Growth supported by mineral exports and the Colluli mine project

After taking a double hit from the COVID-19 pandemic and a locust invasion that decimated crops in 2022, the economy will continue the recovery that began in 2021. Despite the authorities’ refusal to launch a vaccination campaign, growth should be stimulated mainly by a return to standard services. Consumption, which began picking up in 2021 thanks to the resumption of remittances inflows, should benefit from this. In 2022, the improvement in the agricultural sector, on which the population is exceptionally dependent (75% of people earn their livings from agriculture, livestock farming, and fishing), should have a positive impact on household income and, consequently, on consumption, which will nevertheless remain fragile, with 69% of the population living below the poverty line. In addition, agricultural activities will remain exposed to the risk of locusts and climate-related hazards. In 2022, higher export revenues from mining activities (copper, potash, zinc, and gold) will also support growth. After benefiting from the strong recovery in commodity prices in 2021, price levels should remain favorable to change. In addition, work on the significant potash project in Colluli could support exports from 2022. This project will be one of the primary sources of growth in private investment, which will otherwise remain weak. The unfavorable business environment, the slow pace of reforms, unpredictable policies, deficient infrastructure, and an unstable political environment will continue to make foreign investors wary of a country that is still very closed. The contribution of public investment should also remain weak, owing to recurrent financing difficulties.

After a period of deflation between 2016 and 2019, reflecting a contraction in the money supply, inflation initiated a comeback in 2020. It is expected to be sustained in 2022 by prices of imported commodities, especially oil and food (from Ethiopia).

Public debt is still alarmingly high

With the COVID-19 pandemic, the budget deficit increased due to support measures for businesses and the establishment of a National Pandemic Fund. In 2022, it was expected to narrow thanks to higher revenues resulting from the recovery in activity. Despite the end of support measures, the state wage bill and capital investment in infrastructure, as part of mining projects, will maintain the deficit. However, recurrent financing problems are likely to continue to constrain the authorities’ investment capacity. Public debt, essentially domestic and denominated in local currency, remains exceptionally high due to recurrent debt-financed budget deficits and will continue to pressure the country’s public finances. Although relations with the international community have improved slightly following the rapprochement with Ethiopia, access to donor assistance will remain limited.

In 2022, the current account will continue to show a significant surplus, thanks to expatriate remittances and the trade surplus. Despite high oil prices, which are expected to increase the import bill, the trade balance will remain in surplus thanks to the simultaneous recovery of mining exports (95% of export earnings in 2019). The income and services accounts will again register slight deficits, driven by interest payments and imports of services needed for mining activity, respectively. By drawing on foreign exchange reserves (three months of imports) fuelled by repeated current account surpluses, the central bank will continue to maintain the nafka’s dollar peg, which, given the parallel market exchange rate, will remain overvalued.

Tigray conflict fuels tensions on the border with Ethiopia

Since 1993, the political landscape has been dominated by the People’s Front for Democracy and Justice (PFDJ), the only legally authorized party, and by President Isaias Afwerki. The lack of fundamental freedoms and the regime’s totalitarian excesses are widely acknowledged and make the country one of the most closed in the world. However, in 2018, the president signed a peace declaration with neighboring Ethiopia, ending a 20-year war. The conflict with Ethiopia started as a border dispute, and accusations over the funding of al-Shabab armed groups in Somalia had excluded Eritrea from the international community and led to UN sanctions. These were lifted at the end of 2018 following the peace efforts with its neighbors, including Ethiopia, Somalia, Sudan, and Djibouti. Despite the hopes raised by this progress, the country is again under international scrutiny for sending troops to the Tigray region of northern Ethiopia, where a conflict is underway between the regional government and the central government. Many media outlets have reported war crimes and serious human rights violations, including rape and torture. As a result, international pressure is mounting for troops to be withdrawn from the region. The conflict began in November 2020 and remains unresolved, with Eritrean refugee camps in Tigray, particularly at risk.