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Eritrea’s Economy Faces Uncertainty Amidst Recovery

As the global economy continues to recover from the COVID-19 pandemic, Eritrea is expected to see a modest growth rate of 2% in 2021, driven by a rebound in commodity exports and investment in key infrastructure projects. However, significant downside risks remain, including ongoing climate vulnerabilities and fragile macroeconomic conditions.

Economic Performance

According to official data released by the World Bank, Eritrea’s real GDP growth rate was -0.6% in 2020, a significant decline from the previous year’s 3.8%. The country’s fiscal deficit widened to nearly 5% of GDP in 2020, driven by increased investment in mines and infrastructure projects.

Challenges Ahead

  • External current account surplus expected to narrow to 10.7% of GDP in 2020, largely due to a slowdown in remittances and a compression of the merchandise trade surplus.
  • Public debt stands at over 260% of GDP, with 80% owed to domestic banks.

Signs of Optimism

Despite these challenges, there are signs of optimism on the horizon. The government is expected to see spillover effects from the new potash mine in Colluli, which could increase productivity in agriculture and improve food security and livelihoods. Additionally, efforts to normalize relations with the international community could lead to a reduction in external arrears and access to much-needed financing.

Climate Vulnerabilities

However, severe climate vulnerabilities continue to burden Eritrea, and the country’s fragile macroeconomic situation leaves it with limited space to address these risks. The government is working to build infrastructure and jump-start the private sector, but significant challenges remain.

World Bank’s Macro Poverty Outlook for Eritrea

  • Real GDP growth: 13.0% in 2018, -0.6% in 2020, and forecasted at 2% in 2021
  • Inflation: -14.4% in 2018, -16.4% in 2019, and 4.9% in 2020
  • Current account balance: 15.4% of GDP in 2018, 12.1% in 2019, and forecasted at 10.7% in 2020
  • Fiscal balance: 4.3% of GDP in 2018, -1.5% in 2019, and -4.8% in 2020

Future Priorities

As Eritrea navigates these challenges, the government will need to prioritize policies that promote private sector development, improve food security, and address climate vulnerabilities.