African Economic Outlook Eritrea
Nov 5, 2014
Eritrea has faced considerable challenges over the years, including variable climate conditions. This has been compounded by restrictive economic policies, political isolation, a significant decline in remittances and scarcity of foreign exchange. Reflecting these factors, estimated real GDP growth for 2013 fell sharply to 1.1% from 7% the previous year and is projected to increase marginally to 1.9% in 2014. This growth will largely be driven by: copper production at the Bishamine; the start of gold production at the Zara mining project in 2014; and continued exploration activity and investment in the mining sector. In the medium term, Eritrea sees further prospects in oil production, fisheries and tourism.
The budget deficit improved to an estimated 10.3% of GDP in 2013 from 15.5% in 2010, and is projected to narrowly improve as a result of higher mineral revenues.
Exports are projected to grow in 2014, driven by the onset of copper and gold mining at three mines. This may be offset by growth in imports as investments in mining boost demand for imported capital goods. Remittances from the Eritrean diaspora declined significantly, reflecting the impact of the 2011 United Nations Security Council sanctions restraining UN member countries from facilitating transfer of the 2% “recovery and development tax” paid by Eritreans living abroad. Taking these factors into consideration, the current account is projected to deteriorate from an estimated 0.3% of GDP in 2013 to -0.3% of GDP in 2014.
Eritrea has considerable potential to generate growth in agricultural production and agro processing, livestock production, fisheries and fish processing, and mining, as well as through the development of small and medium-sized enterprises, tourism and related hospitality services and infrastructure. The country is currently focusing on developing its tourism industry around the Red Sea port of Massawa and the export potential of its mineral reserves. There is already one active mine, and two more mines are in advanced stages of development. In addition, geological studies have confirmed the presence of oil and natural-gas reserves in commercial quantities.
A number of factors will influence Eritrea’s medium-term economic prospects: i) regional insecurity, especially related to the unresolved issues between Eritrea and Ethiopia; ii) enforcement of UNSC sanctions; iii) recent confirmation that the country will participate in the AfDB’s Drought Resilience and Sustainable Livelihoods Program; iv) discovery of substantial mineral deposits in parts of the country and large foreign investments for their exploitation; and v) the country’s growing commercial relationship with Russia, the United Kingdom, China, India and South Africa.