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IMF sees Eritrea growth hampered by border impasse

(Reuters) / 25 June 2008

ASMARA - Eritrea's deadlock with arch-foe Ethiopia over their shared border will continue to hurt the Red Sea state's economy, the International Monetary Fund (IMF) says.

In a report seen by Reuters this week, the IMF said Eritrea's gross domestic product (GDP) grew in 2007 by an estimated 1.3 percent due to construction work and a better harvest, after the economy shrank by 1.0 percent the previous year. The IMF estimates Eritrea's economy will grow by 1.2 percent this year.

The country is believed to be rich in gold and industrial metals, but few hard facts are known about its largely agricultural economy, which depends heavily on remittances.

‘The war with Ethiopia and subsequent stalemate have put major pressure on fiscal aggregates and fuelled domestic and external imbalances, resulting in high inflation, low growth, low reserves, unsustainable debt and an overvalued exchange rate,’ the IMF said.

Eritrea and Ethiopia fought a 1998-2000 border war, and have been deadlocked over their shared frontier ever since. The impasse ties up resources and tens of thousands of soldiers.

Asmara does not publish a budget and per capita income remains just $200 a year.

Eritrean President Isaias Afwerki told Reuters in a recent interview that growth figures used by Western economists were a misleading indicator, with quality of life and reductions in wealth inequalities better measures for poor nations.

The IMF said Eritrea's income from remittances declined to some 23 percent of GDP in 2007 from 41 percent in 2005. It said this was partly offset by limiting imports.

The IMF said interest rates below the rate of inflation, low private investment, limited outside support and foreign exchange shortages would continue to hurt growth.

It said inflation increased to 12.3 percent in 2007 from 9 percent in 2006 due to imported food costs and monetary growth, and the banking sector was burdened by nonperforming loans. ‘About half of all loans to borrowers other than the government were nonperforming in 2007.’

The report said total public debt stood at 157 percent of GDP and external debt at 65 percent of GDP as of 2007.

‘Nevertheless, institutional discipline and social cohesion have brought the country welfare gains,’ it added.


Eritrea's mining sector is expected to stimulate growth in coming years, the IMF said. The government estimates the first mine will go into production by the end of 2009.

Experts predict a mining boom for Eritrea, a nation of some 4.5 million people where half a dozen foreign firms operate in joint ventures with the government.

IMF predicted GDP growth ‘at 2 percent in 2009, supported by mining-related construction. Thereafter, economic growth could average about 5 percent through 2012 as the mining projects come on stream.

‘Although imports would also rise, receipts for mining exports would help bring the external current account to near-balance by 2012, so gross international reserves would rise gradually to 2 months of imports,’ the report said

Eritrea's minister of mines told Reuters in a recent interview the government would decide on another five applications for mining exploration licences this year.


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