Eritrea: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Tentative start to the economic diversification process
The Eritrean economy is heavily dependent on its agricultural sector (grain, vegetables, cotton, tobacco, and so on), which is itself subject to weather condition uncertainties. GDP growth in 2011 will thus largely depend on the amount of precipitation recorded last year during the July/August rainy season whose late start may have hurt June seedling performance. The heavy rains in August have moreover undermined the outlook for agriculture in the Gash Barka region in western Eritrea. These factors augur poor grain production and yield in 2011, which will affect economic growth. But Eritrea will likely begin to benefit, however, from the operational start-up of both the cement factory built by China in the Messawa customs-free area and the Bisha gold mine operated by the Canadian Nevsum Resources Company. The upward trend of gold prices, if it lasts, is expected to enable a marked increase in exports in 2011, facilitated moreover by new infrastructure projects that have benefited the Messawa Port. The international support for modernization of the artisanal fisheries in the Red Sea will also contribute to more effective exploitation of the country's assets. Economic development will nonetheless continue to be handicapped by persistent structural weaknesses like the bloated defense sector, which monopolizes a high proportion of both the fiscal budget and the labor force, or the deficiencies in road and railway infrastructure.
Low foreign exchange reserves and unsustainable debt
The current account deficit is expected to narrow under the effect of an increasingly favorable trade balance. Foreign exchange reserves will grow despite a possible stagnation in remittances from an Eritrean diaspora, not really willing to finance the needs of government authorities. These remittances are still Eritrea's main source of foreign currencies. But the development of the Bisha gold mine and the one in Zara to be operated by the Canadian Chalice Gold Mines Company will constitute an additional source of foreign exchange and generate revenues for the government. That will pave the way for a reduction in the public sector deficit, which will in any case remain large. Government authorities will thus be expected to rely less on bank borrowing and money creation to finance their needs. The resulting reduction in the money supply will put downward pressure on prices, but they will nonetheless rise about 15%. Despite high foreign debt coupled with public sector debt representing 135% of GDP in 2009, the government has refused to seek assistance from the IMF thus preventing Eritrea from benefiting from the HIPC and MDRI initiatives. Therefore, the financial donors only intervene to provide indispensable humanitarian aid regarding chronic crises linked to food insufficiency.
Recurrent border conflicts
Tensions at the border with Ethiopia have not eased since the decisions by the United Nations late 2009 particularly to prohibit the sale of arms to Eritrea in response to its support to Islamist movements operating in southern Somalia. Sporadic confrontations compounded by territorial disputes with Djibouti have contributed to undermining Eritrea's economic development.
Strengths
- Strategic position on the Gulf of Aden at the entry to the Red Sea
- Mine operation opportunities have attracted foreign investors
Weaknesses
- Extreme vulnerability to climatic shocks
- Excessive weight of military budget
- Risk of armed confrontation with neighboring countries, especially Ethiopia and Djibouti
- Concentration of productive resources in agriculture and military activities
- Limited opportunities for diversifying the economy outside the mining sector
- Chronic shortage of food