ERITREA

COUNTRY OVERVIEW

LOCATION AND SIZE.

Eritrea is an eastern African country occupying an area of 121,320 square kilometers (46,841 square miles), which makes it slightly larger than the state of Pennsylvania. It borders Sudan to the north and west, Ethiopia and Djibouti to the south, and the Red Sea to the east. Its land borders extend for 1,630 kilometers (1,012 miles), while its total coastline is 2,234 kilometers (1,388 miles). Eritrea's capital, Asmara, and its 2 other major cities, Assab and Massawa, are in the southeastern and eastern parts of the country.

POPULATION.

Eritrea's population was estimated to be 4,135,933 in July 2000. The population increased from 2.1 million in 1975 to 3.6 million in 1998, indicating a growth rate of 2.4 percent. The estimated birth rate in 2000 was 42.71 births per 1,000, and the estimated death rate 12.3 deaths per 1,000, contributing to a 3.86 percent growth rate in 2000. The population is expected to increase to about 5.5 million by 2015. Because of drought and a war with Ethiopia, about 1 million Eritreans lived abroad (mostly in Sudan) in 2000, while at least 955,000 were internally displaced.

The major ethnic groups of the predominantly African population of Eritrea are the Tigrinya (50 percent), Tigre and Kunama (40 percent), Afar (4 percent), and Saho (3 percent). There are a variety of religions in the country, with Muslims, Coptic Christians, Roman Catholics, and Protestants dominating. There are also a variety of Cushitic languages spoken in the country. The population is young, with 43 percent under the age of 15 and only 3 percent above the age of 65.

Most Eritreans live in rural areas. In 1998 urban dwellers accounted for only 18 percent of the population, but this figure is expected to reach 26.2 percent by 2015. Asmara is the largest city with 480,000 inhabitants. Other major urban areas include Assab (70,000), Keren (70,000), Mendefera (65,000), and Massawa (35,000).

OVERVIEW OF ECONOMY

Eritrea gained independence from Ethiopia in 1991 and declared statehood in 1993, but its underdeveloped economy had suffered greatly from the 30-year war of independence with its neighbor. Conditions were worsened by a serious drought in the late 1990s, and the outbreak of a new war with Ethiopia that arose over a territorial dispute in 1998 and reached an uneasy, internationally brokered peace in mid-2000. This combination of adverse conditions further destroyed Eritrea's already limited agricultural and industrial capabilities and exhausted its inadequate financial resources, leaving the economy in ruins. Consequently, the country's foreign debt rose from $76 million in 1997 to $142 million in 1998, and to $242 million in 1999.

Eritrea is in transition from a deteriorating socialist economy to a market economy. The government has taken steps to end state monopolies and foster the growth of a private sector. It has encouraged domestic and foreign investments by beginning the privatization of state enterprises and passing laws to open trade and investment to market forces. Measures such as the lowering of business taxes have created some incentive for investment, but the emerging private sector is still too weak and foreign investment too small to make an impact on Eritrea's severe underdevelopment. The private sector is limited to the importation and distribution of goods.

The country's industrial, agricultural, and service sectors are small-scale and underdeveloped. Exports are limited and the country relies heavily on imports, including foodstuffs. Unsurprisingly, the balance of trade has recorded a large annual deficit since independence— $534 million in 1999. Since 1952, Eritrea has depended on 2 strands of economic activity to provide employment and revenue: port services at Assab and Massawa and agricultural exports. Landlocked Ethiopia conducted most of its international trade through these ports until the outbreak of war in 1998. Agricultural exports to a few African and Middle Eastern countries have been a major source of income for Eritrea.

The Eritrean economy grew during the first few years of independence. However, since this growth was due to its earnings from port services, it proved unsustainable as a consequence of hostilities with Ethiopia. Ethiopia placed an embargo on Eritrea's ports, while the heavy cost of war between the 2 countries and a sharp decline in agricultural production caused by war and drought have since damaged the economy. Economic contraction began in the late 1990s, with the growth of Eritrea's gross domestic product (GDP) falling from 7 percent in 1997 to 4 percent in 1998, and to nil in 1999 and 2000. This disaster has made Eritrea dependent on foreign assistance for its survival. The Persian Gulf countries, Italy, Japan, the United States, the World Bank, the African Development Bank (ADB), and the European Union (EU) have collectively been the country's main source of loans, grants, and food aid. Eritreans who have dispersed to live in other countries have become the main hard-currency providers since 1998.

POLITICS, GOVERNMENT, AND TAXATION

Eritrea has enjoyed internal political stability since its independence. In 1993, a splinter group of senior members of the Eritrean Liberation Front (ELF) joined the Eritrean People's Liberation Front to become a political party, the People's Front for Democracy and Justice (PFDJ), which has ruled the country ever since. The Eritrean constitution provides for a multiparty political system, but the reality is a one-party system dominated by the PFDJ, which, while so far unable to rescue the economy, keeps a tight rein on internal order, sometimes by measures such as the restriction of press freedom, that ensures domestic political stability. The opposition groups are all in exile (in Sudan) and include the Eritrean Islamic Salvation party and dissenting ELF factions, but they have no impact on Eritrea's economy.

Despite its liberalization policies, the government still dominates the economy. However, corruption is en-viably low by the standards of many third world countries, and the government encourages industrial growth and exports. It has introduced low customs duties (2 percent in 2000) on capital goods, intermediate industrial spare parts, and raw materials, side by side with high tariffs (50-200 percent) on luxury goods (liquor and tobacco). Nevertheless, by 2001, efforts to create a viable free-enterprise economy and stimulate sustainable growth had not yet succeeded. The major barriers to meeting these objectives include limited financial resources, the absence of adequate infrastructure, lack of expertise and management, and a high illiteracy rate. These factors, with an environment made unattractive by war and drought, have conspired to discourage investment.

It is difficult to gather accurate statistics regarding revenues obtained by the Eritrean government, but it is evident that taxes and tariffs contribute little. In 1996, when the economy showed some growth, taxes contributed 30 percent of national income. However, the worsening economic situation and low international trade figures do not yield sufficient taxable profits or incomes, and the 1996 figure undoubtedly took a sharp fall in 1999 and 2000 when economic growth halted. From 1998, the war with Ethiopia and the drought proved disastrous to the economy. With drastic reductions in port fees and exports, the share of port-generated revenue dropped from 16 percent of revenues in 1996 (about $32 million) to almost nil in 1999 and 2000, while export earnings decreased from about 48 percent in 1996 ($95 million) to about 12 percent in 1999 (just under $26 million).

The gap between Eritrea's annual income and its expenditures is enormous (expenditures outstripped income by more than half in 1996), thus forcing the government to finance its deficit through foreign loans and grants and money from expatriates. In 1999 expatriate purchases of government bonds generated $400 million. Eritrea has been mostly successful in securing favorable loans, enabling it to keep its foreign debt low ($242 million in 1999).

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Eritrea suffers from seriously inadequate infrastructure. An extensive road and rail network built by

the Italians in the 1930s was destroyed during the long war of independence. It is now estimated that there are 4,010 kilometers (2,491 miles) of roads, of which 874 kilometers (543 miles) are paved, but they are poorly maintained. The country's Italian-built, narrow-gauge railway, owned by the state, is almost defunct, with only 317 kilometers (196 miles) accessible. The few road and rail reconstruction projects are proving to fall far short of what is required.

Eritrea has 21 airports and airstrips, 3 of which have paved runways. Asmara International Airport was damaged during the war. Assab has a small airport and another is being built in Massawa. Eritrea's 2 major ports, Massawa and Assab, require upgrading.

Energy production is limited in Eritrea. According to 1997 estimates, the country generates and consumes 177.6 million kilowatt hours (kWh) of electricity, powered by fossil fuel, and many parts of the country, particularly the rural areas, lack electricity. Saudi Arabia, Kuwait, and the United Arab Emirates (UAE) have funded the construction of an 84-megawatt power station, and the European Development Bank has pledged a loan for the restoration of war-damaged power infrastructure. Eritrea has a limited oil production (0.55 million tons in 1998), but its main refinery is closed and thus it must import all refined oil products. Imports of petroleum products amounted to 100,000 tons in 1998.

Eritrea's telecommunications system is old and inadequate. In 2000 there were only 23,578 telephone lines in the entire country. The Eritrean government has installed a digital system to improve and expand the service. There is 1 Internet service provider and a growing number of e-mail stations. The country has 1 state-run television channel and 5 radio stations. In 1997 there were only 345,000 radios and 1,000 television sets in use.

ECONOMIC SECTORS

At the time of independence, Eritrea lacked the basic infrastructure and resources to address its many economic problems. Efforts to improve the infrastructure and develop its backward agriculture, industry, and services have had limited success, despite foreign assistance. Drought devastated agriculture, and war further damaged the inadequate infrastructure, destroyed many farms, and exhausted financial resources. The result was a massive internal displacement of civilians and the flight of large numbers of Eritreans to neighboring Sudan. Thus, by 2000, the country was unable to meet the basic needs of its population. In the wake of such devastation, Eritrea has had to depend on foreign aid and a large quantity of imports for its survival, and most of its limited developmental projects have been placed on hold.

AGRICULTURE

Subsistence agriculture shapes Eritrea's economy and employs about 80 percent of its population, but its contribution to the economy is small. Agriculture's share of the GDP was only 9 percent in 1998 (equal to $261 million), while its contribution to exports was only $8 million. Major exports are livestock, sorghum, and food products exported to Ethiopia (before the war), Sudan, Yemen, the UAE, and Saudi Arabia. In the absence of statistics, one can assume with some certainty that the 1998-2000 war and drought have lowered the contribution of agriculture to Eritrea's economy. The main agricultural products (sorghum, lentils, vegetables, corn, cotton, tobacco, coffee, sisal, and livestock) are insufficient to meet domestic needs, and these must be satisfied through foreign aid and large imports of foodstuffs ($63 million in 1998). The sharp fall in production during the crisis period between 1998 and 2000 led to price increases in food. The production of sorghum fell from 120,000 tons in 1994 to 62,000 tons in 1998. Eritrea can only become self-sufficient in food production if it is able to address its major handicaps: lack of money, poor irrigation, extensive soil erosion, and outdated technology.

The Red Sea coastline of Eritrea is rich in lobster, shrimp, and crab and offers the potential for a valuable export-oriented fishing industry. However, the lack of adequate investment, modern fishing boats, and technology have prevented any development, and fishing represents a negligible economic activity with a low annual catch (5,000 tons in 1999). Fishery projects are focused on privatization and the creation of storage and processing facilities funded by the United Nations Development Program (UNDP) and Japan.

INDUSTRY

Industry is the second largest sector after the service sector. Its main activities, manufacturing and mining, accounted for 29.5 percent of the GDP in 1998, valued at $855 million.

MANUFACTURING.

The manufacturing industry is unable to meet domestic needs, while its exports are insignificant. Exports earned a paltry $4 million in 1998, while imports of industrial goods ran to $250 million. Manufacturing consists of Asmara-based small and medium size establishments producing consumer products such as glass, leather, processed foods, cotton, textile, liquors, and other beverages. New factories produce marble, recycled plastics, metals, and rubber goods. Low investment and management capacity, outdated machinery, and poor infrastructure have prevented growth, and the Eritrean government has privatized some of its industries while ending subsidies to others to stimulate development. It has also lowered taxes and tariffs on industrial exports and imports and offered other incentives to foreign investors.

MINING.

Eritrea's mining industry is small but has growth potential. Its mineral resources include substantial reserves of barite, feldspar, kaolin, gold, potash, rock salt, gypsum, asbestos, and marble. If mining developed, Eritrea's proximity to the Middle East and Europe would be favorable to the export of minerals to those markets. In the absence of domestic investments, companies from Australia, Canada, France, South Korea, and the United States have operated or now operate limited mining operations there. Mineral exports accounted for $12 million in 1998. Eritrea has sought foreign investment for the exploration and development of offshore oil and gas reserves, but Anadarko, an American company, stopped drilling operations in 1999 after disappointing results.

SERVICES

The most important services in Eritrea are tourism, retail, and financial. Services form the largest economic sector, accounting for 61.2 percent of the GDP and 20 percent of the workforce in 1998. However, like the rest of the country's economic sectors, services suffer from underdevelopment.

FINANCIAL SERVICES.

Eritrea has a small state-run financial system. It consists of a central bank, the National Bank of Eritrea (NBE), 4 other banks, dominated by the Commercial Bank of Eritrea (CBE), and an insurance company, the National Insurance Corporation of Eritrea. The NBE accounted for over 60 percent of Eritrean banking assets in 2000. Except for the Housing and Commerce Bank of Eritrea, owned by the ruling party, all other financial institutions are state-owned, and the government licensed several private exchange offices in 1997 to liberalize the industry. No foreign financial institution operates in Eritrea, but the CBE has arrangements for money transfers with 40 foreign banks.

TOURISM.

With its long warm-water coastline and an abundance of historical, archaeological, and natural sites, Eritrea has much to offer as a tourist destination. However, the development of tourism is constrained by the lack of basic infrastructure. There are only 11 hotels, all in Asmara, all of which require renovation. The government has privatized 3 hotels but has failed to find buyers for the rest. Thanks to some success in attracting foreign investment, in 2000 the first foreign hotel, the Inter-Continental, was opened in Asmara. In that year the government negotiated the construction of a casino and several hotels on the Dahlak archipelago by U.S. and Saudi Arabian companies.

RETAIL.

The retail sector of Eritrea is poorly developed. It consists of small-scale traditional shops that are unable to ensure the accessibility of goods and services to either the rural or the urban populations. The emerging middle class is encouraging the establishment of modern retail outlets in major urban areas, but the economic devastation of the country has delayed the creation of a viable retail sector.

INTERNATIONAL TRADE

Eritrea's international trade is characterized by its deficit. The 1998 deficit of $499 million rose to $534 million in 1999, as the value of exports dropped to $26 million against imports of $560 million. Large trade deficits are a clear sign of Eritrea's underdeveloped economy in which the necessity for large-scale imports does not begin to be matched by its output of exportable goods. Imports accounted for a huge 89.7 percent of the GDP in 1998, the same year that an epidemic of cattle disease stopped major livestock exports to Saudi Arabia and Yemen, while drought and the outbreak of war with Ethiopia further decimated local productivity. Although that war ended in June 2000, Eritrea's exports are likely to remain low for a long time because of its devastated farms and infrastructure, its depleted financial resources, and the massive displacement of its population.

The country's main export products are salt, livestock, flour, sorghum, foodstuffs, small manufactures, and textiles. Major imports include foodstuffs, fertilizers, fuel, machinery, spare parts, construction materials, and military hardware. The war brought a sharp increase in military hardware imports, causing state expenditures on defense to jump from 9 percent of the GDP in 1997 to about 44 percent in 1999.

Ethiopia was Eritrea's largest trading partner until 1998, taking 65.8 percent and 64 percent of its total exports in 1996 and 1997. Ethiopia's share dropped to 26.5 percent ($28 million) in 1998 when the countries went to war, but their bilateral trade did not resume when the war was over. Eritrea's other main trading partners are Sudan, Italy, Japan, Saudi Arabia, the United States, Yemen, and the UAE. Sudan was Eritrea's second largest export destination in 1997, taking 17 percent of exports, rising to 27.2 percent in 1998. In 1996 and 1997, Eritrea's main source of imported goods was Saudi Arabia, followed by Italy and the UAE; in 1998, Italy was the most important supplier of imports, followed by the UAE and then Germany.

MONEY

Eritrea shared the Ethiopian currency, the birr, until November 1997 when it introduced its own currency, the nakfa. The NBE adopted a fixed exchange rate for the first 6 months and then switched to a floating exchange

rate, that is, a rate determined by supply and demand. There are no exchange restrictions for the Eritreans or foreigners. The nakfa remained stable between 1997 and 2000, during which time it depreciated slowly against the U.S. dollar, declining from 7.2 to 9.5 nakfas to US__BODY__. This minor fluctuation had no noticeable impact on the pace of economic activity or on the purchasing power of the population.

POVERTY AND WEALTH

Eritrea is one of the world's poorest countries. Poverty is rampant, and the severity of the war, compounded by the effects of drought, forced the migration of about 1 million people (1998 est.) to neighboring Sudan, decreasing the resident population to 3.5 million. In 2000 about half of this population faced a serious humanitarian emergency as their dismal situation gave rise to epidemics of diarrhea, malaria, and respiratory infections.

Basic necessities for dealing with the crises of homelessness, want, and disease are worse than inadequate. In 1997 access to sanitation was available to a mere 13 percent of Eritreans, while only 22 percent had access to safe water. Widespread malnutrition and a poor health-care system lead to high infant mortality (70 per 1,000 live births) and low life expectancy (50.8 years) in 1998. The inadequate medical services are barely available outside the capital.

A high illiteracy rate, estimated at between 49 and 80 percent, demonstrates the weakness of the educational system. Over half of the children of school age do not study because of poverty and a lack of educational facilities. There is only one small university in Asmara with 1,300 students. Solutions to these many social problems are unlikely so long as Eritrea lacks domestic resources and foreign aid remains relatively low.

WORKING CONDITIONS

Eritrea's workforce consists of unskilled workers, over 80 percent of whom are involved in agriculture. The

country suffers from a shortage of skilled or educated labor. There are no unemployment statistics, but one must conclude that, given the state of the economy, it must be high. Unions are legal and The National Federation of Eritrean Workers consists of 129 unions representing over 23,000 workers, and public and private company employees. The labor code prohibits child labor, discrimination against women, and anti-union regulations. Regulations permit the right to strike and endorse equal pay for equal work for women. However, in the absence of mechanisms for enforcement, the labor laws exist in principle rather than in practice. About half of children work and women face discrimination. The working week is 44.5 hours, but many work less than that due to limited employment opportunities. There is no minimum wage, and the market determines wages.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

16TH CENTURY. Eritrea falls under the rule of the Ottoman Empire but claims to the region are disputed by the Ottomans, Italians, Ethiopians, and Egyptians.

1889. Italy signs the Treaty of Wechale with the king of Ethiopia to establish the borders of its colonial state of Eritrea.

1941. Italy loses Eritrea to Britain during World War II (1939-45), and Eritrea falls under a British mandateuntil 1952.

1948. The United Nations (UN) is mandated to determine the future of Eritrea.

1950. The UN adopts Resolution 390 A (V) to provide for the creation of a federation of Eritrea and Ethiopia with Eritrea to retain autonomy under the Ethiopian crown.

1952. The Federation of Eritrea and Ethiopia is ratified.

1961. The Eritrean Liberation Front (ELF) begins an armed struggle against Ethiopia.

1962. Ethiopia formally annexes Eritrea in violation of international law.

1973. A splinter group of the ELF forms the Eritrean People's Liberation Front (EPLF).

1991. Ethiopia's military junta is overthrown. The EPLF defeats the ELF and establishes control over Eritrea. The 2 new governments agree to discuss Eritrea's independence.

1993. In a referendum held in April, almost 100 percent of voters demand independence for Eritrea, and the country declares its independence on May 24.

1994. The EPLF reorganizes itself as a political party, renamed the People's Front for Democracy and Justice (PFDJ).

1997. In May, Eritrea's constitution is promulgated. In November, the Ethiopian currency (the birr) is replaced by the Eritrean nakfa.

1998. In May, a territorial dispute between Eritrea and Ethiopia leads to a new and devastating war.

2000. In June, Eritrea and Ethiopia conclude a peace accord, and refugees who have fled to Sudan begin to reenter the country.

FUTURE TRENDS

War and drought have devastated the Eritrean economy. Eritrea requires large investments in infrastructure as a first step for an overhaul of its economy, and extensive foreign assistance is essential in tackling urgent problems such as malnutrition, and to help revive and expand the economy. The expansion of fishery and tourism could make a major contribution to Eritrea's economic growth, but there is little interest on the part of international donors to help Eritrea achieve these objectives. In the absence of foreign resources, the outlook for the Eritrean economy, at least in the future, would appear bleak.

DEPENDENCIES

Eritrea has no territories or colonies.

BIBLIOGRAPHY

Economist Intelligence Unit. Country Profile: Eritrea. London: Economist Intelligence Unit, 2001.

Eritrea: A New Beginning. London: United Nations Industrial Development Organization, 1996.

Government of Eritrea External Affairs Office. Birth of a Nation .Asmara, Eritrea: Government of Eritrea, 1993.

Tesfai, Alemseged, and Martin Doornbos, editors. Post-Conflict Eritrea: Prospects for Reconstruction and Development. Lawrenceville, NJ: Red Sea Press, 1999.

United Nations. Human Development Report 2000. New York:Oxford University Press, 2000.

U.S. Central Intelligence Agency. World Factbook 2000. <http://www.odci.gov/cia/publications/factbook/index.html>. Accessed August 2001.

U.S. Department of State. FY 2000 Country Commercial Guide: Eritrea. <http://www.state.gov/www/about_state/business/com_guides/2000/africa/index.html>. Accessed September 2001.

Hooman Peimani

CAPITAL:

Asmara.

MONETARY UNIT:

Nakfa (Nkfa). One nakfa equals 100 cents. There are coins of 1, 5, 10, 25, 50 and 100 cents, and notes of 1, 5, 10, 20, 50, and 100 nakfa.

CHIEF EXPORTS:

Livestock, sorghum, textiles, food, small manufactures.

CHIEF IMPORTS:

Processed goods, machinery, petroleum products.

GROSS DOMESTIC PRODUCT:

US$2.9 billion (purchasing power parity, 1999 est.).

BALANCE OF TRADE:

Exports: US$26 million (1999 est.). Imports: US$560 million (1999 est.). [The CIA World Factbook lists exports of US$52.9 million (f.o.b., 1997 est.) and imports of US$489.4 million (c.i.f., 1997 est.).]