Date: Tuesday, 13 June 2023
Real GDP growth slowed to an estimated 2.3% in 2022 from 2.5% in 2021 due partly to the impact of Russia’s invasion of Ukraine on energy, fertilizer, and food prices. Russia and Ukraine account for nearly 100% of Eritrea’s wheat imports, and oil constitutes 71% of the country’s energy consumption. Other factors include the effects of COVID-19 on value chains, climate shocks, and the conflict in northern Ethiopia. Growth in 2022 was led by industry and services on the supply side and by private consumption and investment on the demand side. The recovery in public revenue due to higher international prices for metals (copper, gold, and ores constitute 50% of exports) and fiscal consolidation narrowed the fiscal deficit to 2.2% of GDP in 2022 from 4.1% in 2021. The fiscal deficit was financed by drawdowns of government deposits with the central bank. Despite a drop in the public debt–to-GDP ratio to 164.7% in 2022 from 176.3% in 2021, reflecting debt servicing, Eritrea remains in debt distress. The current account surplus narrowed to 12.2% of GDP in 2022 from 13.5% in 2021, reflecting the uptick in imports due to higher international prices for energy and food. International reserves were estimated at 4 months of import cover in 2022. Inflation rose to 7.5% in 2022 from 4.5% in 2021 on account of higher energy and food prices. The financial sector remains bank-based with limited products. The nakfa is fixed at 15 per US dollar in the official market.
Outlook and risks
Real GDP is projected to grow 2.6% in 2023 and 3.1% in 2024 due to higher international prices for metals, led by industry and services on the supply side and private consumption and investment on the demand side, reflecting the uptick in public and private consumption consistent with the reopening of economic activities. The fiscal deficit is projected to narrow to 1.9% of GDP in 2023 and 1.2% in 2024 on account of fiscal consolidation. The current account surplus is projected to drop to 10.8% of GDP in 2023 and 10.2% in 2024 due to fluctuations in international commodity prices. Headwinds include climate change and the effects of Russia’s invasion of Ukraine and the conflict in northern Ethiopia on supply chains. Poverty is expected to remain high as the share of the working poor, those who earn $3.10 (in purchasing power parity terms) a day, in total employment was an estimated 75.2% in 2019.
Climate change issues and policy options
Eritrea is among the most climate-vulnerable countries globally, with the least readiness. The estimated average climate finance gap for Eritrea over 2020–30 is $1.202 billion a year, greatly limiting the country’s ability to build climate resilience. During 2009–19, the country responded to climate change hazards through several projects, financed largely through grants and loans from bilateral and multilateral partners. Most climate finance was allocated to adaptation programs, notably interventions to restore degraded land and capacity building. The private sector remains small, with low capacity and access to finance. Limited awareness and the absence of catalytic risk-sharing instruments are among the key bottlenecks to private finance for climate and green growth. Consequently, there is a need to develop national platforms for exchanging knowledge and information related to climate change adaptation and mitigation. Eritrea has substantial endowments of copper, silver, zinc, gold, and potash, which accounted for about 10% of GDP and 50% of exports during 2010–19. Strong potential also exists for wind and solar energy. In this context, implementing economic and financial governance reforms to boost competitiveness and enhance the enabling environment for private finance of climate and green growth is equally important.
