, but do not appear feasible in the south in current circumstances; Somaliland is scheduled to hold its first presidential election in February 2002 and legislative election in May 2002, the timing of these is in doubt

National government A Transitional National Assembly was elected in August 2000 but has little ability to administer on the ground; Puntland is a self-declared autonomous region in the north- east, with Garoe as its administrative capital; the Somaliland Republic in the north was declared independent in 1991, with Hargeisa as its administrative capital

Head of state Abdikassim Salat Hassan is president of the Transitional National Assembly based in Mogadishu; Mohamed Ibrahim Egal is president of the Somaliland Republic; the presidency of the Puntland administration is disputed by Jama Ali Jama and Adbullahi Yussuf Ahmed

Main political factions The Somali Reconciliation and Restoration Council (SRRC) was formed in Ethiopia in March 2001 and consists of many of the factions opposed to the Transitional National Assembly; United Somali Congress-Somali National Alliance (USC-SNA); Somali Salvation Democratic Front (SSDF); Somali Patriotic Movement (SPM); Southern Somali National Movement (SSNM); National Salvation Council (NSC); Somali National Front (SNF); Rahawayn Resistance Army (RRA). Several political parties have been formed in Somaliland, the largest being the Democratic United National Party (UDUB)

President Abdikassim Salat Hassan Prime minister Hassan Abshir Farah

Key ministers Parliament passed a no-confidence vote in the transitional national government on October 28th, in effect sacking the prime minister and the entire cabinet; on November 12th the president appointed a new prime minister who, under the constitution, has 30 days to appoint a cabinet

Somaliland Republic Created in May 1991 but awaiting diplomatic recognition; the president, Mohamed Ibrahim Egal, was re-elected in February 1997; an interim constitution came into effect in February 1997 and was affirmed in a popular referendum in May 2001

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 26 Somalia

Economic structure

Annual indicatorsa

1996 1997 1998 1999 2000 Population (m) 9.5 9.6 9.8 10.0 10.2 Exports fobb (US$ m) 187 177 197 186 n/a Imports fobb (US$ m) 295 313 280 314 n/a Total external debtc (US$ m; year-end) 2,643 2,561 2,635 2,606 n/a

November 2001d SoSh23,500:US$1 SolSh6,900:US$1

Principal exports 1990 US$ m Principal imports 1990 US$ m Livestock 43 Manufactures 204 Bananas 28 Non-fuel primary products 104 Hides & skins 3 Fuels 52

Main destinations of exports 2000b % of total Main origins of imports 2000b % of total Saudi Arabia 29 Djibouti 27 United Arab Emirates 29 Kenya 12 Yemen 28 India 9 Bahrain 1 Brazil 9 India 1 Thailand 7 a There are few reliable economic data for Somalia; all figures are rough estimates from official or other sources. b Based on partners’ trade returns; subject to a wide margin of error. c There have been no new disbursements of debt since 1991; statistical changes in the debt stock reflect currency fluctuations and arrears accrued since 1991. d EIU estimates for market rates in Mogadishu (Somali shilling, SoSh) and Hargeisa (Somaliland shilling, SolSh).

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Outlook for 2002-03

Political outlook Talks in November between the president, Abdikassim Salat Hassan, and representatives of the main opposition alliance, the Somali Reconciliation and Restoration Council (SRRC), have raised the possibility that Mr Hassan may meet the principal faction leaders of the SRRC. Brokering a deal between Mr Hassan and the SRRC will be a delicate and lengthy operation, and Ethiopia’s involvement in any reconciliation talks is crucial because of its support of the SRRC. Ethiopia suspects that Mr Hassan is supported by militant Islamists, and violent clashes between SRRC militias and supporters of the Transitional National Assembly (TNA) are likely to continue—the immediate flash-point being the advance of forces commanded by General Mohamed Siad Hersi “Morgan” towards Kismayu. Equally, the history of factional conflict casts doubts on whether the SRRC can maintain its cohesion over the forecast period. With much of the country outside the control of the TNA, the prospect of Somalia becoming a functioning sovereign state after 10 years without any central institutions remains slim. Inter-clan violence is not expected to end.

The passing by the TNA of a vote of no-confidence in the fledgling government in October was in one sense a major step forward for democracy, being the first time that a Somali parliament has legally dissolved a Somali government. However, a lack of control over the whole country means that the new prime minister, Hassan Abshir Farah, will not be able to fully exert his authority during the forecast period. For a similar reason, it is highly unlikely that the legislative election, scheduled for 2003, will be held. Although Somali organisations have been implicated in the United States’ “war on terrorism”, direct US military action is not expected—though covert action against certain groups can not be ruled out. The self-styled Somaliland Republic and the self- declared regional administration in Puntland are not expected to pose a military threat to the TNA, but are equally unlikely to accept its authority.

Economic forecast Unless the TNA gains control over the whole country, which is unlikely to happen in the forecast period, it can do little to manage the economy as a whole. The Central Bank of Somalia, which is currently being re-established, will allow the country representation in various international forums, providing a semblance of normality that the international community will welcome. However, it will have little influence on domestic monetary control given its inability to influence the major factors affecting the value of the Somali shilling and inflation: the many agents who import their own banknotes and the continuing ban on livestock imports from Somalia by Saudi Arabia and other Gulf states. The drop in livestock exports and a fall in expatriate remittances (see below) will worsen the shortage of foreign exchange, putting further pressure on the value of the shilling and in turn raising the price of imported products for local consumers. The reopening of Kenya’s border with Somalia, and Djibouti’s with Somaliland, will give a slight boost to the economy.

Somalia will be prevented from receiving financing under an IMF country programme because of both the new government’s lack of nationwide

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authority and the lack of institutions with which the IMF usually consults, but project funding from multilateral institutions should increase. Private-sector investment may also increase now that the country has (in name at least) an official government. However, this is dependent on security and is likely to be restricted to the exploitation of natural resources. Far more serious, though, will be the drop in remittance income from the Somali diaspora, estimated to range from US$200m to US$500m annually, that will follow the US government’s closing of the Al-Barakat money transfer company and the freezing of its assets. Al-Barakat was the largest of a number of money transfer companies operating in Somalia’s informal banking network, one of the mainstays of the country’s fragile economy, and the Economist Intelligence Unit expects the others to face similar action during the forecast period. The disruption to remittance inflows will have a severe humanitarian impact— already an estimated 750,000 Somalis are facing a major food crisis, mainly due to the worst gu (April-June) crop production for seven years.

Somaliland outlook Official recognition of seven new political parties in the self-styled Somaliland Republic in October marks the dawn of a new era of multiparty democracy. However, the prospects for a smooth transition to multiparty democracy by 2002 are poor. But the opposition parties will find it difficult to compete with the newly formed Democratic United National Party (UDUB; in effect a new government party with the president, Mohamed Ibrahim Egal, at its head) for access to funds and patronage. As parliament was still debating the country’s electoral laws in early November, it seems likely that local government elections, currently scheduled for December 2001, and a presidential election, scheduled for February 2002, will be postponed. Despite these steps towards democratisation, and the region’s relative stability, the chances of Somaliland achieving international recognition will remain slim, as the international community will hope for a reunited Somalia as long as the TNA continues to exist. Economically, the disruption to remittance inflows will worsen the impact of the ban by many Gulf states on livestock imports from Somalia.

The political scene

Parliament votes out the On October 28th the Transitional National Assembly (TNA) passed a no- interim government confidence vote in the fledgling government of the prime minister, Ali Khalif Galaydh, and his cabinet, ending their tenure after just 13 months. Of the 174 legislators attending parliament, 141 voted against Mr Galaydh and his 84- member government, 29 voted in favour and four abstained. The motion of no confidence, which accused the interim government among other things of corruption, violating the national charter, and failing to resolve the country’s security and economic problems, was brought before the TNA on October 12th by 14 MPs. President Abdikassim Salat Hassan appointed Hassan Abshir Farah as the new prime minister on November 12th—Mr Farah has 30 days to appoint a new cabinet. The no-confidence vote is a major step forward for democracy in the country, as it is the first time a Somali parliament has constitutionally (albeit under an interim constitution) dissolved a government.

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The no-confidence vote followed rumours in Mogadishu in recent months of a split between Mr Hassan and his prime minister caused by differences over how to deal with faction leaders opposed to the TNA. Mr Galaydh is believed to have favoured a more hardline approach than Mr Hassan. With Mr Galaydh removed from his post, Mr Hassan may step up his efforts at reconciliation, which are likely to be assisted by Mr Farah (see below). The appointment of a new cabinet brings the opportunity to offer posts to leaders of the Somali Reconciliation and Restoration Council (SRRC), the alliance of faction leaders opposed to the TNA, an option Mr Hassan suggested in September.

The new prime minister In his maiden speech, Mr Farah declared that his first priority was national promotes reconciliation reconciliation, which he aimed to achieve by negotiating with the factions opposed to the TNA, with representatives from the self-styled Somaliland Republic and with the self-appointed regional administration in Puntland. Mr Farah is thought to command greater popular support than Mr Galaydh and known to have good relations with traditional leaders. The appointment of the new prime minister was reportedly warmly welcomed in Puntland, Mr Farah’s home region—he is a member of the dominant Majerteen clan. Previously, Mr Farah had served as Puntland’s interior minister before becoming co-chairman of the Arta peace conference (September 2000, page 26) and minister of water and mineral resources in the outgoing government. Mr Farah also had several ambassadorial roles under the administration of President Mohamed Said Barre, which collapsed in 1991; these links will not allay the suspicions of the main factions in the SRRC and the Somaliland government that the TNA is a revival of the Barre administration.

A reconciliation conference An opportunity for reconciliation emerged in Nairobi at a four-day meeting of is held in Nairobi various political factions from Somalia, opened by the Kenyan president, Daniel arap Moi, on November 1st. The conference, attended by Mr Hassan and representatives of the SRRC, was hailed as a success by both sides, who announced that they had agreed to meet again for further reconciliation talks at an unspecified date. The Kenyan minister of state, Marsden Madoka, said that the faction leaders had agreed on the need for compromise and that their various legal systems should be reviewed, that power-sharing should be based on all Somali clans, and that national disarmament should accompany the process. Co-operation from Ethiopia, which was reportedly angry at being offered only observer status at the Nairobi talks, is crucial if the Kenyan- brokered effort is to make progress. Numerous reports in recent months suggest that Ethiopia has backed the SRRC against the transitional government because of its belief that militant Islamists support Mr Hassan. There were unconfirmed reports that several prominent SRRC leaders, including Hussein Mohamed Aideed, Musa Sude Yalahow and General Mohamed Siad Hersi “Morgan”, were in Addis Ababa during the Nairobi conference.

The TNA consolidates its The TNA has made further progress in its efforts to assert its international international standing legitimacy in recent months. Somalia’s first permanent representative to the UN for ten years, Ahmad Abdi Hashi Hasharo, presented his credentials to the UN secretary-general, Kofi Annan, on September 12th, and Djibouti’s new am- bassador to Somalia was received in Mogadishu on September 30th. Djibouti’s

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ambassador is the third to be accredited to Somalia. The ambassadors of Libya and Egypt have been in Mogadishu since before the creation of the TNA.

The TNA’s new Somali passports, announced in May (June 2001, page 29), arrived in Mogadishu in mid-September from Djibouti. The then prime minister, Mr Galaydh, announced on October 1st that the new documents, printed in France, would be issued immediately.

Violence continues in Despite its progress internationally, the TNA has continued to face a high level Mogadishu of violence and unrest in Mogadishu; several incidents were reported in September alone. At least three people were killed in two separate clashes between rival militiamen in the capital on September 2nd, the day of the release of an MP, Muhammad Abdi Gas, who was held hostage for four months. Mediators who helped secure the MP’s release suggested that the militia’s ransom demand was not met. Three people were reported killed and several others wounded in clashes between rival militia groups on September 10th at Sana Junction in Mogadishu. Several hours of heavy fighting on September 20th between militiamen and TNA police left at least two militiamen dead and several others wounded at the Hawara-Adde settlement in Mogadishu. Outside the capital, the worst incident over the past quarter was the death of at least 32 people in three days of fighting beginning on October 12th between TNA police and militia loyal to a faction leader, Musa Sude Yalahow, in Huriwa district.

Al-Ittihad targeted in fight A Somali Islamist group, Al-Ittihad, has been targeted in American efforts to against global terrorism starve of funds those suspected of being involved in terrorism, following the attacks on the US on September 11th. The US decision to freeze Al-Ittihad’s assets was announced in late September as part of a broad effort by the US and the EU to cut off financial support for Osama bin Laden, the chief suspect in the September attacks. Al-Ittihad is widely believed to be supporting and training ethnic Somali rebels fighting the government in Ethiopia. Although many of its training camps are thought to have closed in response to a series of Ethiopian military incursions in 1997, the group still has strongholds on Somalia’s southern coast and outside the northern port of Bossasso. The United States’ focus on Al-Ittihad may stem from the group’s alleged involvement in a global network of Somali “remittance banks”, which allow Somalis living abroad to transfer money to a relative in Somalia and operate outside the formal international banking sector (see Economic policy and the economy). A further indication that Somalia is among the states being investigated for links with global terrorism came in Washington on October 17th, when the US defence secretary, Donald Rumsfeld, stated that there was no question that Al- Qaida, Osama bin Laden’s organisation, was still involved in Somalia.

Aid agencies tighten Despite condemnation of the attacks by the TNA and Muslim scholars in security Mogadishu, thousands of Somalis took to the streets of the capital waving photographs of Mr bin Laden on September 23rd, as demonstrators burned American and Israeli flags in protest at US policy in the Middle East. Aid agencies working in Somalia stepped up security in the wake of the September attacks fearing reprisals against foreigners for American strikes against

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Afghanistan (and possibly other Islamic countries). All international UN staff were withdrawn from Somalia after war-risk insurance coverage for UN flights was discontinued by the insurance company. Some 30 international staff in Hargeisa, Somaliland, and 15 international staff in Baidoa, in southern Somalia, were evacuated by September 24th. The EU also said that it had evacuated around 80 foreign aid workers from Somalia. On September 29th the UN announced the return of its personnel and the resumption of humanitarian flights, having obtained the necessary insurance guarantees.

General Morgan advances Bu’aale, the regional capital of Jubbada Dhexe, came under the control of on Kismayu militia loyal to General Morgan of the SRRC in mid-October, a few days after the Juba Valley Alliance (JVA), a pro-TNA militia grouping, withdrew from the town. Reports indicate that General Morgan’s forces met no resistance on October 16th as they entered Bu’aale, which had been captured from the SRRC in late August (September 2001, page 30) by JVA forces, who also control the port of Kismayu, 250 km to the south. Some observers say that General Morgan’s forces—which were reportedly bolstered on September 9th by 40 soldiers flown in from Gaalkacyo, the administrative base of Colonel Abdullahi Yussuf Ahmed, the deposed Puntland leader—are involved in operations to cut the Mogadishu-Kismayu highway.

Puntland’s presidency The dispute over the presidency of the self-declared regional administration in remains uncertain Puntland escalated in mid-November and it is currently unclear who holds the position. Jama Ali Jama was elected the new president on November 14th at a congress of clan elders and Ahmed Mohamed Gonle was elected vice-president. The congress began on August 26th and after several months of stalemate proceedings accelerated following the appointment of a new chairman in late October. Mr Jama, a former army officer, has stated that his first priority is to restore peace in the region. However, the outgoing president, Colonel Abdullahi Yussuf Ahmed (September 2001, page 31), refused to recognise the outcome of the congress, and on November 21st, the day after Mr Jama’s inauguration, launched an attack on the region’s capital, Garowe. Forces loyal to Mr Ahmed, who still considers himself to be the president after parliament extended his term in April (June 2001, page 29), have reportedly captured the city. Mr Jama’s whereabouts are unknown, but the situation is likely to remain tense in what had been a relatively peaceful region of Somalia.

Economic policy and the economy

Declining remittances A fall in unregulated remittance flows into Somalia, due to suspicions of a link worsen humanitarian crisis between the money transfer companies and the Al-Qaida network, will have a severe humanitarian impact. Randolph Kent, head of the UN Development Programme for Somalia, said in late October that the drop in workers’ remittances was one of three factors contributing to a “major food crisis” which has put 300,000 Somalis in urgent need of assistance and made another 450,000 vulnerable. The other factors are drought—the gu harvest (April-June) in 2001 was the worst for seven years—and the continuing ban by Saudi Arabia

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on imports of Somali livestock. Somali expatriates are increasingly wary of being linked with remittance companies for fear of being labelled terrorist sympathisers, and agents of the remittance companies are reported to have faced problems from national authorities. Estimates of annual transfers range from US$200m to US$500m, mostly sent in tiny amounts (this compares with a UN estimate that only US$60m was receive in foreign aid in 2000). The system relies entirely on trust, circumventing formal transfer systems—there is no formal banking sector in Somalia—and bank employees often have strong Islamic beliefs. The system has become increasingly efficient over the past decade, and offices have been established worldwide. Transfer charges range from 1% to 8%, depending on the location of the remitter and the remittances’ ultimate destination; the larger banks are even used by the UN to pay its staff in Somalia. But their operations have caused concern among Western governments, and opponents within Somalia have linked them with extremism. In late September the US government placed Al-Ittihad on a list of groups whose assets were to be frozen.

US government seizes assets These fears appeared to be confirmed on November 7th when the US of money transfer company authorities ordered the immediate closure of the Al-Barakat money transfer company and the seizure of its assets worldwide, accusing it of transferring funds on behalf of Mr bin Laden and Al-Qaida. Al-Barakat’s chairman, Ahmad Ali Jimale, immediately denied the claim. In total, 62 individuals and organisations with ties to Al-Barakat and a Swiss-based money transfer company, which the US authorities also suspect of complicity in financing terrorism, have had their assets, totalling US$43m, seized. Mr Jimale said he formed Al-Barakat, which operates in 40 countries, following the outbreak of civil war in Somalia in 1991 and the collapse of the country’s formal banking system, as a means of helping Somalis who had fled the country to transfer funds to relatives back home. To date, the informal banking network, known as hawalad, remains the only way of transferring funds to Somalia. Al-Barakat was the largest of the handful of hawalad companies operating in Somalia. US officials have claimed that Somalis can use other remittance companies, but Al- Barakat had the largest foreign branch network and distribution network in Somalia, so considerable disruption to remittance flows is inevitable.

The shilling depreciates The depreciation of the Somali shilling accelerated in the last quarter. The further shilling, which after more than a year of relative stability at about SoSh10,000:US$1, began to fall in September 2000 because of a ban on livestock imports by Saudi Arabia and other Gulf states—a leading source of foreign exchange—and the import of banknotes by various factions. The exchange rate fell from SoSh20,000:US$1 in August 2001 in Mogadishu’s Bakara market, the city’s largest, to SoSh23,500:US$1 in October. Two people were killed during rioting in Mogadishu on October 9th after local shops and businesses refused to accept SoSh500 (2 US cents) banknotes because they were worn out and worth very little, fuelling further inflation. The price of a cup of tea in the capital doubled virtually overnight, from SoSh500 to SoSh1,000, the smallest denomination many businesses will take. Demonstrators stoned businesses and shops, and private security forces responded by firing into the crowds. President Hassan tried to calm the situation, reassuring Somalis that

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the note was legal tender and telling the police and the courts to ensure that it was accepted. The day after the demonstration, TNA police arrested at least 25 people for refusing to accept the banknote. Violent demonstrations also broke out in Beled Weyne in Hiiraan region on October 23rd, when businesses refused to trade in the SoSh500 note.

The TNA’s tax-collecting exercise in Mogadishu’s main markets, which began in early September (September 2001, page 29), faltered on September 23rd, when tax collection at Bakara market was halted by security men who went on strike over non-payment of their salaries. The SRRC, rejecting the legitimacy of the TNA, stated that tax payments would only be legitimate when there was a nationally or locally elected administration.

Kenya reopens the border The Kenyan president, Daniel arap Moi, ordered the immediate reopening of with Somalia the border with Somalia on November 5th after a three-month closure. Mr Moi described the move as a goodwill gesture, following the meeting of the Somali transitional government and some faction leaders in Nairobi. The closing of the border had largely cut off the supply of qat from Kenya, increasing the price in Somalia of this widely used narcotic.

Libyan company launches Horn Africa, a Libyan investment firm, held a ceremony at Mogadishu’s Hotel investment programme Shaamo, attended by senior government officials, MPs and businessmen, on September 30th to launch its investment programme in Somalia. The company plans to invest in the agriculture, fishing and livestock sectors.

News from the Somaliland Republic

The political scene

Seven political parties are The self-styled Somaliland Republic’s National Commission for the Registration officially registered of Political Parties issued certificates of registration on October 1st to seven political parties (see table) which had officially fulfilled the registration requirements by its September 21st deadline. One of the parties, the Somaliland Alliance for Islamic Democracy (SAHAN), was formed the day before the registration deadline by combining the Somaliland Salvation Party with the Somaliland Islamic Party and prominent opposition figures including several members of the Somali National Movement (SNM), veterans of the fight against the former president Mohamed Siad Barre in the late 1980s. Other SNM members, dismayed at the apparent sidelining of the organisation that had successfully fought Barre, declared that they would neither register the SNM nor participate in the forthcoming elections. The organisation’s executive committee stated that the SNM would devote its resources to finding other avenues to save Somaliland from the government’s “ill-motivated designs”.

Somaliland gears up for a Somaliland’s new political parties have begun to develop their infrastructure in multiparty system recent weeks. The Justice and Welfare Party (UCID) opened offices in Burao and Berbera on October 10th, the same day that SAHAN opened its office in

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the town of Gabilay and held a public rally in Hargeisa. Although each new party claims to have a plan of action, none appears to have published a manifesto so far and some have not even managed an inaugural conference. Somaliland’s president, Mohamed Ibrahim Egal, has brushed aside charges from traditional clan leaders that the Ururka Demoqoraadiga Ummaddaha Bahoobay or Democratic United National Party (UDUB), effectively the new government party, was illegal, and has opened UDUB branches in most districts of Somaliland. A series of talks on election issues between the government and the new opposition parties began in early October, but the outcome of these discussions has not been made public.

Somaliland: licensed political parties, Oct 2001

Name (in English) Abbreviationa Democratic United National Party UDUB Justice and Welfare Party UCID Somaliland Alliance for Islamic Democracy SAHAN Salvation and Protection of Somaliland’s Aspirations BIRSOL Vanguards for Peace and Prosperity HORMUUD Unification of Somaliland’s Viewpoints UMAD Somaliland’s Beacon Light Party ILAYS

a Derived from the parties’ Somali names,

Source: Press reports.

Elections may be The Somaliland parliament was still debating the electoral laws, which will rescheduled include the establishment of an Election Commission, in early November. Local government elections are scheduled for December 2001, followed by a presidential election in February 2002 and parliamentary elections in May, but many observers in Hargeisa suggest that rescheduling is inevitable, as the parties are unprepared for the polls. Some legislators also suggest that the order of these events should be changed—that the parliamentary election should precede the presidential election. MPs from Awdal region have boycotted the debate on the electoral laws as they claim that the new laws will be based on the 1960 allocation of electoral constituencies, which they do not believe gives fair representation to their region

Economic policy and the economy

The Somaliland shilling The Somaliland shilling has fallen against the US dollar in recent months. depreciates Trading at around SolSh5,000:US$1 in August, in September the shilling fell further, to SolSh7,500:US$1, before recovering to SolSh6,900:US$1 in early November. The sharp depreciation in September was in response to the pressure being placed on Somali money transfer companies following the attacks on the US. A further fall in the shilling is expected as the closure of Al- Barakat has caused a reduction in foreign-exchange inflows.

The border with Djibouti is Djibouti reopened the border with Somaliland on November 4th signalling a reopened marked improvement in bilateral relations. This followed a two-week visit to

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Djibouti in early October by a delegation, headed by the Somaliland foreign minister, Abdihamid Garad Djama, which produced a six-point agreement to end hostilities (see Djibouti: The political scene). Relations between the two sides were soured by Djibouti’s hosting of the Somali peace talks at Arta in 2001, and the border was closed by Djibouti in April after a trade dispute (June 2001, page 31).

Somali refugees return Some 4,900 Somali refugees were voluntarily repatriated from eastern Ethiopia from Ethiopia in late October in three road convoys organised by the UN High Commissioner for Refugees (UNHCR). The UNHCR announced in Addis Ababa on November 6th that about 6,400 others were due to leave Darur camp, which is due to close by the end of the year, for Hargeisa, in November. The UN World Food Programme is giving them food and household tools to last nine months as well as plastic sheeting and US$30 each. Almost 47,500 Somali refugees have been repatriated from Ethiopia in 2001. In 2000 some 139,000 Somali refugees were voluntarily repatriated.

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Djibouti

Political structure

Official name République de Djibouti

Form of state Unitary republic

Legal system Based on the Napoleonic Code. A referendum in September 1992 endorsed a new constitution, which allows a maximum of four political parties

National legislature National Assembly (Assemblée nationale); 65 deputies, elected by universal suffrage, serve a five-year term; an alliance of the RPP and the FRUD holds all the seats

National elections December 1997 (legislative) and April 1999 (presidential); next elections due in December 2002 (legislative) and April 2005 (presidential)

Head of state President, elected by universal suffrage; serves a term of six years

National government The president and his appointed Council of Ministers; last reshuffled in May 1999

Main political parties Rassemblement populaire pour le progrès (RPP), the former sole legal party, split in 1996, and dissidents formed Groupe pour la démocratie et la république, which was later banned; Parti national démocratique; Parti pour le renouveau démocratique. In 1991 Front pour la restauration de l’unité et de la démocratie (FRUD) launched a rebellion by the Afars. In 1994 the government signed a peace agreement with one faction of FRUD. The faction was legalised in 1997 and contested the legislative election in alliance with the RPP. A peace deal was signed with the militant FRUD faction in May 2001

President Ismael Omar Guelleh Prime minister & minister for land development Dileita Mohamed Dileita

Key ministers Agriculture & water resources Dini Abdellah Bililis Commerce & industry Saleban Omar Oudine Communication & culture Rifki Abdulkader Bamakrama Defence Ougoureh Kifle Ahmed Economy, finance & privatisation Yacin Elmi Bouh Education Abdi Ibrahim Obsieh Employment & solidarity Mohamed Barkat Abdillahi Energy & natural resources Mohamed Ali Mohamed Foreign affairs & co-operation Ali Abdi Farah Interior Abdulkader Doualeh Waiss International co-operation Mahmoud Ali Yusuf Justice, prisons & human rights Ismail Ibrahim Houmed Presidential affairs & investment promotion Osman Ahmed Moussa Public works, housing & construction Saleiban Omar Oudine Transport & equipment Elmi Osbieh Waiss

Non-cabinet advisers Directeur de cabinet Ismael Hussein Tani Chef de cabinet Ali Guelleh Abubaker

Central bank governor Djama Mohamed Haid

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Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (Dfr bn) 86.8 88.9 91.4 94.6 97.8 Real GDP growth (%) –3.8 0.5 0.8 1.5 2.3 Populationb (m) 0.61 0.62 0.62 0.63 0.63 Consumer price inflation (%; av) 2.6 2.4 2.0 1.9 2.0 Exports fob (US$ m) 40 43 59 69 n/a Imports fob (US$ m) 201 204 240 252 n/a Current-account balance (US$ m) –20 –12 –3 –4 n/a Reserves excl gold (US$ m; year-end) 77.0 66.6 66.5 70.6 67.8c Total external debt (US$ m; year-end) 296 274 288 280 n/a External debt-service ratio, paid (%) 5.8 3.4 6.2d 7.0d n/a Exchange rate Dfr:FFr (av) 34.7 30.4 30.1 28.8 24.6c Exchange rate Dfr:US$ (av) 177.7 177.7 177.7 177.7 177.7c

November 13th 2001 Dfr177.7:US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1998e % of total Primary sector 3.5 Private consumption 79.5 Secondary sector 14.9 Government consumption 23.6 Construction & public works 6.6 Gross domestic investment 15.3 Tertiary sector 81.6 Exports of goods & services 45.4 Transport & communications 28.0 Imports of goods & services –63.8 GDP at factor cost 100.0 GDP at market prices 100.0

Exports 1998e US$ m Principal imports fob 1998ef US$ m Re-exports 45 Food & beverages 53 Locally produced goods 14 Qat 17 Petroleum products 17 Machinery 15

Main destinations of exports 1999g % of total Main origins of imports 1999g % of total Somalia 50 France 14 Yemen 21 Saudi Arabia 14 France 16 Ethiopia 9 Ethiopia 4 China 7 UAE 4 UK 6 a EIU estimates. b IMF figures, including refugees and expatriates. c Actual. d Calculated by the EIU from Banque nationale de Djibouti data. e Provisional estimates. f Excluding goods for re-export. g Based on partners’ trade returns; subject to a wide margin of error.

© The Economist Intelligence Unit Limited 2001 EIU Country Report December 2001 38 Djibouti

Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3Qtr 4 Qtr 1 Qtr 2Qtr Government finance (Dfr m) Revenue & grants 7,551 8,820 6,186 6,553 8,906 n/a n/a n/a Revenue 6,206 6,490 4,719 5,665 6,394 n/a n/a n/a Grants 1,345 2,330 1,467 888 2,512 n/a n/a n/a Expenditure 7,289 8,670 7,374 7,639 9,379 n/a n/a n/a Current 6,967 7,768 7,009 7,291 7,829 n/a n/a n/a Development 322 902 365 348 1,550 n/a n/a n/a Balance 262 150 –1,188 –1,086 –473 n/a n/a n/a Output Energy consumption (mwh) 46,915 38,327 30,532 43,132 46,912 n/a n/a n/a Household 25,667 19,566 14,041 16,993 20,773 n/a n/a n/a Others (industrial etc) 21,248 18,761 16,491 26,139 26,139 n/a n/a n/a Prices Consumer prices (Mar-Apr 1999=100) 97.5 98.8 99.6 101.0 99.5 n/a n/a n/a % change, year on year n/a n/a n/a 2.5 2.1 n/a n/a n/a Financial indicators Exchange rate Dfr:US$ (av) 177.72 177.72 177.72 177.72 177.72 177.72 177.72 177.72 Dfr:US$ (end-period) 177.72 177.72 177.72 177.72 177.72 177.72 177.72 177.72 M1, (end-period; Dfr m) 27,737 30,274 27,796 29,164 28,845 27,911 27,466 28,145 % change, year on year 3.7 3.5 –5.2 0.3 4.0 –7.8 –1.2 –3.5 M2, (end-period; Dfr m) 50,878 52,021 50,545 51,598 52,348 52,608 52,868 54,311 % change, year on year –3.4 –3.8 –5.9 –4.8 2.9 1.1 4.6 5.3 Sectoral trends Djibouti port traffic (‘000 tonnes) Incoming goods 862.8 752.7 1,061.2 611.6 958.7 n/a n/a n/a Bound for Ethiopia 453.4 350.0 483.8 358.2 454.0 n/a n/a n/a Outward bound goods 91.6 70.3 97.8 103.0 166.4 n/a n/a n/a From Ethiopia 63.4 20.5 39.0 62.9 65.8 n/a n/a n/a Foreign tradea (US$ m) Exports fob 46.32 37.64 37.64 33.74 41.29 30.63 77.64 37.39 Imports cif –161.64 –170.12 –183.78 –144.43 –140.51 –145.93 –190.42 –147.29 Trade balance –115.32 –132.48 –146.14 –110.69 –99.22 –115.30 –112.78 –109.90 Foreign reserves (US$ m) Reserves excl gold (end-period) 62.2 70.6 62.2 62.5 59.1 67.8 63.0 67.5 a DOTS estimates.

Sources: Banque nationale de Djibouti, Indicateurs économiques et monétaires; IMF, International Financial Statistics; Direction of Trade Statistics.

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Outlook for 2002-03

Political outlook President Ismael Omar Guelleh will seek finance and concessions from the US, by playing on American concerns that Somalia was used by the Al-Qaida network as a conduit for funds. He was swift to express solidarity with the US following the September 11th attacks, and has sought to capitalise on Djibouti’s role as broker of the negotiated settlement in Somalia that created the Transitional National Assembly in 2000. Djibouti’s political and commercial elite, which has extensive links with Somalia’s merchant class both in the Horn and the Gulf, will try to distance itself from the Dubai-based Al- Barakat corporation, which is suspected by the US authorities of being a financier of Osama bin Laden’s Al-Qaida network. US concerns over terrorism appear to have stimulated regional co-operation and prompted the brief visit by the Ethiopian prime minister, Meles Zenawi, to Djibouti on November 10th. The fact that US interest in the activities of Islamist groups in southern Somalia has tightened intelligence and military ties between Ethiopia and Washington should, through its close relationship with Ethiopia, indirectly benefit the Djiboutian government. Direct US use of Djibouti’s port and military facilities, as occurred during the 1991 war against Iraq, does not appear imminent. Nevertheless, closer regional co-operation spearheaded by Ethiopia should increase the political capital generated by Mr Guelleh’s sponsorship of the Somali peace process in 2000.

Mr Guelleh’s regional diplomatic standing contrasts strongly with his authoritarian rule at home. However, there is evidence that he now feels more secure domestically: in September an amnesty of his most vehement opponents—including Moumin Bahdon, Mr Guelleh’s main rival to succeed President Hassan Gouled Aptidon—was declared. Five prominent critics of Mr Guelleh have been permitted to re-enter public life. The government claimed that the amnesty reflected Mr Guelleh’s desire to reconfigure domestic politics following the May 2001 peace deal with Ahmed Dini (June 2001, page 37), to encourage a more pluralist campaign in the legislative election, which is scheduled for late 2002. Although opposition groups may win seats in parliament at the election, effective power will remain with the presidency. Those opposition groups (largely exiled) that are opposed to the peace accord signed by Mr Dini are highly unlikely to return to armed struggle, because of the changed regional situation and closer ties between Ethiopia and Djibouti.

Economic forecast Credible forecasts of the performance of the Djiboutian economy are made difficult by the lack of economic data. Recently some steps have been taken towards improving information flows, including better monitoring of fiscal performance. However, further evidence of commitment to financial transparency, together with administrative reforms, will be required before significant multilateral financial assistance is forthcoming. In general, multilateral agencies are likely to remain sceptical of President Guelleh’s commitment to financial rigour. The administration’s obvious lack of commitment to fundamental change belies recent statements by the president and his prime minister on the need for reform. One example of this is the continued failure to curb the bloated civil service wage bill, despite an

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undertaking to the IMF to do so; the civil service remaining the main vehicle for patronage and political control. After being stalled for five years, fiscal and structural reforms are unlikely to accelerate over the forecast period. Other reforms previously agreed with the IMF, especially streamlining the civil service, privatisation and labour market liberalisation, will continue to be delayed. Without domestic political consensus, proper economic reform is not possible and the economy is unlikely to show any dynamism or substantial growth. Instead, its fortunes will continue to depend on Ethiopian traffic through its port—Ethiopian trade is not expected to return to Eritrean ports during the forecast period—and on muddling through the reform programme to ensure that external financing trickles in.

The political scene

Speculation over American Military action by US and allied forces against Afghanistan, in the wake of the use of military facilities attacks on September 11th, raised the possibility that Djibouti’s strategically located port and airstrip facilities might again be used in the context of any wider military action. During the 1990-91 Gulf war, Djiboutian bases were used for refuelling and support services by American and French forces. Reuters reported that the US had indeed promptly requested logistical assistance from Kenya and Djibouti. However, following a meeting between the US ambassador, Donald Yamamoto, and President Ismail Omar Guelleh on September 20th, the foreign minister Ali Abdi Farah, told the weekly newspaper La Nation that Djibouti had received no such request, adding: “when the time comes, we will take the measures deemed appropriate.” Government officials told the UN regional information network that Djibouti had received no official request for the use of its facilities.

The spokesman for the French Ministry of Defence also played down the likelihood of an immediate change in the regional role of its Djibouti-based military forces. France currently has 2,660 men based at its Djibouti garrison, which also acts as a logistical centre for a fleet of four ships based in the Indian Ocean. On September 20th France’s six ageing Mirage F1-C aircraft based in Djibouti were replaced by five, more modern Mirage 2000-C aircraft. Military sources said that this move had been long scheduled and was not linked to the increase in regional tension.

An anti-terrorism On October 7th a national anti-terrorism committee (Comité national de lutte committee is established contre le terrorisme) was convened under the chairmanship of the justice minister, Ismael Ibrahim Houmed. The seven-man committee was created by presidential decree four days earlier. According to local reports, the committee comprises the ministers of justice, finance, interior and foreign affairs, the army chief-of-staff, the governor of the Banque nationale de Djibouti (the central bank) and the director of national security. Internal security was visibly stepped-up the following week, with additional police and paramilitary forces positioned at diplomatic, financial and oil installations. On October 17th President Guelleh was one of ten African heads of state to attend a one-day meeting on counter-terrorism in Dakar, Senegal. Delegates from the 28 African

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001 Djibouti 41

states present suggested that the African Union should convene a summit on the issue, noting that though the body had agreed an anti-terrorism pact in 1999, only three states had ratified it.

Relations with Somaliland On October 21st Djibouti’s Ministry of Foreign Affairs and International Co- improve operation confirmed that a six-point agreement had been signed with the authorities in the Somaliland Republic for re-opening the Loyada border crossing between the two countries. This had been officially closed since June, following the latest episode in the fraught bilateral ties between Djibouti and the Somaliland Republic. Following a visit on October 5th to Djibouti by a Somaliland delegation composed of Ahmad Yusuf Du’ale, the education minister, and Abdihamid Garad Djama, the foreign minister, the two sides agreed to end hostilities, which had recently degenerated into vitriolic criticism of Somali clansmen (September 2001, page 41). A bilateral commission to oversee the free movement of goods and people between both countries and to ensure private property rights was established. The ministerial visit was reported to have followed pressure from the governments of both the US and the United Arab Emirates. A fortnight earlier, President Guelleh had indicated that reconciliation was possible if frontier security could be guaranteed; adding, “too much ego, misplaced words, have never helped anyone”.

Economic policy and the economy

Little progress is made with On November 1st, in his speech to the annual congress of the ruling decentralisation Rassemblement populaire pour le progrès (RPP) in the south-western town of Ali Sabieh, President Guelleh stressed the centrality of regionalisation to economic reform. Decentralisation was also a key element of the peace deal signed with Afar militants in May (June 2001, page 37). Yet in practice there are few signs of a reorientation of economic activity away from the capital, Djibouti-ville, and its port. A similar credibility gap between stated intent and practice is likely to undermine a new initiative, launched by the prime minister, Dileita Mohamed Dileita, in October. Under the initiative, designed to streamline government decision-making, a technical committee drawn from both public and private sectors is to be established to make proposals on improving public services and reducing poverty.

A new mobile phone On October 30th the Council of Ministers agreed legislation enabling Djibouti- network is agreed Telecom to establish a mobile phone network. The new GSM900 network, to be known locally as Evatis, will have a capacity of 25,000 subscribers throughout the country. According to official reports it will cost DFr800m (US$4.5m) to construct, although no details of financing or contractors have been given. Although Djibouti has good international communication links, it currently does not have a mobile phone system, and the vast majority of landline subscribers are concentrated in Djibouti-ville. Two years ago the state- owned telecommunications authority was restructured to attract foreign investment in the expansion of telephone networks.

© The Economist Intelligence Unit Limited 2001 EIU Country Report December 2001 42 Djibouti

Trade tensions with A five-man delegation from the Ethiopian Chamber of Commerce (ECC) Ethiopia are discussed visited Djibouti in mid-October as a part of a series of initiatives to try to negotiate an end to the trade disputes between the two neighbours. The Ethiopians met Djiboutian ministers and officials, as well as their counterparts in Djibouti’s International Chamber of Commerce. The meetings led to the creation of a Joint Ethio-Djiboutian Business Council as a forum for the discussion and resolution of bilateral trade disputes. However, the ECC, which represents mainly private-sector businesses, has only indirect influence on the Ethiopian government and the large state- and party-owned companies which dominate key sectors of the economy. Ethiopia’s state-owned shipping and forwarding agency, Maritime Transit Services Enterprise (MTSE), is the company most affected by Djibouti’s attempts to reserve key port handling and forwarding activities for national companies (September 2001, page 41). In September Djibouti’s Ministry of Transport announced that it would delay implementation of the new legislation until late October. In mid-November, despite the efforts of the Ethiopian business delegation, the position of MTSE, and that of other foreign companies operating at the port, was still uncertain.

Fiscal and monetary data Credible economic data on which to base estimates of the state of the economy suggest stabilisation remain limited; much of the country’s statistics-gathering capacity disinte- grated in the early 1990s. Foreign technical assistance, coupled with tighter external monitoring of fiscal policy, appears now to be paying dividends in the form of improved data, although the lack of recent continuous time series still makes comparisons problematic. New monetary statistics, published by the Banque nationale de Djibouti (the central bank) in September, show that broad money (M3) grew by just under 4% in the year to August 2001 and narrow money (M1) contracted by 3.9%. Growth of all monetary aggregates has been sluggish—M3 growth has picked up slightly owing to an increase in time deposits—illustrating the weak state of the Djiboutian economy. Separate data, published in an economic information bulletin in August, show that govern- ment expenditure was sharply lower in the first half of 2001 than in the same period of 2000. At end-June the budget deficit was DFr1.17bn (US$6.6m), 40% lower than the deficit of DFr1.97bn recorded in mid-2000; this reduction was achieved despite the steep fall in external financial assistance over the period.

EIU Country Report December 2001 © The Economist Intelligence Unit Limited 2001