Eritrea’s 2015 Economic Outlook

Eritrea’s 2015 Economic Outlook

Authors: Nyende Magidu , Luka Okumu

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  • Economic growth is projected at 2.1% in 2015, up from 1.3% in 2013 and 2.0% in 2014,reflecting improved economic activity and increased investment in the mining sector.
  • Continued improvements in public financial management, progress towards implementation of the Drought Resilience and Sustainable Livelihoods Programme (DRSLP) and enhanced skills development have created favourable medium-term prospects.
  • Eritrea has made an effort to promote growth, but this has been narrowly based on a sectorial strategy and is now being threatened by increasing social and territorial disparities.

Eritrea is aiming at creating a modern, private sector-led economy (Macro Policy 1994; National Indicative Development Plan 2014-2018). Attaining this objective is, however, compromised by an inadequately enabling investment and business environment, United Nations sanctions, and overall weak macroeconomic conditions. Real GDP growth is projected to increase from 2.0% in 2014 to 2.1% in 2015, double the rate recorded in 2013, because of increasing investments in the mining sector. Over the medium term, the government sees further prospects in improved trade with Middle-Eastern and Asian countries, additional mining activities, the growth of the food sector and the development of the tourist industry. The current GDP composition is: services (59.9%), non-manufacturing (17.3%), agriculture, hunting, forestry and fisheries (16.9%) and industry (5.9%).

The budget deficit increased to 10.7% of GDP in 2014, up from 10.3% in 2013, but will fall back again to 10.3% in 2015 and 9.9% in 2016 as a result of increasing revenue from mining projects, access to more grant resources, and the government’s continued implementation of strict fiscal rules and consolidation strategies. Inflation declined slightly in 2014 because of food-supply shocks, high foreign exchange demand, and high commodities prices on the international market. Lower international food prices and weaker oil prices in 2015 and 2016 should contain inflation at an annual average of about 12% for the period 2015-16.

Exports are forecast to grow in 2014-15, due to mineral production at the Asmara project, but the current account balance is forecast to deteriorate from 0.2% of GDP in 2014 to -1.2% and -1.5% in 2015 and 2016 respectively, partly due to decreases in both remittances and the “development and recovery tax” (a 2% tax levied on the Eritrean diaspora). Based on IMF Article IV 2009, Eritrea is a pre-decision point highly indebted poor country (HIPC) and is therefore eligible or potentially eligible for HIPC Initiative multilateral debt relief (MDR). However, no discussions on an IMF-supported programme have been initiated, although the government is engaged with the IMF’s capacity-building institute through the East African Regional Technical Assistance Centre (E-Afritac), located in Tanzania, and has also agreed to participate in the African Development Bank’s Transition Support Facility.

The medium-term outlook could present some risks because of the size of the fiscal and current account deficits coupled with high inflation. Improved management of these conditions and enhanced control of the exchange rate regime and public debt could attract more private investment. Thus, medium-term economic prospects will be influenced by: i) tensions over the border with Ethiopia, which are a basis for high security infrastructure expenditure; ii) relations and co-operation with the international community; iii) implementation of the regional programme on drought resilience and sustainable livelihoods under the Intergovernmental Authority on Development (IGAD), plus capacity building under the African Development Bank’s new Transition Support Facility; iv) increasing investments in the mining sector, and v) continued engagement with Middle-Eastern and Asian countries.

Table 1: Macroeconomic indicators

2013 2014(e) 2015(p) 2016(p)
Real GDP growth 1.3 2 2.1 2
Real GDP per capita growth -1.9 -0.6 -0.4 -0.3
CPI inflation 12.3 11.6 12.1 12.3
Budget balance % GDP -10.3 -10.7 -10.3 -9.9
Current account balance % GDP 0.3 0.2 -1.2 -1.5

Source: Data from domestic authorities; estimates (e) and projections (p) based on authors’ calculations.

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