Date: Thu, 9 Oct 2014 00:38:42 +0200
Eritrea: Stronger private sector, qualified workforce, international
integration needed, says AFDB
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AFDB
October 08, 2014 (Nairobi) - In a newly released report prepared by the
African Development Bank's (AfDB) East Africa Regional Resource Center in
Nairobi, Kenya, on the occasion of the Bank's 50th anniversary.
In the report the AfDB explores socio-economic aspects from a country and
regional perspective, providing a picture of each of the region's countries
(Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Rwanda, Seychelles,
Somalia, South Sudan, Sudan, Tanzania and Uganda), setting out their
strengths and challenges to be met, and the trends for their future
prospects.
The AfDB stresses that Eritrea could benefit from strengthening cooperation
with the international community, in order to access more development
financing. The Bank also highlights that Eritrea's existing technological
base of the productive economy is antiquated undermining international
competitiveness due to a lack of qualified, trained and experienced human
resources. Eritrea's economy continues to be mainly dominated by the service
and public sector, according to the AfDB. According to the Bank the the main
risks to Eritrea's stability can be categorized into three types -
political, socio-economic and environmental. At the political level,
Eritrea's relations with its regional neighbors remain strained, at
socio-economic level, youth and unemployment and on environmental growing
pressures from the scarcity of water and pasture. The Bank also underlines
the importance of a private sector which remains small and underdeveloped in
Eritrea but could potentially play an important role as a partner in service
delivery and employment creation. In the health sector, Eritrea has made
marked strides towards achieving the MDGs. For example, in the education
sector, GoSE has rolled out a comprehensive program covering basic education
and literacy, secondary as well as technical vocational and education
training, the Bank said.
Eritrea and the Region
Eastern Africa includes five landlocked nations - Burundi, Rwanda, Uganda,
South Sudan and Ethiopia - and two island nations - Comoros and Seychelles.
The remaining six - Somalia, Sudan, Eritrea, Djibouti, Kenya and Tanzania -
all have ports on the Red Sea or Indian Ocean, which makes them vital in
supplying ocean access to inland countries.
The geography of the region is profoundly impacted by the Eastern African
segment of the Great Rift Valley system. This in turn has dramatic impact on
the region's economy.
All of Africa's Great Lakes were formed as the result of the rift, and most
lie within the valley between the two branches, including Lake Kivu and Lake
Tanganyika. Lake Victoria, the second-largest freshwater body in the world,
also lies within the rift, supplying fisheries and livelihoods to
surrounding populations from three countries.
Because of this rich geology, the region has vast untapped energy which is
only now beginning to be developed. For instance, Lake Assal in Djibouti
sits in the Afar Triangle above a geothermal vapour field and the AfDB is
commencing efforts to tap this potential energy source . Geothermal energy
is also present in Kenya and Ethiopia and more sources will likely be found
elsewhere along the East African Rift. Methane gas is trapped under Lake
Kivu and the AfDB has mobilized fi nancing through its private sector window
to tap this resource.
However the region's endowment of natural resources is highly variable.
While Albertine Rift and island countries enjoy adequate rainfall, others
(Sudan, Somalia, Kenya, Djibouti, Eritrea, parts of Ethiopia) include areas
that are severely water stressed. Though they have large tracts of arable
land, rain-fed agriculture is not feasible in much of the Sahel. This
explains the prevalence of livestock-based livelihoods in Sahelian climatic
zones and many countries' desire to develop irrigation potential from lakes
and rivers.
Eastern Africa accounted for 12% of the continent's combined GDP in 2012
(excluding Somalia and Southern Sudan). Ethiopia and Rwanda have achieved
the highest growth rates on a consistent basis, whereas Eritrea and
Seychelles have recovered from contraction earlier in the decade. Moreover,
annual GDP growth has been outpacing population growth in all countries
measured, delivering net positive income gains per capita and a decade of
progress toward poverty reduction across the region.
EAC member countries contribute the greatest amount to regional GDP,
followed closely by Horn countries and trailed by island countries. The five
largest economies now contribute about 93% of regional GDP (Fig. 8), with
Ethiopia having overtaken Sudan, Tanzania and Kenya, all of whom were larger
in absolute terms when measured in 2009. Mineral exports and industrial
revival have contributed to growth in Ethiopia and Eritrea, whereas Sudan's
economy has contracted since the secession of South Sudan.
Services have overtaken agriculture as a component of GDP (42%) and as a
driver of growth on a region-wide basis, with an increasing amount
contributed by financial services and communications. ICT-enabled innovation
has led to new product development flourishing in Kenya and radiating
outwards. Specifically, Kenya's MPESA payment system is now recognized as a
global best practice which is being broadly replicated in Eastern Africa and
elsewhere. Services GDP is followed by agriculture (including livestock,
forestry and fisheries), at about 33% of GDP, and remains a major supplier
of livelihoods in the region.
Mining, quarrying and construction contribute about 15% of GDP and is on a
rising trend, while manufacturing presently contributes about 10% of
regional output.
Alongside the many positive attributes and developments in the region,
Eastern Africa has a number of challenges to overcome, particularly with
respect to fragility, political conflict and governance. The challenge of
fragility is reflected in the fact that the region has six states eligible
to access resources from the AfDB's Fragile States Facility.
The region is confronted by numerous political conflicts. Relations between
Ethiopia and Eritrea remain tense, while Djibouti and Eritrea have
intermittent disagreement on borders.
Comoros remain vulnerable to sporadic outbursts of civil conflict,
humanitarian deprivation continues in the Darfur province of Sudan, and
Burundi continues to struggle with the legacy of its past civil war.
Additional security concerns in the region include conflict in neighbouring
areas, e.g. in the Democratic Republic of Congo, which adversely affected
Rwanda's economy, as well as the continued presence of Al-Shabaab in
south-central Somalia. Recurrent attacks have occurred in Uganda and Kenya
and Somali piracy in the Gulf of Aden costs the regional economy increased
insurance premiums as well as reduced tourism and trade.
Persistent poverty, unemployment and marginalization foster violence in
Somalia - it is crucial to the stability and integration prospects of the
region that Somalia becomes unified and peaceful. In addition, there remain
outstanding border demarcation and oil revenue-sharing issues between Sudan
and South Sudan, and the political conflict now simmering internally within
the latter poses the risk of taking on an ethnic dimension. On the positive
side, the elections and transition of government in 2013 in Kenya were
peaceful.
Eritrea
Eritrea's Minister of Finance, Berhane Habtemariam, said in the report that
the aspiration of the Government of State of Eritrea is to achieve a
broad-based growth driven by knowledge and technology. Emphasizing that
Eritrea therefore recognizes the importance of education and training for
the development of the country. He also mentioned that the AfDB has been
partnering with the Government of Eritrea to realize these efforts in a more
consistent manner through its programmed operations in the country.
"Since this partnership of the AfDB and the Government, the education sector
has experienced signifi cant progress in terms of rehabilitation of
infrastructure and in the general improvement of access to education
facilities," the Minister said.
Overall Development Profile
Real GDP grew strongly in 2011 at 8.7% and in 2012 at 7.0%, but decreased
sharply to an estimated 1.1% in 2013, mainly due to a drop in production at
Bisha mine, a fall in remittances, a decline in the price of gold, and poor
agricultural harvest due to erratic rainfall patterns.
Real GDP growth is projected to increase slightly to 1.9% in 2014 and to
2.2% in 2015, on account of increased investments in the mining sector and
measures such as the provision of infrastructure particularly rural
irrigation facilities to increase agriculture productivity. Eritrea's
economy has been and continues to be dominated by the service sector, which
contributed almost 50% to GDP (2012).
The second largest sector in terms of GDP contribution is the public sector,
with 28.1%. The contribution of the agricultural sector is relatively small
(16.9%) and has been declining in recent years. The industrial sector,
dominated by mining, contributes only about 5.9% of GDP.
The private sector (outside of agriculture) plays a limited role and is
mostly concentrated in the services and trade sub-sectors. Eritrea's public
debt stood at 105% of GDP in 2013 with domestic debt estimated at 85.9% and
external debt at 25.2% of the total.
Going forward, Eritrea could much benefit from strengthened cooperation with
the international community, in order to access more development financing.
This could include a reform program to reduce external indebtedness through
the HIPC and MDRI mechanisms. The country's medium term economic performance
will critically depend upon a robust economic reform program, preferably
supported by external grants or highly concessional funding.
While the UNDP 2012 Human Development Report with an HDI of 0.351 ranks
Eritrea only at 181 out of 187 countries, progress has been made in recent
years. In the health sector, the country has made marked strides towards
achieving the MDGs. For example, in the education sector, GoSE has rolled
out a comprehensive program covering basic education and literacy, secondary
as well as technical vocational and education training.
The country's investments in the education sector have accounted for 8-10%
of total national budget and 2.6- 3.7% of GDP, lower than the continental
ratio of 4.5%. While gross enrolment ratios have reached 93% for boys at the
primary level, more effort is needed for full inclusion of girls.
Eritrea is on pace to achieve six of eight MDGs, with MDG 1 (poverty) and
MDG 8 (global partnership) unlikely to be met. These achievements have
translated into a steady increase in life expectancy at birth from 53 years
in 1995 to 62 years in 2011. Nevertheless, the country still faces
significant challenges in reducing poverty and ensuring food security.
Eritrea's national development strategy is embodied in the forthcoming
National Development Plan 2013-2017. Its main objective is to attain rapid,
widely shared, sectorally and regionally balanced economic growth with
macroeconomic stability and sustained poverty reduction. Its three strategic
pillars include: (i) food security; (ii) physical and social infrastructure;
and (iii) human capital development.
While Eritrea seeks to create a modern, technologically advanced, and
internationally competitive economy, a critical mass of qualified, trained
and experienced human resources is a prerequisite for sustainable,
export-led industrial development.
The existing technological base of the productive economy is antiquated and
undermines international competitiveness. Low educational and skill levels
act as an immediate constraint on industrial growth and economic
transformation. Eritrea has an acute shortage of skilled manpower in
virtually all sectors impacting all aspects of the development effort in
both the private and public sectors.
Risk to Stability
The main risks to Eritrea's stability can be categorized into three types -
political, socio-economic and environmental. At the political level,
Eritrea's relations with its regional neighbors remain strained. Although
there is no longer any overt conflict, relations with Ethiopia continue to
be tense, which constrains the performance of the economies of both
countries. Disparities in economic opportunities and unemployment, notably
of the youth, are also posing risks to stability. Environmental pressures
are increasingly growing, especially the scarcity of water and pasture.
Other challenges include weaknesses related to state capacity, resource
mobilization and infrastructure, especially roads and energy. Weak
institutional capacity is a key issue and significantly impairs the
country's ability to deliver public services.
The private sector remains small and underdeveloped but could potentially
play an important role as a partner in service delivery and employment
creation. In view of the weak capacity of the public sector, it is critical
to promote the engagement of the private sector through public private
partnerships and CSOs in service delivery.
Natural Resources and Extractive Industries
Important mineral resources exist in Eritrea including potash, gypsum,
common salt, silica, kaolin, gold, silver, copper, zinc, gold, marble,
granite, limestone, sand and gravel. Currently, there are two gold mines in
production and more are expected to open. The Asmara Project has four mining
deposits: (i) the Debrarwa copper-gold-silverzinc deposit; (ii) the Emba
Derho copper-zinc-gold-silver deposit; (iii) the Adi Nefas
zinc-copper-gold-silver deposit; and (iv) the Gupo Gold deposit.
Eritrea has recently begun refi ning its gold at a refi nery erected in
Sudan in order to capture more value added from its exports. In sum, the
extractives sector is expected to be the key driver of the economy over the
medium and longer terms.
Aside from extractive resources, Eritrea has great potential for the
development of renewable energies, including geothermal, solar and wind
energies. These renewables can support the growing needs of the whole
country if fully developed. At present, the nation suffers from energy
shortages with a limited grid system and some towns relying upon power from
isolated generators.
Regional Integration and Trade
Despite its strategic position, Eritrea is among the least integrated
countries in the Horn of Africa. Only 20% of Eritrea's trade is with COMESA
countries. Infrastructure deficits, institutional capacity weaknesses,
strained political relationships, and regional conflicts all hinder regional
integration. Nonetheless, the government considers the benefits of regional
integration as critical for the country's peace, food security, and
infrastructure development. Eritrea has therefore taken up membership in the
COMESA, CEN-SAD, and is activating its membership in IGAD.
Private Sector Development
The 2010 Africa Infrastructure Development Index ranks Eritrea at 47 out of
53 countries surveyed in terms of infrastructure development due to major
deficits, particularly in transport, water and sanitation, energy and ICT
sectors. The current state of port facilities is also poor. These structural
deficits translate into higher costs of doing business, impede national and
regional connectivity and inhibit Eritrea's competitiveness.
The private sector in Eritrea is largely comprised of MSMEs concentrated in
few sectors of the economy. As noted above, the sector is small and
underdeveloped and continues to be hampered by the state's dominant role in
the economy and the challenging business environment. In the 2012 World Bank
Doing Business Report, Eritrea was ranked 182nd out of 185 countries and
43rd out of 46 Sub-Saharan economies. Eritrea is rated poorly on several key
factors.
For instance, the Logistics Performance Index ranks Eritrea at 147 with a
score of 2.11 in contrast to an average of 2.46 for SSA. At the
macroeconomic level, businesses and foreign trade are constrained by foreign
exchange controls. The use of price controls and rationing of foreign
exchange have contributed to the unfavorable business environment.
Attracting private investments is also constrained by limited financial
services.
To improve the country's business climate, the government has prioritized
and focused on strengthening human resource capacity and provision of
selected physical infrastructure, including the establishment of Massawa
free trade zone and improving the road network.
In 2012, the government selectively sought investment in the mining, energy,
fisheries, and tourism sectors through investment conferences. Specifically,
two conferences were held, aiming at the privatization of 32 manufacturing
firms, 13 hotels, the Eritrean Telecommunications Corporation and the
government's remaining shares in the National Insurance Corporation of
Eritrea. The authorities recognize that shortages of foreign exchange,
declining remittances, and heavy government borrowing from the banking
sector have hindered private sector activity and that reforms in these areas
are required.
AfDB Assistance - Highlights and Successes
The AfDB's support to Eritrea began in 1996 and loans and grants amounting
to a total commitment of UA102.9m have been approved as of April 2014. The
largest share of this support has been allocated to the social sector (43%),
with agriculture and rural development (29%), multi-sector (20%), the
transport sector (6%) and urban development (2%) following. Since the
commencement of the AfDB's support, the government has prioritized human
capacity development, infrastructure, livelihood improvement and food
security as key areas of focus for attaining a rapid, sustainable and widely
shared growth and poverty reduction. The AfDB has made a valuable
contribution to overall social development, rural development and capacity
building in Eritrea.
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