- Macroeconomic conditions in Eritrea deteriorated in 2002. Real GDP has declined, inflation accelerated, and gross international reserves declined. A review of Eritrea's economic trends points to serious drought, the legacy of war, political and governance difficulties as the reasons behind this decline.
In a review of the Eritrean economy and its recent developments, the International Monetary Fund (IMF) discovered all over negative trends. Too many external shocks and government minsmanagement has led the economy to decline.
Eritrea was found to be confronted with a wide range of serious economic challenges, including crisis management related to the drought and macroeconomic stabilisation in the immediate term and the move toward a peacetime economy in support of growth and poverty reduction over the medium term.
- Addressing these challenges will require a combination of decisive crisis management, sound macroeconomic and development policies, and extensive donor support to lay the foundations for higher economic growth and poverty reduction over the medium term, according to the IMF assessment.
Macroeconomic performance had been "seriously impaired by the drought and the lingering effects of the border conflict with Ethiopia during 1998-2000, which has resulted in large-scale destruction of infrastructure and dislocation of the population," the Fund noted.
Eritrean authorities also had remained concerned about the unresolved border issue and thus only hesitatingly had begun to implement the donor-supported demobilisation program for some 200,000 combatants. Military expenditure thus had remained high.
Reflecting these factors, economic growth in 2002 was negative at -1.2 percent, against +8.7 percent in 2001, according to the last numbers. "The weakness of the economy and tight supply situation resulted in a sharp acceleration of inflation, with consumer prices rising by 24 percent by end 2002, compared with 8 percent at end-2001," the IMF said.
For 2003, Eritrean authorities however had prepared an "austerity" draft budget intended to reduce the domestic fiscal deficit to some 6 ½ percent of GDP, compared with 21 percent in 2002. On the revenue side, large increases were expected from the sales of government-owned houses and apartments, as well as the privatisation of 3 hotels.
On the expenditure side, the principal savings in the 2003 budget were planned to come from the demobilisation of 130,000 combatants, which would have "cut the defense budget in half," according to the IMF. This would also relieve the severe shortages of labour, especially in the private sector, including agriculture.
The Fund however had found Eritrean government plans for 2003 too optimistic. The IMF assessment team expected Eritrea to experience a domestic fiscal deficit of 13 ½ percent of GDP in 2003. They however "welcomed the authorities' intention" to substantially reduce the fiscal deficit. For 2003, the government and the IMF expected an economic growth rate of 5.4 percent.
Understood as an indirect critique of the Eritrean government's elimination of an independent press, the IMF also called for "a broadening of the flow of information, an increase in transparency, and a strengthening of dialogue and cooperation mechanisms within government and between the government and the private sector."
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