- A new report on the economic performance of Eritrea indicates that the country is far from stepping out of its economic crisis. The economic detraction of the last six years has been even greater than previously assumed, and Eritrea's regional isolation has strongly damaged trade.
According to the latest review of Eritrea's economy by the International Monetary Fund (IMF), the late 1990s ad the post-border war period has been an era of economic crisis. Especially the last few years have been difficult, with a long-lasting drought affecting agriculture and regional isolation affecting trade.
The economic downturn started in 1998, according to the newest IMF statistics on Eritrea. While the country had experienced solid growth in the preceding years, real GDP growth in 1998 shrunk to only 1.8 percent, well below population growth. In 1999, there was zero growth.
With the 1998-2000 Ethiopian-Eritrean border war at its peak, the economy in 2000 even detracted by 13.1 percent, the revised IMF data show. 2001 saw a short-lasting recovering with 9.2 percent GDP growth, while this was reduced to 0.7 percent in 2002 and 3.0 percent in 2003. All the estimates presented by the IMF's newest analysis are significantly lower than previous data published by the Fund.
Independent estimates of Eritrea's economic performance in 2004 cite a positive GDP growth of 2.0 percent, while the IMF makes no estimates on developments in 2004. Given an annual population growth of an estimated 2.6 percent, this should mean that Eritrea also in 2004 has had a negative GDP per capita growth rate.
The IMF mainly explains this economic crisis by the border war with Ethiopia, which severely damaged the country's economic and social infrastructure and displaced over one-third of the population.
Continued tensions over the border demarcation dispute with Ethiopia had resulted in "Eritrea remaining in a heightened state of mobilisation," the IMF notes. "The ongoing 'no war/no peace' impasse could continue indefinitely, thereby delaying the demobilisation programme and a return to a peacetime economy."
However, the post-border war recovery had also been impaired by four consecutive years of drought. Domestic food production for 2004 is likely to cover only 17 percent of domestic demand, resulting in an estimated 1.7 million people - almost half the population - requiring food assistance. Malnutrition has increased in many parts of the country, but there are encouraging signs that the drought may now be over.
Following a near collapse of exports during 1997-98 because of the emerging border conflict with Ethiopia, exports declined further owing to the break in trade relations with Sudan, while imports rose by 14 percent on account of food aid. This has led to a shrinking economy and a collapse in foreign reserves.
In addition to the shrinking economy, the IMF expressed concern about "the increase in inflation, the decline in international reserves to a critically low level, and the sharp contraction in Eritrea's exports." Also an unsustainable foreign debt level was a major source of concern.
As a result of six years of economic crisis, poverty in Eritrea remains pervasive, defence spending large, and fiscal deficits are at unsustainable levels. Eritrea remains one of the poorest countries in the world, with a per capita GDP of about US$ 130. More than half of the population lives on less than US$ 1 per day and about one third lives in extreme poverty - meaning that they have access to less than 2,000 calories per day.
While the IMF agrees with Eritrean authorities that the tense situation on the Ethiopian border and the four-year drought are the main reasons for this setback, the Fund also criticises the government's handling of the economy. With the large-scale public sector intervention, there was not an environment conducive to private-sector development in the country.
The IMF report highlighted "the adverse impact of the widespread use of administrative controls, the expanding role of the state into commercial activities, and the lack of a transparent regulatory environment, which undermine investor confidence and private sector development." The Fund urged Asmara authorities to "return to their post-independence liberalisation strategy as a basis for sustainable growth and poverty reduction."
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