Eritrea’s Economic Growth Improved in Q3 2014

Eritrea's Macro-Economic Stability Continues to Gain Momentum
Eritrea’s Macro-Economic stability continues to gain momentum. According to the World Bank global growth forecast, Eritrean economy will show a growth by 3.0%, 4.0%, and 4.3% for the period between 2015 – 2017.

By East Africa Quarterly Bulletin,

THE East Africa Quarterly Bulletin, which monitors socio-economic developments across the continent, has been released by country economists and country program officers of the African Development Bank Group’s (AfDB) East Africa Regional Resource Center (EARC), Nairobi, Kenya.

According to the report, Economic growth in Eritrea improved during the third quarter (Q3) of 2014, supported by increased production in the mining sector and continued development of the Asmara mining project, which is expected to produce copper, zinc, gold and silver by mid-2015.

This growth has not resulted in broad based improvements in the living standards of ordinary Eritreans, it is expected to have a positive impact on the people’s welfare over the medium-term as the on-going investments in infrastructure, such as roads and power, are completed, the report stated.

The mining sector has continued to be the leading driver of economic growth especially since an estimated 60% of Eritrea’s territory contains minerals. Investing in Eritrea has increasingly become attractive given the country’s strategic location, relatively corruption free institutions, and sound macroeconomic policy, robust mining legislation and national cohesion and stability.

Eritrea’s domestic revenue receipts have been boosted significantly following a long-term agreement reached between the China-based Sichuan Road and Bridge Group and the Government to develop and explore mining areas with gold and copper.

Public revenue has been boosted by new and existing mining projects through increased tax collection and income from Government’s stake in the mining ventures. The Fiscal deficit is expected to reduce from an estimated 11.7% of GDP in 2013 to 10.3% of GDP in 2014 and 9.8% of GDP in 2015 on account of the growth in revenues from the mining projects.

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The public debt stood at 105% of GDP in 2013 with domestic debt estimated at 84.9% of GDP while external debt was at 20.1%. The Government has continued to pursue its objective of fiscal consolidation, underpinned by its prudent debt management goal of reducing the debt to GDP ratio to the 40% threshold.

Eritrea’s short term economic growth and financial strength will depend mainly on the development of the mining sector.  However, achieving inclusive growth will require the implementation of prudent fiscal policies that allow the channeling of natural resources rents and revenues, the AfDB said.

The monetary policy stance was geared towards gradual recovery of economic growth while reducing controls on the foreign exchange market operations to encourage investments and growth of public revenues. Headline inflation remained at 6.4% during the third quarter of 2014 largely due to the continued effects of drought on food prices, which has exerted significant pressure on household disposable income and discretion to spend.

The official exchange rate remained at 15.4 Nakfa per USD despite the liberalization of foreign currency market operations. Full liberalization of the foreign currency regime, building broad partnership and multiple pathways to tap different financial sources could unlock the foreign currency shortages and exchange overvaluation. This would further promote private investment spending needed to boost economic growth and create sustainable employment in the country.

Exports increased during the quarter under review on the back of growing demand for cement in Qatar and pick-up in copper production at the Bisha mine, gold production at the Koka mine, and further development of the Asmara mining project. Export growth will be further boosted by the continuing development of the Asmara project, which is expected to produce multiple mineral exports including copper, zinc, gold and silver by mid-2015.

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The Asmara project operator, Canada-based Sunridge Gold, increased the project’s after-tax net present value by 24% in March 2014, to USD 428m. Growth in exports is likely to be offset by a strong expansion in imports, as investments in mining boosts demand for capital goods. Imports of mining related services are also expected to rise, resulting in a reduction in the surplus on the services account.

Economic ties between Eritrea and Sudan have been strengthened by the President of Eritrea’s visit to Sudan in May 2014. The economic ties particularly related to the strengthening of bilateral trade are expected to improve Eritrea’s economic growth outlook.