Eritrea: Risk Assessment
Country Risk Rating
Business Climate Rating
- Extensive mineral resources (potash, copper, gold, silver, zinc)
- Strategic position on the Red Sea
- Large public and external deficits
- Critical level of debt
- Country has become an international pariah state
- Worrying human rights record
- Very difficult business climate
The Mining Sector is the Only Island of Activity
Growth will likely remain relatively subdued in 2018. Weak public resources are expected to continue to mainly benefit the army and will, therefore, provide only negligible support for growth. Flows of foreign investments, limited by a very degraded business climate, are unlikely to offset the public investment deficit. Mineral resources (copper, zinc, gold, silver, potash) are the only attraction for foreign, particularly Chinese, investment. The mining sector is thus almost the only driver of growth. Operations at the Koka (gold) mine since 2015 and the start of production at the Asmara mine (copper, zinc, gold) should help reduce dependency on the Bisha mine (copper, zinc, gold), which accounts for 40% of state revenues. This is especially necessary with the recovery rate of zinc and copper, with the latter expected to decline from 2018 until a scheduled cease in production in 2021. The Colluli Potash Project could, in future, take over from the Bisha mine, but it looks unlikely that production will start in 2018.
Private consumption is set to remain anemic in a country that is among the poorest countries in the world. Despite substantial inflows of remittances from expatriate workers, household income – deriving mainly from rudimentary agriculture (the sector employs almost 80% of the workforce) – is low. This income is further eaten up by inflation, which is expected to fall only slightly. Insufficient agricultural output to meet the needs of the population puts pressure on food prices. Inflation, exacerbated by a shortage of foreign exchange, which impedes imports, is broadly responsible for the overvaluation of the nafka, pegged to the US dollar. This is reflected in a growing gap between the official exchange rate and the rate used on the parallel market.
Twin Deficits Increase the Debt Burden
The military budget, estimated at 25% of public expenditure, continues to burden the fiscal balance. The growth in mining income could help to slightly narrow this substantial deficit, but revenue mobilization remains broadly inadequate. Financing the deficit by creating money is fueling inflation. Money creation is also, at least in part, the reason for the buildup of domestic debt, thus putting public debt at a worrying level. Highly strained relations with donors prevent Eritrea from benefiting from debt relief under the HIPC initiative.
The external accounts are expected to continue to develop in line with exports of mineral resources. With base metal prices expected to stabilize, led by those for copper and zinc, export revenues should hold up. The import bill is set to fall in connection with the drop in demand for capital goods needed for the development of mining projects.
Isaias Afwerki's Regime Still Ostracized by the International Community
Since 1993, power has been concentrated in the hands of President Isaias Afwerki, supported by his People’s Front for Democracy and Justice Party - the only legally authorized party. Reports from the country suggest that most freedoms are suppressed and human rights violations are legion. Eritrean citizens are fleeing forced labor and also indefinite periods of military service introduced since the war against Ethiopia (1998-2000). Officials from the High Commission for Refugees thus make up almost 10% of the total population.
As a result, relations with the international community are particularly tense. In particular, Eritrea is, accused of supporting armed groups, such as Al Shabaab in Somalia, and rebel movements on the border with Ethiopia. Still benefiting from some aid from the European Union and strong relations with China, the country is not yet completely isolated. The regime’s collaboration with Pyongyang could, however, justify tougher UN sanctions.
Although the country is no longer in last place in the 2017 Doing Business rankings, this is only because Somalia now occupies that position. The business climate thus remains an impediment to economic development.