Economy of Eritrea - Foreign Economic Relations

Foreign Economic Relations

China, South Korea, Italy, South Africa, and Germany are aggressively pursuing market opportunities in Eritrea. There is growing interest in U.S. products and services in Eritrea, although U.S. investment in Eritrea is still small.

In 2002 Eritrea imported goods worth US$533 million, including food, military matériel, fuel, manufactured goods, machinery, and transportation equipment. Eritrea’s main suppliers were the United Arab Emirates, Saudi Arabia, Italy, Germany, and Belgium. In January 2005, all imports by private businesses and individuals were temporarily suspended because of the country’s shortfall in foreign currency. In 2002 exports from Eritrea were valued at US$52 million, and the bulk were skins, meat, live sheep and cattle, and gum arabic. The major markets for Eritrean goods were Sudan, followed by Italy, Djibouti, and Germany. More recently, fish, flowers, salt, and textiles have joined the list of exports, and Sudan is no longer a major trading partner. In 2002 imports worth US$533 million far exceeded exports at US$52 million.

Asmara’s poor relations with neighboring countries have had a profoundly negative impact on the economy, one reason for the dire balance of payments situation. Exports declined significantly during the border conflict with Ethiopia, a decline exacerbated by a subsequent break in trade relations with Sudan. At the same time, imports—mostly of food aid, manufactures, and transportation equipment—continue to rise, and foreign reserves have declined to precarious levels. According to the International Monetary Fund, in 2003 foreign reserves were just US$17.2 million, sufficient to cover only two weeks of imports. The balance of payments in 2000 was negative US$44.7 million; by 2003 it had improved to negative US$16.4 million. Remittances from Eritreans abroad and foreign aid form a significant portion of Eritrea’s income. Of the two, remittances far exceed foreign aid and are estimated to have reached US$400 million per year in 1999, the last year for which figures are available. In January 2005, the government halted all imports by businesses and the private sector because of the country’s shortfall in foreign currency.

In 1997 external debt totaled US$75.5 million. By 2001, that figure had grown to US$409.6 million. A 2005 US House hearing on the horn of Africa described that "nearly 80 percent" Eritreans of receiving food aid.

Foreign investment, although ostensibly favored by the Eritrean government, is nonetheless hindered by government regulations that seek to protect domestic industries from foreign competition and by a generally unfavorable investment climate. Major foreign investors in Eritrea include China, South Korea, Italy, South Africa, and Germany, as well as the World Bank.

In 1998 net official development assistance was US$135.8 million; in 2002 it reached US$217.6 million. The government prefers private-sector investment to official aid programs, and its relations with aid-dispensing nations and international institutions have often been difficult.