Eritrea: Risk Assessment
Country Risk Rating
Business Climate Rating
- Extensive mineral resources (potash, copper, gold, silver, zinc)
- Strategic position on the Red Sea
- Potential additional gateway for Ethiopia
- Critical level of debt
- Country has become an international pariah state
- Worrying human rights record
- Very difficult business climate
- State plays a massive role in the economy
- Extreme poverty, high emigration
Resumption of growth in 2021
Even though Eritrea was only slightly impacted health-wise by the COVID-19 pandemic, the country's growth dropped in 2020 as the economy was hit by a twin supply and demand shock. The national lockdown, caution among consumers and investors, and the collapse of global demand all reduced demand. Supply, meanwhile, was affected by supply chain disruptions. This supply shock caused inflation to rise dramatically after several years of deflation due to low prices for consumer goods imported at an overvalued exchange rate. As supply chains get back to normal and demand, especially external demand, recovers, growth is expected to pick up sharply in 2021 to outstrip pre-crisis levels. The government may invest massively in the health system following COVID-19. The mining sector, the mainstay of the economy, was severely impacted in 2020 by the drop in demand for commodities as industrial and construction activity came to an abrupt halt in many countries. The sector is poised to recover in 2021, with the Bisha copper and zinc mine set to increase its production, which, possibly coupled with higher prices, could boost the country's export revenues. Moreover, the development of the Colluli potash mine is proceeding on schedule, despite government-imposed restrictions due to the health crisis. The facility is expected to begin producing potassium sulfate in 2022.
However, much of the FDI (9.6% of GDP) goes to this sector. Due to uncertainties related to the recovery, these investments are likely to decline, hurting the mining sector and its exports, which are vital at a time when imports are expected to continue to increase. Agriculture (about 30% of GDP and 60% of employment) was hard hit by locust invasions, which sharply reduced yields and forced the country to increase food imports. Reliance on food imports is expected to continue in 2021.
A widening public deficit, but a comfortable current account surplus
The increase in public spending and the decrease in revenues, in connection with the COVID-19 crisis, caused the public deficit to widen. While no plan was officially adopted, the government-aligned itself with the WHO in terms of preparedness and response measures. The government also made it easier for micro and small enterprises to access credit, thus limiting business closures and supporting the economy. Furthermore, the authorities are expected to continue vigorously raising donations from citizens and expatriate remittances for the National Pandemic Fund. This fund has made it possible to meet the most urgent health needs and assist the poorest and most vulnerable households. Public debt, which is mainly domestic and denominated in the local currency, is still at an extremely high level and will continue to pressure the country's finances in the years to come. In addition, although relations with the international community have improved slightly, access to donor assistance will remain limited.
Looking at the external accounts, the current account surplus is large, thanks to remittances from Eritrean expatriates (12% of GDP), as well as a trade surplus driven by mining exports (25% of GDP). The surplus narrowed in 2020 due to lower net exports. Drawing on foreign exchange reserves fuelled by repeated current account surpluses, the central bank will continue to maintain the nafka's peg to the dollar, which, given the parallel market exchange rate, will remain overvalued.
A return to the international scene to be confirmed
The political landscape is dominated by the People's Front for Democracy and Justice, the only legally authorized party, which has been led by President Issayas Afeworki since 1993. The total absence of democracy and fundamental freedoms, alongside the regime’s totalitarian excesses, is widely acknowledged and made Eritrea one of the most closed countries in the world.
However, in July 2018, the president signed a peace declaration with the Ethiopian Prime Minister, Abiy Ahmed, agreeing to officially end 20 years of war, reopen borders and restore trade, transport, and telecommunications links between the two countries. Originally due to a border dispute, the conflict with Ethiopia, coupled with accusations over the funding of al-Shabab armed groups in Somalia, had excluded Eritrea from the international community and led to UN sanctions (arms embargo, travel bans, asset freeze). These sanctions were lifted in November 2018 to welcome the peace efforts made, which also extended to relations with Somalia, Sudan, and Djibouti. The peace agreement has raised high hopes in the region, as illustrated by the various infrastructure investments announced since then. However, the unilateral decision to close borders with Ethiopia in April 2019, as well as the regime's slowness in complying with the peace agreement and initiating reforms, are fuelling uncertainties among potential investors. A reform of the country’s indefinite military service, one of the main reasons prompting Eritreans to emigrate, would be a major signal of openness.