Economy Of Eritrea

Following the conclusion of the War of Independence, Eritrea’s economy underwent significant transformations that marked a period of substantial change and development. The war, which lasted from 1961 to 1991, had left the country’s infrastructure severely damaged and its economic base fragmented. In the immediate post-independence years, the government focused on rebuilding critical sectors such as agriculture, industry, and services, while also attempting to establish a foundation for sustainable economic growth. The transition from a war-torn economy to one with potential for growth involved extensive efforts to rehabilitate infrastructure, improve agricultural productivity, and attract investment in natural resource development. These foundational changes set the stage for subsequent economic performance and structural shifts within Eritrea. In recent years, Eritrea’s economy demonstrated notable growth, with gross domestic product (GDP) expanding by 8.7 percent in 2011. This growth rate was indicative of a recovering economy that was benefiting from increased agricultural output, expanding mining activities, and the gradual improvement of domestic industries. The 2011 GDP growth reflected a combination of favorable climatic conditions that boosted crop yields and the government’s emphasis on self-reliance and economic diversification. Additionally, infrastructural projects and increased public investment contributed to this upward trajectory. The 8.7 percent increase marked a significant improvement compared to previous years, signaling a positive shift in economic momentum. The upward trend in GDP growth persisted into 2012, with the economy expanding by 7.5 percent over the 2011 figures. This sustained growth underscored the resilience of Eritrea’s economic sectors despite ongoing challenges such as limited access to international markets and sanctions. The continuation of robust growth rates was supported by ongoing development in the mining sector, which attracted foreign investment and generated export revenues. Furthermore, government policies aimed at enhancing agricultural productivity, including irrigation projects and improved farming techniques, contributed to the steady increase in economic output. The 7.5 percent growth in 2012 reaffirmed the country’s capacity to maintain economic expansion in the face of external and internal constraints. By the year 2020, Eritrea’s total GDP was valued at approximately $8.090 billion. This valuation reflected the cumulative effects of sustained growth and the gradual diversification of the economy over the preceding decade. The GDP figure encompassed contributions from various sectors, including agriculture, mining, manufacturing, and services. Despite the relatively modest size of the economy in global terms, the $8.090 billion valuation indicated progress in economic development and resource utilization. The government’s focus on leveraging natural resources and improving domestic production capacities played a role in achieving this level of economic output. However, the economy continued to face challenges related to limited infrastructure, restricted access to international financial systems, and a narrow export base. Worker remittances from abroad constituted a major component of Eritrea’s economy, estimated to account for about 32 percent of the country’s gross domestic product. The Eritrean diaspora, which is substantial due to historical migration patterns and displacement caused by conflict, played a critical role in supporting the domestic economy through financial transfers. These remittances provided vital foreign exchange inflows that helped stabilize the balance of payments and supported household consumption. The reliance on remittances also highlighted the limited domestic employment opportunities and the challenges faced by the local economy in generating sufficient income. The government recognized the importance of these funds and implemented policies to facilitate remittance flows, which in turn contributed to poverty alleviation and economic resilience. Eritrea is endowed with abundant natural resources, including valuable minerals such as copper, gold, and potash, alongside non-metallic resources like granite and marble. These resources represent significant potential for economic development and export earnings. The mineral wealth is concentrated in various regions across the country, with copper and gold deposits being particularly prominent. Potash, used primarily in fertilizers, adds to the diversity of mineral resources available for exploitation. The presence of granite and marble offers opportunities for the construction and decorative stone industries, both for domestic use and export. The government has prioritized the exploration and development of these resources as a means to diversify the economy and reduce dependence on agriculture and remittances. As of 2012, twenty mining companies had obtained licenses to prospect and exploit mineral resources within Eritrea. This licensing activity reflected growing interest from both domestic and international investors in the country’s mining sector. The government’s regulatory framework aimed to encourage responsible mining practices while ensuring that the extraction of resources contributed to national development goals. The presence of multiple licensed companies indicated a competitive environment and the potential for increased mineral production and export revenues. These companies engaged in exploration, feasibility studies, and initial extraction activities, laying the groundwork for expanded mining operations. The development of the mining sector was seen as a key driver for future economic growth and industrialization. It is important to note that the information regarding Eritrea’s economy and mining sector requires updating to reflect recent events or newly available data as of May 2023. Economic conditions, growth rates, and sectoral contributions may have evolved due to changes in domestic policies, global market dynamics, and geopolitical factors. Additionally, developments in infrastructure, investment climate, and international relations could have influenced the trajectory of Eritrea’s economic performance. Updated data would provide a more accurate and comprehensive understanding of the current state of the economy, the effectiveness of government initiatives, and the role of key sectors such as mining and remittances in shaping Eritrea’s economic landscape.

Eritrea’s recent economic trajectory has been marked by significant volatility, a condition largely attributable to its heavy reliance on rainfed agriculture, which accounts for roughly one-third of the national economy. This dependence on agriculture makes the country particularly susceptible to climatic variations, especially droughts, which have recurrently disrupted agricultural productivity and thus the broader economic stability. The agricultural sector does not operate in isolation; it is closely intertwined with distribution services, which contribute approximately 20% to the gross domestic product (GDP), facilitating the movement and sale of agricultural and other goods throughout the country. Additionally, the mining sector plays a pivotal role in Eritrea’s economy, also representing about 20% of GDP. The mining industry, centered on the extraction of minerals such as gold, copper, zinc, and potash, has been a critical source of foreign exchange and government revenue, although its output has exhibited fluctuations that have influenced overall economic performance. Following a period of economic contraction between 2015 and 2018, during which real GDP shrank at an average annual rate of -2.7%, Eritrea experienced a notable recovery in 2018, with real GDP growth estimated at approximately 12%. The preceding contraction was primarily driven by a combination of frequent droughts that adversely affected agricultural yields and a decline in mining output, both of which undermined economic activity and fiscal revenues. The resurgence in 2018 reflected improvements in these sectors, alongside increased trade and investment activities that helped stabilize and stimulate growth. However, this recovery occurred within a broader context of persistent economic challenges, including structural vulnerabilities and external shocks. During the period from 2016 to 2018, Eritrea experienced negative inflation rates, a phenomenon commonly referred to as deflation. This deflationary trend was closely linked to a currency exchange operation conducted in November 2015, which effectively contracted the money supply within the economy. The currency exchange involved the redenomination of the Eritrean nakfa and the withdrawal of old banknotes, measures that reduced liquidity and purchasing power in the short term. The resulting contraction in money supply suppressed consumer prices, contributing to the observed negative inflation rates. Deflation persisted into 2018, further exacerbated by increased trade activity with neighboring Ethiopia. The expansion of cross-border commerce introduced competitive pressures that exerted downward effects on domestic prices, reinforcing the deflationary environment. In response to ongoing fiscal challenges, Eritrea has pursued a tighter fiscal policy in recent years, aiming to address persistent budget deficits that had emerged in the aftermath of intensified regional instability beginning in 1998. The conflict and related geopolitical tensions placed considerable strain on public finances, necessitating adjustments to government spending and revenue collection strategies. By 2018, these fiscal consolidation efforts yielded a notable fiscal surplus estimated at approximately 11% of GDP. This surplus was primarily achieved through significant reductions in capital expenditures, reflecting a scaling back of public investment projects, as well as the implementation of various revenue-enhancing measures, including improved tax collection and administrative reforms. These measures collectively contributed to strengthening the government’s fiscal position and reducing reliance on external borrowing. Despite the attainment of a fiscal surplus, Eritrea continued to face mounting fiscal pressures, particularly in relation to recurrent expenditures. Ongoing costs associated with public sector wages, including labor-related expenses, remained substantial and were expected to increase in the near term. These recurrent expenditures posed challenges to sustaining fiscal discipline, as they limited the government’s flexibility to allocate resources toward capital investments or social services. The persistence of these pressures underscored the delicate balance Eritrea needed to maintain between fiscal consolidation and meeting essential public sector obligations. The short-term economic growth outlook for Eritrea remained constrained by these fiscal limitations and the restricted opportunities available under prevailing economic and regulatory conditions. Structural impediments, including limited access to international finance, trade restrictions, and a relatively narrow economic base, further complicated efforts to stimulate robust and sustained growth. Within this context, the recovery of the agricultural sector was projected to decelerate, reflecting both the sector’s vulnerability to climatic shocks and the broader macroeconomic constraints that inhibited investment and productivity enhancements. The agricultural sector’s slowdown had significant implications for overall economic performance, given its substantial contribution to employment and GDP. Eritrea’s macroeconomic environment continued to be characterized by significant challenges, including an unsustainable debt burden that complicated fiscal and monetary management. The country had accumulated arrears owed to major international financial institutions such as the World Bank, reflecting difficulties in meeting external debt obligations and accessing concessional financing. These arrears limited Eritrea’s ability to secure new funding for development projects and constrained its engagement with the global financial system. Additionally, vulnerabilities persisted within the financial sector, including limited banking infrastructure and constrained credit availability, as well as in the external sector, where trade imbalances and foreign exchange shortages posed ongoing risks to economic stability. These factors collectively underscored the complex and precarious nature of Eritrea’s economic landscape during this period.

In 2011, Eritrea’s Gross Domestic Product (GDP) was estimated at approximately $4.037 billion, reflecting the total monetary value of all goods and services produced within the country during that year. This figure represented a significant increase from the previous year, with the 2011 GDP marking an 8.7 percent growth over the 2010 GDP. The notable expansion in economic output was primarily driven by several key factors, including a rise in agricultural production, the continued development and expansion of the mining sector, and favorable international market conditions, particularly the increase in global gold prices. The agricultural sector experienced improved yields due to favorable weather conditions and enhanced farming practices, which contributed to the overall economic growth. Agriculture, while constituting a smaller portion of the economy relative to other sectors, remained a vital source of livelihood for a large segment of the Eritrean population. Simultaneously, the mining industry underwent considerable expansion, with increased exploration and extraction activities, especially in gold mining. The surge in gold prices on the international market further amplified the sector’s contribution to the national economy, providing a substantial boost to export revenues and government income. Although comprehensive and detailed sectoral data for Eritrea’s economy are not readily available due to limitations in statistical reporting and data collection infrastructure, estimates for the year 2011 provide insight into the relative contributions of different economic sectors to the overall GDP. The services sector was estimated to contribute approximately 55 percent of the total GDP, making it the largest component of the economy. This sector encompasses a wide range of activities, including public administration, education, health services, retail trade, transportation, and communication services, reflecting the growing importance of non-agricultural and non-industrial activities in Eritrea’s economic landscape. The industry sector accounted for about 34 percent of the GDP in 2011, underscoring the significance of manufacturing, construction, and mining activities within the country. The industrial sector’s substantial share of GDP highlights Eritrea’s ongoing efforts to diversify its economy beyond traditional agriculture by developing its mineral resources and expanding industrial production capabilities. Mining, in particular, played a pivotal role within this sector, with gold mining operations contributing significantly to industrial output and export earnings. The agriculture sector made up the remaining 11 percent of the GDP, indicating its relatively smaller but still essential role in the economy. Despite its modest share, agriculture remained a critical source of employment and subsistence for much of the Eritrean population, especially in rural areas. The sector’s performance was closely linked to climatic conditions, availability of arable land, and government policies aimed at improving food security and rural livelihoods. Despite the positive growth trends observed in 2011, Eritrea’s overall GDP growth faced persistent challenges stemming from ongoing border tensions with neighboring countries. These geopolitical conflicts created an environment of uncertainty and instability, which hindered foreign investment, disrupted trade routes, and imposed additional costs on the economy. The protracted border disputes also diverted government resources toward defense expenditures, limiting the funds available for development projects and economic diversification efforts. Consequently, while the country demonstrated robust growth in certain sectors, the broader economic potential remained constrained by these external security concerns and their associated economic repercussions.

In 2004, agriculture remained the primary source of livelihood for nearly 80 percent of Eritrea’s population, underscoring its central role in the country’s socio-economic fabric. Despite this extensive employment, the agricultural sector contributed only 12.4 percent to Eritrea’s gross domestic product (GDP), reflecting a significant disparity between labor input and economic output. This discrepancy was indicative of underlying structural challenges within the sector, including low productivity and limited access to modern agricultural inputs. Over time, efforts to enhance agricultural productivity were undertaken, notably through the adoption of modern farming equipment and improved cultivation techniques. The construction of dams also played a critical role in water management, enabling more reliable irrigation and reducing dependence on erratic rainfall patterns, which historically constrained crop yields. Despite these advancements, the agricultural sector continued to face substantial obstacles, particularly a lack of adequate financial services and investment. The scarcity of credit facilities and capital investment hindered farmers’ ability to procure necessary inputs such as fertilizers, quality seeds, and machinery, thereby limiting the potential benefits of technological improvements. Furthermore, the sector’s growth was constrained by insufficient infrastructure and market access, which restricted farmers’ opportunities to commercialize their produce effectively. The limited availability of extension services and agricultural research further compounded these challenges, impeding the dissemination of best practices and innovations among rural farming communities. Eritrea’s major agricultural products encompassed a diverse range of crops and livestock outputs, reflecting the country’s varied agro-ecological zones. Staple cereals such as sorghum, barley, millet, teff, and wheat formed the backbone of food production, while pulses like beans and lentils contributed to dietary protein intake and soil fertility through nitrogen fixation. Livestock products, including dairy and meat, were integral to rural livelihoods and nutrition, with leather also representing an important byproduct of animal husbandry. The cultivation and processing of these commodities were predominantly carried out at a subsistence level, with limited surplus reaching local markets. This agricultural diversity was vital for food security but was vulnerable to external shocks and structural impediments. The protracted conflict with Ethiopia, particularly the war that spanned from 1998 to 2000, had a profound and deleterious impact on Eritrea’s agricultural productivity. The displacement of approximately one million Eritreans during this period disrupted traditional farming activities, as large segments of the rural population were forced to abandon their land and livelihoods. This mass displacement not only reduced the labor force available for cultivation but also led to the neglect and degradation of arable land. The conflict’s aftermath also left a legacy of widespread land mines scattered across the countryside, posing a persistent threat to agricultural development. Nearly a quarter of Eritrea’s most fertile and productive land remained unoccupied due to the danger posed by these unexploded ordinances, severely restricting the expansion and intensification of farming activities. The lingering effects of the 1998–2000 conflict extended beyond displacement and land mines, contributing to a general decline in agricultural productivity. The destruction of infrastructure, including irrigation systems and farm-to-market roads, coupled with the disruption of input supply chains, hampered recovery efforts. Additionally, the war diverted government resources and attention away from agricultural development towards defense and reconstruction priorities. This prolonged period of instability undermined confidence among potential investors and donors, further limiting the inflow of capital and technical assistance necessary for revitalizing the sector. Forestry, by contrast, was not regarded as a significant economic activity within Eritrea. The country’s arid and semi-arid climate, coupled with extensive land degradation and deforestation, limited the extent and productivity of forested areas. Consequently, forestry contributed minimally to the national economy, with limited commercial exploitation or sustainable management practices in place. The sector’s marginal role was also due to the prioritization of other land uses and the scarcity of market demand for forest products. In response to ongoing challenges in agriculture and rural livelihoods, the Eritrean government, as of 2011, actively promoted the large-scale cultivation of cactus plants. This initiative aimed to alleviate human suffering by providing a resilient and drought-tolerant crop that could serve as a source of food, fodder, and income in arid regions. The cactus cultivation program also held potential for increasing future export revenues, as processed cactus products could access niche markets domestically and internationally. The promotion of cactus represented an innovative approach to addressing food security concerns and diversifying agricultural production under challenging environmental conditions. The introduction of cactus plants to Eritrea had historical roots dating back to 1839, when a French Catholic missionary first brought them to the southern regions of Digsa, Akrur, and Hebo. This initial introduction laid the foundation for the plant’s adaptation to Eritrea’s climatic conditions and its gradual incorporation into local agricultural systems. Subsequently, a second generation of cactus plants was introduced by Italian colonizers during the construction of the Asmara rail lines, particularly at Arberebu. The Italians’ efforts to establish cactus cultivation were part of broader agricultural and infrastructural development projects during the colonial period, which sought to exploit the plant’s utility for soil stabilization and as a drought-resistant fodder source. Reliable data on the size and economic value of Eritrea’s fishing industry have historically been scarce, reflecting the sector’s largely artisanal nature and limited formal documentation. Nonetheless, Eritrea’s extensive coastline along the Red Sea presents significant potential for the expansion of the fishing industry beyond its current subsistence and small-scale operations. The country’s marine resources include a variety of commercially valuable species, and the coastal environment offers opportunities for both capture fisheries and aquaculture development. However, the lack of comprehensive data and investment has constrained the sector’s growth and integration into the national economy. Eritrea has actively engaged in the export of fish and sea cucumbers harvested from the Red Sea, targeting markets in Europe and Asia. These exports represent an important source of foreign exchange and contribute to the livelihoods of coastal fishing communities. The trade in sea cucumbers, in particular, caters to high-value niche markets, especially in East Asia, where demand for this delicacy remains strong. The government has recognized the importance of developing the fishing sector as a means of economic diversification and rural development. Infrastructure improvements have been pivotal in supporting the expansion of Eritrea’s seafood exports. The construction of a new jet-capable airport in Massawa, combined with the rehabilitation of the port facilities, has enhanced the capacity for handling and exporting high-value seafood products. These developments have facilitated more efficient transportation and logistics, reducing spoilage and increasing the competitiveness of Eritrean fish products in international markets. The improved connectivity has also attracted interest from investors and traders seeking to capitalize on the region’s marine resources. In 2002, Eritrea’s fish exports amounted to approximately 14,000 tons, a figure that represented only a fraction of the estimated maximum sustainable yield of nearly 80,000 tons from the country’s marine waters. This discrepancy highlighted the untapped potential of Eritrea’s fishing grounds and underscored the need for sustainable management and investment to scale up production. The sustainable yield estimate took into account the biological capacity of fish stocks to replenish, emphasizing the importance of balancing exploitation with conservation to ensure long-term viability. A fish processing plant established in 1998 played a critical role in adding value to Eritrea’s seafood exports. This facility processed and exported about 150 tons of frozen fish monthly to markets in Britain, Germany, and the Netherlands, demonstrating Eritrea’s ability to meet international quality standards and access developed country markets. The plant’s operations provided employment opportunities and contributed to the development of a nascent seafood processing industry, which could serve as a foundation for future sectoral growth. However, the development of Eritrea’s fishing industry has been complicated by geopolitical tensions, particularly disputes over fishing rights in the Red Sea. Incidents of conflict with Yemen occurred in 1995 and again in 2002, reflecting competing claims and enforcement actions in the contested maritime areas. These tensions, coupled with Eritrea’s strained international relations more broadly, have posed challenges to the expansion and modernization of the fishing sector. The political environment has affected foreign investment, access to regional cooperation frameworks, and the ability to implement effective fisheries management, thereby limiting the industry’s growth prospects.

As of 2001, Eritrea’s mineral sector was characterized by significant untapped potential, with substantial mineral deposits remaining largely unexplored. Despite the country’s known geological richness, comprehensive assessments and systematic exploration had yet to be fully undertaken, leaving much of the mineral wealth unidentified and undeveloped. This situation reflected the nascent stage of Eritrea’s mining industry at the time, as the government and private sector began to recognize the strategic importance of mineral resources for economic diversification and growth. The limited exploration activities conducted up to that point suggested that Eritrea could possess considerable reserves of valuable minerals, which, if properly exploited, could contribute substantially to national revenue and employment. In 1998, the Eritrean government reported that artisanal mining activities had yielded approximately 573.4 kilograms of gold. This figure underscored the presence of gold deposits accessible through small-scale, labor-intensive mining methods, which had traditionally been a source of livelihood for local communities. However, despite this measurable output, the total gold reserves within the country remained imprecisely quantified due to the lack of extensive geological surveys and exploration programs. The discrepancy between artisanal gold production and the unknown scale of reserves highlighted the need for more systematic exploration to ascertain the full extent of gold resources and to facilitate the transition from informal to formal mining operations. International observers and industry experts recognized Eritrea’s potential not only in precious metals but also in the quarrying of ornamental stones such as marble and granite. The country’s geological formations were noted for their suitability for producing high-quality decorative stones, which could serve both domestic construction needs and export markets. This recognition pointed to opportunities for developing ancillary mineral industries beyond traditional metal mining, potentially diversifying the mining sector and adding value through processing and manufacturing. The ornamental stone sector was seen as a promising avenue for investment, capable of generating employment and contributing to infrastructure development. By 2001, approximately ten mining companies had obtained licenses to prospect for various minerals within Eritrea, marking initial steps toward formal mineral exploration and development. These licenses reflected growing interest from both domestic and international entities in assessing Eritrea’s mineral potential. The licensing process was part of the government’s broader strategy to attract investment and technical expertise necessary for resource development. The presence of these companies indicated a gradual shift from artisanal and informal mining toward more structured and commercially viable operations, setting the stage for future expansion of the mining sector. Concurrently, the Eritrean government was actively engaged in conducting a comprehensive geological survey aimed at attracting potential investors to the mining industry. This survey involved systematic mapping and evaluation of the country’s mineral resources, providing critical data to support exploration and development activities. The government’s efforts to compile detailed geological information were intended to reduce investment risks and enhance the attractiveness of Eritrea’s mining sector to foreign and domestic investors. By improving the understanding of mineral deposits, the survey sought to facilitate informed decision-making and promote sustainable exploitation of mineral wealth. However, the development of Eritrea’s mining industry faced significant challenges, notably the presence of hundreds of thousands of land mines scattered across the country, particularly along the border with Ethiopia. These land mines posed a serious obstacle to exploration and infrastructure projects, restricting access to mineral-rich areas and endangering personnel and equipment. The legacy of conflict and the extensive minefields hindered the expansion of mining activities, necessitating costly and time-consuming demining operations before exploration and extraction could proceed safely. This security and safety issue remained a critical constraint on the full realization of Eritrea’s mineral potential. A decade later, in 2011, the mining sector in Eritrea witnessed renewed international interest, exemplified by the entry of AngloGold Ashanti, a major global gold producer. The company initiated exploration activities targeting the Arabian-Nubian Shield, a geologically significant region known for its gold deposits. AngloGold Ashanti had established a joint venture with Thani Dubai Mining in 2009, structured as a 50/50 partnership, to pursue exploration and development opportunities in Eritrea. This collaboration signaled confidence in the country’s mineral prospects and represented a strategic move to capitalize on the underexplored gold potential within the Arabian-Nubian Shield’s geological framework. In the same year, Chalice Mining, an Australian-based company, applied for an 18-year mining license through a joint venture arrangement in which it held a 60% stake, with the remaining 40% presumably held by local or partner entities. This application demonstrated ongoing interest from foreign firms in securing long-term mineral rights in Eritrea, reflecting the country’s growing reputation as an emerging mining destination. Chalice Mining’s pursuit of an extended license indicated a commitment to sustained exploration and development activities, which could contribute to the expansion of Eritrea’s mining output and the diversification of its mineral base. Also in 2011, Nevsun Resources, a Canadian mining company, completed the construction of the Bisha gold mining project, marking a significant milestone in Eritrea’s mining industry. The Bisha mine was projected to produce approximately 350,000 ounces of gold annually during the period in which gold ore was available. This level of production positioned Bisha as a major contributor to the country’s mineral output and export earnings. Following the depletion of the gold ore, the mine was expected to transition its focus to the extraction of copper and zinc, reflecting the polymetallic nature of the deposit. This phased approach to mining operations illustrated the potential for sustained mineral production over an extended period, enhancing the mine’s economic viability and the sector’s contribution to the national economy. By 2012, the exploration landscape in Eritrea had diversified, with nine exploration companies actively operating within the country. These companies originated from a variety of countries, reflecting broad international interest in Eritrea’s mineral resources. Canadian firm NGEx Resources was among the operators, alongside Australian companies such as Chalice Gold Mines, South Boulder Mines, and Sunridge Gold Corp. Chinese entities included Sichuan Road and Bridge Group, Zhong Chang Mining Co., China Africa Huakan Investment Co., Land Energy Group (China) Ltd, and Beijing Donia Resources Co. Additionally, companies from the United Kingdom, including London Africa Ltd and Andiamo Exploration Ltd., as well as firms from the United Arab Emirates and Barbados, were engaged in exploration activities. This multinational presence underscored Eritrea’s emergence as a focal point for mineral exploration, attracting diverse expertise and investment aimed at unlocking the country’s mineral wealth.

During the period of federation between Eritrea and Ethiopia, which lasted from 1952 until Eritrea’s annexation by Ethiopia in 1962, the industrial capacity of Eritrea underwent significant changes that ultimately undermined its development. Much of the industrial infrastructure and investment that had previously been established in Eritrea was redirected toward Ethiopia, particularly to Addis Ababa and other Ethiopian urban centers. This shift in focus led to a gradual decline in Eritrea’s industrial sector, as capital equipment became increasingly outdated and maintenance was neglected. The lack of reinvestment and modernization during this period resulted in the deterioration of industrial facilities, leaving Eritrea with an industrial base that was ill-equipped to support economic growth or diversification by the time of Eritrea’s eventual independence in 1993. Despite these historical challenges, by 2003 the industrial sector had regained some prominence within Eritrea’s economy, contributing approximately 25.3 percent to the country’s gross domestic product (GDP). This figure reflected the sector’s role as a significant component of the national economy, although it remained relatively modest compared to agriculture and services. The industrial sector’s contribution was indicative of ongoing efforts by the Eritrean government to rehabilitate and expand industrial activities in the post-independence era, aiming to reduce reliance on imports and create employment opportunities. The 25.3 percent share of GDP underscored the sector’s importance in the broader economic landscape, despite the lingering effects of earlier neglect and infrastructural limitations. Eritrea’s industrial production encompasses a diverse range of goods, reflecting both the country’s natural resource endowments and its attempts to develop value-added manufacturing. Among the major industrial products are processed food and dairy products, which serve both domestic consumption needs and local markets. The food processing industry includes the production of packaged foods, canned goods, and dairy items such as milk, cheese, and butter, which are crucial for food security and nutrition. Additionally, the production of alcoholic beverages forms a notable segment of the industrial output, with local breweries and distilleries producing traditional and commercial beverages that cater to Eritrea’s population and contribute to government revenues. The manufacturing of glass and leather goods also constitutes important sectors within Eritrea’s industrial landscape. Glass production includes the manufacture of bottles and containers, which support the beverage industry, while leather goods encompass footwear, bags, and other accessories crafted from locally sourced hides. These industries benefit from the availability of raw materials and provide employment opportunities in urban centers. Furthermore, Eritrea has developed a marble processing industry, capitalizing on the country’s abundant marble deposits. Marble is quarried and processed for use in construction and decorative purposes, both domestically and for export. Textile manufacturing, although limited in scale, produces fabrics and garments that serve local markets and contribute to the diversification of industrial activities. Salt production remains one of Eritrea’s traditional industries, particularly in the coastal regions such as the Danakil Depression, where the extraction of salt through evaporation methods has been practiced for centuries. Salt is harvested and processed for both domestic use and export, representing a vital source of income for communities involved in this sector. The combination of these varied industrial products illustrates Eritrea’s efforts to rebuild and expand its manufacturing base following decades of economic disruption. While challenges remain, including limited access to capital, technology, and international markets, the industrial sector continues to play a crucial role in the country’s economic development strategy.

Households in Eritrea accounted for more than 80 percent of the country’s total energy consumption, highlighting the predominance of residential demand within the national energy profile. This substantial domestic energy use reflected the reliance of Eritrean families on energy primarily for cooking, heating, and lighting, as well as for powering small household appliances. The high percentage of household consumption underscored the limited development of industrial and commercial energy sectors relative to the residential sector, which remained the primary driver of energy demand. This pattern was indicative of Eritrea’s largely agrarian economy and the nascent stage of its industrialization, where energy infrastructure was predominantly oriented toward serving the needs of the population in their homes rather than extensive commercial or manufacturing activities. In 2001, Eritrea’s electricity production was estimated at approximately 220.5 million kilowatt-hours, reflecting the country’s modest generation capacity at the time. This level of production was constrained by limited infrastructure and the challenges posed by the country’s geography and economic conditions. Despite these limitations, the electricity generation capacity was sufficient to meet much of the existing demand within urban centers and some rural areas connected to the grid. The production figure also illustrated the early stages of Eritrea’s efforts to expand its energy sector and improve access to electricity for its population, which had historically been limited due to infrastructural and financial constraints. Electricity consumption in Eritrea during the same year was estimated at 205.1 million kilowatt-hours, indicating a relatively high utilization rate of the electricity generated. This consumption level suggested that the majority of the electricity produced was effectively distributed and used, with limited losses in transmission or distribution. The close alignment between production and consumption figures pointed to an energy system that, while small in scale, operated with a degree of efficiency in matching supply to demand. This balance was critical for a country facing significant challenges in expanding its energy infrastructure and underscored the importance of maximizing the use of available resources to support economic and social development. A significant development in Eritrea’s electricity infrastructure was the completion in 2003 of an 88-megawatt power plant located just south of the port city of Massawa. This plant represented a major enhancement of the country’s generation capacity and was financed through international cooperation, with funding provided by Saudi Arabia, Kuwait, and Abu Dhabi. The construction of this plant had been delayed for nearly three years due to the war with Ethiopia, which had disrupted infrastructure projects and diverted resources toward the conflict. The completion of the plant marked a critical milestone in Eritrea’s efforts to rebuild and modernize its energy sector following the cessation of hostilities, enabling improved electricity supply to support economic recovery and growth. The war with Ethiopia, which lasted from 1998 to 2000, had a profound impact on Eritrea’s infrastructure development timeline, including the delay of the Massawa power plant project. The conflict not only caused direct physical damage to infrastructure but also strained the country’s financial and human resources, impeding investment in energy and other critical sectors. The nearly three-year postponement of the power plant’s construction illustrated how regional conflict could disrupt long-term development plans and delay the provision of essential services. The war’s legacy continued to influence Eritrea’s energy sector, necessitating concerted efforts to restore and expand infrastructure in a post-conflict environment. In 2001, Eritrea’s annual petroleum consumption was estimated at 370,000 tons, despite the country lacking any domestic petroleum production capabilities. This reliance on imported petroleum products underscored Eritrea’s dependence on external sources to meet its energy needs, particularly for transportation, industry, and power generation. The absence of indigenous oil production meant that the country was vulnerable to fluctuations in global oil prices and supply disruptions, which could have significant economic and social repercussions. The consumption figure reflected the growing demand for petroleum products as Eritrea sought to develop its economy and improve transportation and industrial services. The management of petroleum procurement in Eritrea was overseen by the Eritrean Petroleum Corporation, which conducted purchases through international competitive tenders. This approach aimed to ensure transparency, cost-effectiveness, and reliability in securing petroleum supplies from global markets. By engaging in competitive bidding processes, the corporation sought to obtain favorable terms and prices, thereby minimizing the financial burden on the government and consumers. The reliance on imported petroleum and the centralized management of its acquisition highlighted the strategic importance of petroleum imports to Eritrea’s energy security and economic stability. According to assessments by the U.S. Department of Commerce, Eritrea possessed potential opportunities for both onshore and offshore exploration of oil and natural gas resources. These prospects were based on geological surveys and regional studies suggesting the presence of hydrocarbon deposits within Eritrea’s territorial boundaries and continental shelf. However, as of the early 2000s, these exploration opportunities had not yet been realized or developed commercially, due in part to limited investment, technical capacity, and geopolitical considerations. The untapped potential for oil and gas exploration represented a significant opportunity for Eritrea to diversify its energy sources and reduce dependence on imports, contingent upon attracting foreign investment and developing the necessary infrastructure. The utilization of renewable energy sources such as wind and solar power in Eritrea experienced modest growth, driven in part by the expansion of solar power manufacturing companies within the country. This growth reflected increasing recognition of the potential for renewable energy to address the country’s energy access challenges, particularly in rural and off-grid areas where traditional electricity infrastructure was lacking. The development of local solar manufacturing capabilities contributed to reducing costs and increasing the availability of solar technologies, facilitating wider adoption among households and small businesses. Wind energy, while less developed than solar, also began to attract attention as a complementary renewable resource that could contribute to Eritrea’s energy mix. The Eritrean government expressed a clear interest in developing alternative energy sources, including geothermal, solar, and wind power, as part of a broader strategy to diversify the nation’s energy portfolio. This commitment was motivated by the desire to enhance energy security, reduce environmental impacts, and promote sustainable development. Geothermal energy, in particular, was identified as a promising resource given Eritrea’s geological conditions, which included volcanic activity and geothermal gradients conducive to energy extraction. The government’s focus on renewable energy development aligned with global trends toward cleaner energy sources and reflected an understanding of the long-term benefits of reducing reliance on imported fossil fuels. Within the capital city of Asmara, Harnet Avenue stood as a notable location, often referenced in discussions of urban development and infrastructure. While not directly an energy facility, its mention in the context of the energy sector highlighted its significance as a central thoroughfare that connected key administrative, commercial, and residential areas. The avenue’s prominence underscored the urban dimension of Eritrea’s energy challenges and opportunities, as expanding electricity access and modernizing infrastructure were critical to supporting the city’s growth and improving the quality of life for its inhabitants. The development of energy infrastructure in and around Asmara, including along major avenues such as Harnet, was indicative of the broader national efforts to integrate energy considerations into urban planning and development.

In 2011, the services sector accounted for approximately 55 percent of Eritrea’s gross domestic product (GDP), reflecting its significant role within the national economy. This sector emerged as the largest contributor to the country’s economic output, surpassing both agriculture and industry in terms of value added. The predominance of services within Eritrea’s GDP indicated a gradual structural transformation from a primarily agrarian economy toward a more diversified economic base, although agriculture and mining continued to remain important. Within the services sector, financial services constituted the majority, representing a critical component of Eritrea’s economic infrastructure and development strategy. Financial services in Eritrea encompassed a range of banking, insurance, and investment institutions that collectively supported economic activities across various sectors. These institutions provided essential financial intermediation, credit facilities, and risk management tools necessary for both public and private enterprises. The financial sector’s development was closely linked to the government’s efforts to promote economic growth, facilitate investment, and stabilize the national currency. Despite challenges related to limited access to international financial markets and a relatively small domestic market, Eritrea maintained a structured financial system centered around a handful of key institutions. At the apex of Eritrea’s financial system was the National Bank of Eritrea, which served as the nation’s central bank. Established shortly after Eritrea’s independence in 1993, the National Bank was responsible for formulating and implementing monetary policy, regulating and supervising financial institutions, managing the country’s currency reserves, and maintaining overall financial stability. The bank also played a pivotal role in issuing the Eritrean nakfa, the national currency introduced in 1997 to replace the Ethiopian birr. Through its regulatory functions, the National Bank ensured the soundness of the banking sector and facilitated the development of financial markets within the constraints of Eritrea’s economic environment. Complementing the central bank’s role were several commercial and specialized banks that provided a variety of financial services to individuals, businesses, and government entities. The Commercial Bank of Eritrea was the largest and most prominent among these institutions, operating as the primary provider of retail and corporate banking services. It offered deposit accounts, loans, and payment services, thereby supporting everyday financial transactions and credit needs across the country. The bank’s extensive branch network enabled it to reach a broad customer base, including urban and rural populations, although banking penetration remained relatively low compared to global standards. In addition to the Commercial Bank, the Housing and Commerce Bank of Eritrea played a specialized role by focusing on financing for residential construction and commercial enterprises. This institution aimed to address the country’s housing shortage and stimulate commercial development by providing mortgage loans and business credit. Its activities were aligned with national priorities to improve living standards and promote entrepreneurship. The bank’s services were particularly important in urban centers such as Asmara, where demand for housing and commercial infrastructure was concentrated. The Agricultural and Industrial Bank of Eritrea was another key financial institution, tasked with supporting the agricultural and industrial sectors through targeted credit programs. Recognizing the importance of agriculture in Eritrea’s economy, this bank provided loans to farmers for inputs such as seeds, fertilizers, and equipment, as well as financing for agro-processing and small-scale industrial ventures. By facilitating access to capital, the bank contributed to efforts aimed at increasing productivity, diversifying economic activities, and generating employment opportunities in rural areas. Its role underscored the government’s commitment to fostering sectoral development through specialized financial services. Further expanding the financial landscape was the Eritrean Investment and Development Bank, which focused on long-term investment financing and development projects. This institution was instrumental in mobilizing resources for infrastructure development, industrial expansion, and other strategic initiatives critical to Eritrea’s economic growth. By providing medium- and long-term loans, the bank supported projects that were often beyond the scope of commercial banks due to their scale or risk profile. Its involvement in development finance reflected a broader policy framework aimed at promoting sustainable economic progress and reducing dependence on external aid. Complementing the banking sector was the National Insurance Corporation of Eritrea, the principal provider of insurance services within the country. Established to offer risk management solutions, the corporation provided coverage for life, health, property, and commercial risks, thereby enabling individuals and businesses to mitigate financial losses arising from unforeseen events. The availability of insurance products contributed to economic stability by encouraging investment and protecting assets. Although the insurance market in Eritrea remained relatively underdeveloped compared to more advanced economies, the National Insurance Corporation played a vital role in laying the foundation for a more comprehensive financial services sector. Together, these financial institutions formed the backbone of Eritrea’s services sector, facilitating economic transactions, promoting investment, and supporting development objectives. Despite operating within a challenging environment characterized by limited foreign exchange reserves, international sanctions, and a relatively small domestic market, the sector’s contribution to GDP underscored its importance. The government’s continued emphasis on strengthening financial institutions and expanding access to financial services aimed to enhance economic resilience and foster inclusive growth across the country.

The development of Eritrea’s tourism industry has faced numerous challenges that have significantly constrained its growth and potential. One of the primary obstacles has been the limited access to financial resources necessary for building and maintaining tourism infrastructure, promoting the country as a destination, and supporting related services. This scarcity of funds has restricted the establishment of hotels, transportation networks, and other amenities that are essential for attracting international visitors. Compounding these financial difficulties is the widespread presence of land mines across various regions of Eritrea, remnants of decades of conflict, which pose severe safety risks to both locals and tourists. The existence of these land mines has not only endangered human lives but also discouraged investment in tourism-related activities and infrastructure development, as areas deemed unsafe are often avoided by potential visitors and developers alike. The ongoing tensions between Eritrea and Ethiopia have further exacerbated the challenges faced by the tourism sector. Since Eritrea gained independence in 1993, the two countries have experienced intermittent conflict, most notably the border war from 1998 to 2000, which left deep scars on bilateral relations. Despite the signing of peace agreements, political and military tensions have periodically resurfaced, creating an unstable environment that undermines confidence in the safety and security of the region. Such instability has had a direct negative impact on Eritrea’s ability to attract and sustain international tourism, as travelers typically seek destinations with predictable and peaceful conditions. The persistent threat of renewed hostilities has deterred tour operators, investors, and tourists from engaging with Eritrea’s tourism market, further limiting its development. The presence of land mines has been a particularly daunting issue for the tourism industry. Mines are scattered across former battlefields, border areas, and rural regions, making many potentially attractive sites inaccessible or hazardous. This situation has necessitated extensive mine clearance efforts, which require significant time, expertise, and funding—resources that have often been in short supply. The danger posed by land mines not only restricts the movement of tourists but also hampers the construction of new roads, lodgings, and other facilities that could support tourism growth. Consequently, large portions of the country remain off-limits or underutilized for tourism purposes, reducing the variety and appeal of destinations available to visitors. Political and military tensions between Eritrea and Ethiopia have continued to flare up sporadically, contributing to an environment of uncertainty that is unfavorable for tourism. Despite the 2018 peace agreement that formally ended the state of war between the two nations, mistrust and occasional diplomatic strains have persisted. This fragile peace has meant that Eritrea remains perceived as a high-risk destination, particularly for international travelers who prioritize safety. The broader regional instability linked to these tensions has also affected Eritrea’s connectivity with neighboring countries, limiting cross-border tourism and regional cooperation initiatives that could have bolstered the industry. As a result, the tourism sector has struggled to gain momentum, overshadowed by concerns about security and political volatility. Reflecting the limited scale of Eritrea’s tourism industry during the early 2000s, data from the World Tourism Organization indicated that international tourism receipts amounted to only US$73 million in 2002. This figure underscores the relatively small contribution of tourism to the country’s overall economy at that time, especially when compared to other nations in the region that had more developed tourism sectors. The modest revenue generated was indicative of low visitor numbers, constrained by the factors of insecurity, land mine hazards, and infrastructural deficiencies. It also highlighted the need for substantial investment and policy reforms to unlock Eritrea’s potential as a tourist destination, given its rich cultural heritage, historical sites, and diverse landscapes that remained largely untapped due to these prevailing challenges.

According to the International Monetary Fund (IMF), the banking system in Eritrea is characterized by the exclusive government ownership and operation of all commercial banks. This state-controlled structure reflects the country’s broader economic framework, where the government maintains significant influence over key sectors. The absence of private commercial banks means that the government exercises direct oversight and control over banking activities, including the provision of financial services, credit allocation, and foreign exchange management. This centralized approach aims to align banking operations with national economic priorities and development goals, although it also limits competition and diversity within the sector. Despite the government monopoly, Eritrean commercial banks appear to adhere to prudent banking regulations, as noted by the IMF. These regulatory frameworks are designed to ensure financial stability, sound risk management, and the protection of depositors’ funds. Compliance with such regulations suggests that the banks maintain adequate capital adequacy ratios, follow established guidelines for loan provisioning, and implement measures to mitigate credit and operational risks. The regulatory environment, therefore, provides a foundation for maintaining confidence in the banking system, even within the constraints of a state-run model. However, the effectiveness of these regulations depends heavily on consistent enforcement and the capacity of regulatory bodies to monitor banking activities. The commercial banking sector in Eritrea has demonstrated a notable level of profitability, which is primarily attributed to income generated from foreign exchange transactions. Given Eritrea’s economic context, foreign exchange operations constitute a significant source of revenue for banks, as they facilitate currency conversions, remittances, and international trade payments. These activities often yield higher margins compared to traditional lending, especially in a country where foreign currency inflows, including remittances from the diaspora, play a crucial role in the economy. Consequently, banks have leveraged their foreign exchange services to bolster their financial performance, compensating for limitations in other areas of their operations. Nevertheless, the sector faces considerable challenges stemming from a high proportion of non-performing loans (NPLs). Non-performing loans represent credit extended to borrowers who have failed to meet their repayment obligations for a specified period, typically 90 days or more. In Eritrea, the elevated level of NPLs indicates difficulties in credit risk management and borrower repayment capacity, which undermine the quality of bank assets. The prevalence of NPLs can erode banks’ profitability by increasing provisions for loan losses and reducing the funds available for new lending. This situation also reflects broader economic constraints, such as limited private sector development, low diversification, and external shocks, which affect borrowers’ ability to service their debts. Compounding these challenges, the core lending activities of most Eritrean commercial banks do not generate sufficient income to cover their operating costs. Traditional lending, which involves providing loans to individuals and businesses, typically serves as the primary revenue source for commercial banks worldwide. However, in Eritrea, the returns from interest income on loans are often inadequate to offset expenses related to staff salaries, branch operations, and administrative overheads. This shortfall may result from several factors, including conservative lending practices, low interest rates, or the high incidence of loan defaults. As a result, banks rely heavily on alternative income streams, such as foreign exchange transactions, to sustain their operations and maintain profitability. The reliance on non-lending income underscores structural weaknesses in the banking sector and highlights the need for reforms to enhance credit risk assessment, expand the customer base, and improve the efficiency of lending practices.

Agriculture has historically been the cornerstone of Eritrea’s labor force, with approximately 80 percent of the population engaged in this sector. This overwhelming majority reflects the country’s reliance on subsistence farming and pastoralism as primary means of livelihood, particularly in rural areas where mechanization and industrial development remain limited. The predominance of agriculture is closely tied to Eritrea’s climatic and geographical conditions, which influence the types of crops grown and livestock raised. Despite challenges such as periodic droughts and limited access to modern farming technology, agriculture continues to employ the largest segment of the population, underscoring its critical role in sustaining the nation’s economy and food security. In contrast, the remaining 20 percent of Eritrea’s workforce is distributed between the industrial and service sectors. Industrial employment encompasses activities such as manufacturing, mining, and construction, which have gradually expanded but still represent a relatively small portion of the labor market due to infrastructural constraints and limited foreign investment. The services sector includes government administration, education, healthcare, retail, and tourism, which have seen incremental growth as urban centers develop and the government prioritizes diversification of the economy. However, the limited scale of these sectors compared to agriculture highlights the ongoing challenges Eritrea faces in achieving balanced economic development and creating employment opportunities outside the agricultural domain. The economic conditions of the country during the early 2010s can be partially understood through the lens of gross domestic product (GDP) per capita. In 2011, Eritrea’s GDP per capita at nominal value was estimated to be $475. This figure reflects the relatively low income levels and limited economic output per person within the country, indicative of the broader developmental challenges Eritrea faced. Factors contributing to this modest GDP per capita include the heavy reliance on subsistence agriculture, limited industrial base, and the impact of regional conflicts and international sanctions that constrained economic growth. While GDP per capita provides a snapshot of average economic well-being, it also underscores the need for structural reforms and investment to enhance productivity and improve living standards for the Eritrean population.

The official currency of Eritrea is the Eritrean nakfa (ERN), which was introduced in November 1997 as part of the country’s efforts to establish a stable monetary system following independence. The introduction of the nakfa replaced the Ethiopian birr, which had been in use during the period of Ethiopian administration prior to Eritrea’s independence in 1993. The establishment of the nakfa was a significant step in asserting Eritrea’s economic sovereignty and facilitating the development of a national financial infrastructure. The currency was named after the town of Nakfa, a symbol of Eritrean resistance during the war of independence, underscoring the currency’s national significance. In early 2005, the Eritrean government implemented a decree mandating that all financial transactions within the country be conducted exclusively in nakfa. This policy shift was widely interpreted as an attempt to increase foreign capital reserves by limiting the circulation and use of foreign currencies within the domestic economy. The decree effectively prohibited the use of foreign currencies such as the US dollar, the Ethiopian birr, and other foreign notes for everyday transactions, thereby reinforcing the nakfa’s role as the sole legal tender. This measure was intended to strengthen the central bank’s control over monetary policy and reduce the parallel or black-market foreign exchange activities that had previously undermined the official exchange rate regime. Following the decree, it became illegal for individuals to hold and exchange foreign currency within Eritrea. This prohibition was strictly enforced by the authorities as part of the broader effort to stabilize the national currency and curb inflationary pressures. The ban on foreign currency transactions was also aimed at encouraging the repatriation of foreign earnings and remittances into the official banking system, thereby increasing the government’s foreign exchange reserves. However, this policy also posed challenges for businesses and individuals who relied on foreign currency for trade and savings, contributing to a complex economic environment characterized by a dual currency system operating unofficially alongside the official one. On January 1, 2005, the Eritrean government established the official foreign exchange rate at US$1 equal to ERN 15. This fixed exchange rate was intended to provide a stable and predictable basis for international trade and financial transactions, as well as to anchor inflation expectations within the domestic economy. The pegging of the nakfa to the US dollar at this rate reflected the government’s commitment to maintaining currency stability despite external economic pressures and internal fiscal constraints. Nevertheless, the fixed exchange rate regime faced challenges due to persistent inflation and limited foreign exchange reserves, which sometimes led to discrepancies between the official and parallel market rates. Inflation has remained a persistent economic challenge in Eritrea, significantly affecting the cost of living and economic stability. This inflationary pressure has been exacerbated by several factors, including years of drought that have severely impacted agricultural production and driven up grain prices. The reliance on imported food staples, combined with domestic shortages, has contributed to sustained increases in consumer prices. Additionally, high defense expenditures have placed further strain on the national budget, diverting resources away from productive investments and social services, thereby fueling inflationary dynamics. The government’s fiscal and monetary policies have struggled to contain inflation, which has had adverse effects on household incomes and overall economic growth. The International Monetary Fund (IMF) provided an estimate indicating that Eritrea’s average inflation rate in 2003, the most recent year for which data was available, stood at approximately 23 percent. This high inflation rate reflected the cumulative impact of supply shocks, fiscal imbalances, and structural economic challenges facing the country. The IMF’s assessment highlighted the difficulties Eritrea faced in achieving macroeconomic stability amidst external shocks and internal policy constraints. Persistent inflation at this level posed significant obstacles to poverty reduction and economic development, as rising prices eroded the purchasing power of consumers and increased uncertainty for investors. Among the notable infrastructure projects undertaken in Eritrea was the construction of the Massawa-Asmara Highway, which formed a key component of the Wefri Warsay Yika’alo program. This program represented a comprehensive national development initiative aimed at rebuilding and modernizing the country’s infrastructure in the aftermath of prolonged conflict. The highway, connecting the port city of Massawa on the Red Sea coast with the capital city of Asmara, played a crucial role in facilitating trade, transportation, and economic integration within Eritrea. By improving access to the port and reducing travel times, the Massawa-Asmara Highway contributed to enhancing the efficiency of goods movement and supporting broader economic activities. The project also symbolized the government’s commitment to infrastructure development as a foundation for sustained economic growth and national reconstruction.

Eritrea has historically refrained from publishing an official government budget, a practice that has significantly complicated efforts to accurately assess the country’s fiscal condition. The absence of transparent and detailed budgetary reports has limited both domestic and international analysts’ ability to evaluate the government’s financial management, revenue generation, and expenditure patterns. This lack of official fiscal data has necessitated reliance on estimates from external organizations such as the International Monetary Fund (IMF) and the CIA World Factbook, which attempt to reconstruct Eritrea’s fiscal profile based on available information and economic indicators. According to the International Monetary Fund, Eritrea’s overall fiscal deficit was estimated at 17 percent of gross domestic product (GDP) in 2003. This figure reflects a substantial imbalance between government revenues and expenditures, indicating that the government spent significantly more than it earned during that year. The fiscal deficit at this level suggests that Eritrea faced considerable challenges in mobilizing sufficient domestic resources to fund its public services and development projects. In monetary terms, government expenditures in 2003 were estimated at approximately US$375 million, while revenues amounted to only US$235.7 million. This disparity between expenditures and revenues underscores the magnitude of the fiscal shortfall, revealing a gap of nearly US$139 million that had to be financed through borrowing, external assistance, or monetary expansion. The fiscal situation in Eritrea was even more precarious in the preceding year, 2002, when the fiscal deficit reached a significantly higher level of 32 percent of GDP. Such an extraordinarily large deficit is indicative of severe fiscal stress, often associated with unsustainable government spending and inadequate revenue collection mechanisms. The sharp reduction in the deficit from 32 percent in 2002 to 17 percent in 2003 suggests some degree of fiscal consolidation or improved revenue mobilization, although the deficit remained substantial by international standards. This persistent fiscal imbalance has had profound implications for the country’s macroeconomic stability and its ability to finance essential government functions without resorting to excessive borrowing or monetary financing. A key factor contributing to Eritrea’s fiscal difficulties is the consistent pattern of government expenditures exceeding the amounts initially budgeted. This overspending has been particularly pronounced in the defense sector and other discretionary areas of government spending. Eritrea’s defense expenditures have historically absorbed a large share of the government’s budgetary resources, reflecting the country’s security concerns and military commitments following its war of independence and subsequent border conflicts. The tendency for defense and discretionary spending to surpass budgeted levels has exacerbated fiscal pressures, limiting the government’s flexibility to allocate resources to other critical sectors such as health, education, and infrastructure development. Eritrea’s monetary policy framework is closely intertwined with its fiscal operations, as the government’s financing needs heavily influence monetary policy decisions. This linkage indicates a lack of independent monetary policy control, with the central bank effectively subordinated to the government’s budgetary requirements. In practice, this has meant that monetary policy often serves as a tool to finance fiscal deficits, either through the direct monetization of government debt or indirect mechanisms such as credit expansion. The absence of an autonomous monetary policy has complicated efforts to maintain price stability and control inflation, as monetary expansion driven by fiscal deficits tends to exert upward pressure on prices and undermine macroeconomic stability. The country’s debt situation further compounds its fiscal challenges. Eritrea’s debt levels have been described as unsustainably high, reflecting an accumulation of both domestic and external liabilities that exceed the government’s repayment capacity. High debt burdens increase the risk of fiscal instability by diverting resources toward debt servicing rather than productive investment or social spending. Moreover, unsustainable debt levels constrain the government’s ability to borrow further on concessional terms, potentially limiting access to international capital markets and development assistance. Eritrea’s debt sustainability concerns have been exacerbated by limited economic diversification, low export earnings, and persistent fiscal deficits. Improvement in Eritrea’s fiscal situation is closely linked to the demobilization of its military forces, a process expected to reduce military-related expenditures substantially. The large size and operational costs of the military have been a major driver of government spending, and demobilization would free up fiscal resources for other priorities. However, the timing and pace of military demobilization remain uncertain, and until such measures are implemented, the government’s fiscal position is unlikely to improve significantly. The reduction in defense expenditures through demobilization is anticipated to alleviate some of the fiscal pressures, enabling a reallocation of resources toward development and social sectors. According to the CIA World Factbook, Eritrea’s government revenues total approximately $715.2 million, while total outlays, or expenditures, amount to about $1.021 billion. This data corroborates the persistent fiscal deficit observed in other assessments, with expenditures exceeding revenues by roughly $305.8 million. The scale of this deficit highlights the ongoing fiscal imbalance faced by the Eritrean government. The discrepancy between revenues and outlays underscores the challenges in achieving fiscal sustainability, particularly in the context of limited economic diversification and external financial constraints. The figures from the CIA World Factbook provide a more recent snapshot of Eritrea’s fiscal landscape, reflecting the continued need for fiscal reforms and improved budgetary transparency to enhance economic stability and development prospects.

Several countries have demonstrated a keen interest in exploring and capitalizing on market opportunities within Eritrea, reflecting the nation’s potential as an emerging economic partner in the Horn of Africa. Notably, China, India, South Korea, Italy, South Africa, and Germany have actively pursued various avenues of economic engagement, ranging from trade to investment. These countries have sought to establish footholds in Eritrea’s developing markets, infrastructure projects, and resource sectors, recognizing the strategic importance of the country’s location along the Red Sea and its untapped natural resources. The involvement of these nations underscores a broad international recognition of Eritrea’s economic prospects despite the challenges posed by its regulatory environment and political landscape. While Eritrea has attracted interest from a diverse array of foreign partners, the United States has exhibited a comparatively modest role in terms of investment. Although there is a growing demand within Eritrea for U.S. products and services, American investment remains relatively limited when juxtaposed with the levels of engagement from other foreign investors, particularly those from Asia and Europe. This discrepancy may be attributed to a combination of factors, including U.S. foreign policy considerations, Eritrea’s investment climate, and broader geopolitical dynamics. Nevertheless, the increasing interest in U.S. goods indicates potential for expanded economic relations should conditions evolve favorably. In 2011, Eritrea’s import sector was characterized by a substantial volume of goods necessary for both industrial and consumer needs, with total imports valued at approximately US$899.9 million. The composition of these imports reflected the country’s developmental priorities and consumption patterns, encompassing machinery critical for industrial and infrastructural development, petroleum products essential for energy and transportation, food items to supplement domestic agricultural production, and a variety of manufactured goods. This import profile highlights Eritrea’s reliance on external sources to meet the demands of its economy and population, as well as the challenges it faces in achieving self-sufficiency. The main suppliers of goods to Eritrea in 2011 represented a geographically and economically diverse group of countries, including Brazil, China, Egypt, India, Italy, Germany, Saudi Arabia, and South Africa. Each of these nations contributed to Eritrea’s imports in distinct ways, reflecting their respective industrial capacities and trade relationships. For instance, China and India supplied a significant portion of machinery and manufactured goods, while Saudi Arabia and Egypt were key providers of petroleum products. European countries such as Italy and Germany contributed a range of manufactured goods and technology, underscoring the multifaceted nature of Eritrea’s trade partnerships. This diverse supplier base not only ensured a steady inflow of essential goods but also indicated Eritrea’s ability to engage with multiple international markets despite logistical and regulatory challenges. On the export front, Eritrea’s total exports in 2011 were valued at US$415.4 million, revealing a trade deficit when compared to imports. The export portfolio was dominated by primary commodities and small-scale manufactured goods, including food products, livestock, sorghum, and textiles. These exports reflected the country’s agricultural base and artisanal manufacturing sectors, which have historically formed the backbone of its economy. The prominence of livestock and sorghum in export figures pointed to Eritrea’s reliance on traditional agricultural products, while textiles and small manufactured goods indicated the presence of nascent industrial activity. This export composition underscored both the opportunities and limitations inherent in Eritrea’s economic structure at the time. The primary markets for Eritrean exports in 2011 included China, Egypt, Italy, Saudi Arabia, Sudan, and the United Kingdom, highlighting a blend of regional and global trade relationships. China’s role as a major export destination aligned with its growing economic ties to Eritrea, while Egypt and Sudan represented important regional partners within the Horn of Africa and North Africa. Italy and the United Kingdom’s involvement reflected historical and linguistic ties, as well as ongoing commercial interests. Saudi Arabia’s inclusion as a key market underscored the importance of the Middle Eastern economies to Eritrea’s trade dynamics. This network of export destinations demonstrated Eritrea’s capacity to engage with a variety of international markets, although the scale and diversification of exports remained limited. In recent years, Eritrea has sought to diversify and expand its export commodities beyond traditional agricultural products. New additions to its export portfolio have included fish, flowers, and salt, reflecting efforts to capitalize on the country’s natural resources and climatic advantages. The development of the fishing industry, facilitated by Eritrea’s extensive Red Sea coastline, has opened avenues for seafood exports, while the cultivation of flowers has targeted niche markets with potential for higher value returns. Salt production, leveraging Eritrea’s arid environment and mineral deposits, has also emerged as a noteworthy export commodity. These expansions signify a strategic attempt to broaden the country’s economic base and increase foreign exchange earnings, although challenges related to infrastructure, quality standards, and market access persist. Foreign investment in Eritrea has historically encountered significant obstacles, primarily due to stringent government regulations designed to shield domestic industries from foreign competition. These protective measures have created an overall unfavorable investment climate, deterring many potential investors and complicating efforts to attract substantial foreign capital. The Eritrean government’s cautious approach to foreign investment reflects concerns about economic sovereignty and the preservation of local enterprises, but it has also limited the inflow of technology, expertise, and financial resources that could stimulate growth. Consequently, foreign investors must navigate a complex regulatory environment, which includes restrictions on ownership, profit repatriation, and operational freedoms, factors that collectively constrain the scale and scope of foreign participation in the economy. Despite these challenges, several major foreign investors have maintained a presence in Eritrea, including China, South Korea, Italy, South Africa, and Germany. These countries have engaged in various sectors such as infrastructure development, mining, manufacturing, and trade, often leveraging bilateral agreements and diplomatic ties to facilitate their investments. The involvement of the World Bank has also been notable, providing financial support and technical assistance aimed at fostering economic development and institutional capacity building. The participation of these investors and international organizations reflects a nuanced landscape in which Eritrea balances its protective policies with the need for external capital and expertise, navigating complex geopolitical and economic considerations. The Eritrean government has consistently expressed a preference for private-sector investment over official aid programs, adopting a stance that generally involves declining foreign aid. This policy is rooted in a desire to promote self-reliance and reduce dependency on external assistance, which the government perceives as potentially undermining national sovereignty and long-term development objectives. However, this approach has led to strained relations with aid-dispensing nations and international organizations, many of which have sought to engage with Eritrea through development aid and humanitarian programs. The government’s reluctance to accept aid has limited the scope of international cooperation and has sometimes resulted in diplomatic tensions, complicating efforts to integrate Eritrea more fully into the global economic system. A significant turning point in Eritrea’s foreign economic relations occurred on 16 September 2018, when Eritrean President Isaias Afwerki and Ethiopian Prime Minister Abiy Ahmed signed a landmark peace agreement in Jeddah, Saudi Arabia. This accord formally ended a protracted 20-year conflict that had persisted from 1998 to 2018, a period marked by hostilities, border disputes, and economic isolation. The peace agreement not only ceased active hostilities but also laid the groundwork for the normalization of diplomatic and trade relations between the two countries. This historic development was widely regarded as a catalyst for regional stability and economic integration, opening new avenues for cooperation and development. Following the peace agreement, Eritrea and Ethiopia embarked on a process of restoring trade and diplomatic ties, which had been severely disrupted during the conflict. The normalization of relations facilitated the reopening of borders, the resumption of commercial exchanges, and the initiation of joint projects aimed at fostering economic growth and infrastructure development. These collaborative efforts encompassed sectors such as transportation, energy, and agriculture, reflecting a shared interest in leveraging mutual strengths to enhance regional connectivity and prosperity. The renewed partnership between Eritrea and Ethiopia marked a significant shift in the Horn of Africa’s geopolitical landscape, with implications for foreign economic relations and investment prospects in both countries.