Gundet Newsletter, June 4, 2000

Reference: Eritrea: Statistical Appendix. IMF Country Report No.00/55. May 11, 2000.

On May 11, 2000, the IMF released a statistical appendix for Eritrea, summarizing economic data for the country through 1999. The data show the Eritrean economy in dire straits, without even taking into account the events of May 12-31 when the Eritrean army was defeated and driven from western and central Eritrea.

It is interesting to note that Ethiopian data is consistently reported in terms of GDP while Eritrea uses GDP or GNP depending on which indicator yields more favorable statistics. For example, Eritrea reports its budget deficit in terms of GNP, but its economic growth is reported in terms of GDP. This is because the GNP takes into account overseas remittances and thus makes the deficit seem smaller. However, the "remittances" have declined since 1997 and Eritrea’s GNP has correspondingly shrunk to the level of 1996. In order to avoid focusing on this drop in the GNP, Eritrea reports its growth in terms of GDP. A consistent use of either GDP or GNP would have made it easier to analyze the data and compare to other countries.

Following are some highlights from the IMF report. It should be noted that the data are largely gathered and reported by the Eritrean government, therefore the reliability of some of the data is in question.

Debt: Eritrea’s external debt has tripled since 1997 to reach 225 million dollars in 1999. This is about 30 percent of GNP. At this rate Eritrea’s debt will be unsustainable by the time the payments come due. What happened was a big increase in loan disbursements in 1998 and 1999. Also Libya kicked in 14.7 million dollars for unspecified purposes in 1999 while other Arab countries disbursed an additional 33.6 million dollars in 1999. It took Eritrea only six years of independence to run its debt load to unsustainable levels.

Growth: The Eritrean government claims the economy grew by three percent in 1999. In reality this growth is almost entirely due to growth in government spending categorized as “general services.” This category is used to cover Eritrean military spending on construction of trenches, bunkers, planting mines, etc. Since the entire Eritrean trench lines and associated fortifications are now under Ethiopian control, the purported economic growth is something of a joke.

Aside from government spending, the additional area of growth was the agricultural sector, where a second good rainfall year allowed Eritrea to maintain a high agricultural output (relative to 1997 and 1996). However, it is clear that the food aid looted at Assab has been a factor in the reported agricultural growth. The looted food aid amounted to roughly 15 percent of Eritrea’s cereal production, and would thus be sufficient by itself to allow Eritrea to report a large increase in agricultural output. That Eritrea is including the looted food aid as part of its production is indicated by the fact that Eritrea is officially reporting to the IMF that it received no food aid in 1998/99.

The fact that tax revenue only increased by 5 million nakfa in 1999 (0.6%) also demonstrates the unreliability of the purported Eritrean growth rate of 3 percent. When adjusted for inflation, the tax revenue has actually declined despite the increase in tax rates. This shows that the Eritrean economy is shrinking, not growing.

Exchange Rate: As of December 1999, the official rate had sunk to 8.9 to the dollar while the rate offered by the licensed foreign-exchange bureaus was 9.9 to the dollar.

Remittances: In 1997 net private transfers to Eritrea were reported as 352 million dollars. This represented a massive increase of 108 million dollars from the previous year. When the IMF asked for an explanation, it was told that the Eritrean government had launched a campaign among the Eritrean diaspora in 1997(before the war) to support the launching of the Nakfa currency. According to the Eritrean government, the Eritrean diaspora responded by transferring an additional 100 million dollars into Eritrean bank accounts in 1997. The IMF, seemed to reserve judgement on this matter by simply noting that there were inadequate records of financial and trade inflows for Eritrea.

Ethiopian observers however, have noted that the 108 million dollar windfall coincided with Eritrea’s borrowing of over one billion Birr from Ethiopia during this same period. Most Ethiopians have suspected that Eritrea used this loan in conjunction with its introduction of a new currency, to engage in massive currency exchange fraud and smuggling. The documents of Horn International Bank, a bank opened by Eritreans in Ethiopia fronting for the EPLF, clearly show Eritrea's intention to engage in illegal currency manipulation in Ethiopia and to divert foreign exchange to Eritrea.

The proof of Eritrea’s criminal activities has come with the remittance data for 1998 and 1999. Net private transfers have actually fallen to 245 and 240 million dollars in 1998 and 1999 respectively. The reason for the decline is that Ethiopia is no longer open for Eritrean currency fraud. Thus, despite the intensive campaigns to raise foreign currency for the war, Eritrea has not been able to make up the shortfall caused by the end of illegal currency transfers from Ethiopia.

For comparison, in Ethiopia the latest remittance data available are for 1997/98 where the net private transfers were listed as 317 million dollars.

Deficit: Huge deficits have been the norm for Eritrea during its entire seven years of existence. In 1998 and 1999 however, the budget deficits became truly breathtaking. Even when foreign grants are included, in 1998 the deficit was 1.6 billion nakfa and in 1999, 2.6 billion nakfa. In percent of GNP, these figures are –27.3 and –37.4 percent respectively. If these figures are reported as percent of GDP they are in the neighborhood –50 percent. As noted above however, Eritrea reports its figures as percent of GNP because of the importance of external transfers (private and official) to the economy. In 1999 these transfers accounted for 37 percent of the GNP.

To see just how massive these deficits are, it should be noted that the 1999 deficit of 2.6 billion nakfa exceeded total government revenue and external grants combined (2.2 billion nakfa). In other words Eritrea was spending more than twice what it was earning. (Note: The combined revenue consisted of 1.8 billion nakfa from Eritrean government plus 378 million nakfa from external grants).

For Ethiopia, the latest budget deficit available was 1997/98 where the deficit was –3.9% of GDP.

Military Spending: Officially, Eritrea is reporting its defense spending as 62% of the budget in 1998 and 61% of the budget in 1999. These are probably the highest military spending percentages in the world, but they are likely underestimated. The Eritreans have hidden a large portion of this spending under the category “general services.” The military spending is included in both the current budget and capital budget. In the capital budget, this category experienced a 600 percent increase since 1997. This spending would probably be for construction of trenches, bunkers, planting landmines etc. One-third of capital spending is now part of this category.

Government debt (domestic): Government debt has exploded by 250 percent since 1997. The government now accounts for 60 percent of the debt in the Eritrean economy, indicating a credit crunch. If the multi-billion nakfa budget deficits are not stopped, then the Eritrean government will soon use up all the deposits in the banking system and it will be forced to print large amounts of extra money, or find an outside sponsor (eg Libya or Qatar).

The issue of "net claims on the birr area" is also still unresolved, and it may be that the Eritreans are counting this as part of the banks reserve. If so then the two Eritrean banks are not meeting solvency standards because the likelihood of the expired old birr notes being accepted in Ethiopia is zero. Those birr notes are worthless.

Exports: Total exports have crashed to the lowest level since independence. The 197 million nakfa (about 25 million dollars) reported for 1998 still includes Ethiopia as receiving 27%. (The war started in May 1998) The 1999 figures can thus be expected to be even lower. The declining trend in Eritrean exports had actually started in 1996.

Inflation: The inflation rate in 1998 was 16.6 percent, and a similar figure is expected for 1999 although final data were not released. This is a fairly high level relative to the low-inflation environment being enjoyed by economies elsewhere in the world.

Investment: Investment has shown a consistent decline since 1996 when projects worth 851 million nakfa were recorded. In 1999 the recorded investment projects had a total worth of 362 million nakfa; a decline of 57 percent representing a steady trend from 1996.