Eritrea was one of the fastest growing African economies in 2011, with growth in gross domestic product (GDP) projected at 14%, up from an estimated 2.2% in 2010, according to the World Bank’s June 2012 Global Economic Prospects. The growth was mainly stimulated by favorable harvest and the mining sector (mainly gold), which has attracted substantial foreign direct investment.
However, growth in absolute terms is small. Eritrea is one of the least developed countries in the world, with an average annual per capita income of $403 in 2010 for a population of about 5.3 million, of whom an estimated two-thirds live in rural areas. Eritrea is ranked 177th out of 187 countries in the 2011 United Nations Human Development Index, and the Eritrean Diaspora is large and increasing.
Rain-fed agriculture, the predominant economic activity for more than two thirds of the population, is a very risky enterprise, and food security remains one of the government’s main concerns. Favorable rains and rehabilitation of rural infrastructure have led to improved agricultural performance and food security in the last three years. Large fiscal and trade deficits are managed through price, exchange rate and interest rate controls, which have led to a shortage of foreign exchange and a fall in private sector activity. The size of the public debt in proportion to GDP is a concern. The official annual inflation rate rose to 13.3% in 2011, from 11.6% in 2010, but much improved compared to 29.5% in 2009. In the longer term, sustained real economic growth of seven percent or more will be required for Eritrea to reach the Millennium Development Goal (MDG) of halving the proportion of people living in extreme poverty by 2015.
Like many small, low- income states with a trade imbalance, Eritrea is extremely vulnerable to rising international fuel and food prices. Eritrean authorities have indicated that they are using careful management of domestic food stocks and selectively passing on fuel price increases to the consumer to manage the impact, but there are shortages of both food and fuel products and supply is rationed.
Although there has been significant fiscal consolidation since the end of the border war, the fiscal deficit as a percentage of GDP remains high, and resulting macroeconomic imbalances continue to be managed through regulations and price controls. Annual per capita growth improved in 2011, after a long period of negative trend. The risk of macroeconomic instability, the use of price controls, regulations and rationing, particularly of foreign exchange, create an unfavorable business environment.
By virtue of its location in the Sahel, Eritrea suffers periodic droughts and chronic food shortages hampering development efforts. Even in times of good rainfall domestic food production is estimated to meet 60-70% of the population’s needs. The last household survey and Participatory Poverty Assessment undertaken in 2003 estimated around two-thirds of the people were living below the poverty line. The current applicability of the estimate is questionable since 2003 followed a particularly bad drought year and agricultural production has been favorable since then. However, at the same time, economic growth has slumped and per capita incomes have been in decline.
The general health status of Eritrea greatly improved after independence. Many health outcome indicators compare favorably with Sub-Saharan African neighbors, and are improving faster, although up-to-date comprehensive data on outcomes has been a challenge. According to the 2011 African Development Indicators report, the infant mortality rate decreased from 58 deaths per 1,000 in 2000 to 39 deaths per 1,000 in 2009, under-five mortality rate dropped from 89 deaths per 1,000 in 2000 to 55 deaths per 1,000 in 2009, child immunization rate was 95% in 2009 and access to safe drinking water has reached over 60%. Based on DHS between 1995 and 2002, total fertility rate decreased from 6.1 to 4.8.
Success in some disease control programs, supported by the World Bank and other partners, is particularly impressive. While most other Sub-Saharan African countries suffer from an increasing HIV epidemic, HIV prevalence in Eritrea is estimated to be low and under control at about 0.8% of the adult population in 2009 compared to the Sub-Saharan African average of 5%. In addition, since 1999, the country has been able to reduce overall malaria morbidity by more than 86% and mortality due to malaria by more than 82%.
Nevertheless, important challenges remain. Rural households suffer worse health outcomes, and improvements are coming more slowly. Malnutrition is of particular concern among women and children. An estimated 46% of the population were estimated to be undernourished in 2002, and 40% of children were found to be underweight for their age. Around 37% of women have a low body mass index. Maternal mortality ratios have drastically reduced but are currently still high (280 per 100,000 in 2008 from 330 per 100,000 in 2005)
Despite expanding schooling opportunities, Eritrea faces significant challenges in enrollment and completion of elementary school. The elementary school gross enrollment ratio stands at only 72%, lower than the low-income countries and the Sub-Saharan African averages of 92%. But, with low girls’ enrolment relative to boys, gender equity in schools remains a concern. Additional challenges lie in the high repetition and dropout rates, and the resulting elementary completion rates of 50% on average. Coming from such a low starting point, well-targeted public investments in human capital as well as physical capital are critical to improved well-being for Eritreans.
Eritrea is a young nation-state. After a 30-year war with Ethiopia, Eritrea attained de facto independence in May 1991 and de jure independence two years later. The initial years of independence were marked by impressive progress in rehabilitating basic economic and social infrastructure, improving social indicators, macroeconomic stability and economic growth. From 1993 to 1997, the economy grew at an average annual rate of 10.9%.
These development gains were interrupted when a border dispute with Ethiopia erupted into renewed conflict in May 1998.The Ethiopia-Eritrea Boundary Commission (EEBC) made a final “virtual” demarcation of the boundary at the end of 2007. This has been accepted by Eritrea but was rejected by Ethiopia. Tensions between the two countries remain high and both have troops positioned alongside the border. In a situation that has been described as "no war, no peace," Eritrea's government has remained in a state of heightened mobilization and border security remains priority. The stalemate is considered as a major impediment to the government’s development efforts as a number of possible national socio-economic initiatives and resources remain tied up.
The government of Eritrea is investing in three priority areas; food security and agricultural production, infrastructure development, and human resources development. However, Eritrea’s economic conditions remain challenging as a result of the global economic slowdown, macroeconomic situation and limited physical and human capital. High budget deficits, resulting mainly from large military expenditure, and large social safety net, restrict the government’s ability to maintain prudent fiscal targets. Moreover, revenue as a percentage of GDP has drastically fallen, from about 50% in 2003 to less than 19% in 2011, partly due to decline in private sector activity and foreign aid. But revenue from the mining sector, if managed prudently, creates prospects for improving the revenue-spending ratio. International remittances have fallen possibly due to the recent global financial crisis.
The country also continues to suffer from political isolation and sanctions imposed by the UN Security Council over the government’s alleged role in the Horn of Africa insecurity. Majority of the people are young, and youth unemployment and underemployment is high. Half of the youth, though well educated, have no access to jobs. Recurrent drought in the Horn of Africa region also poses a food security challenge.
Last updated September 2012