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.