07:47 a.m. Jun 22, 1998 Eastern
By Manoah Esipisu
ASMARA, June 22 (Reuters) - Just when Eritrea had finally cut its budget deficit to single-digit levels, the border conflict with its Horn of Africa neighbour Ethiopia threatens to put the countrys hard work at risk.
Treasury officials say they will have to dig deep to finance the cost of the conflict, incurred by the thousands of troops deployed along the country's long border with Ethiopia, including a 400-square-km stretch of disputed territory.
Resources earmarked for other projects will likely be ploughed into defence, limiting the impact on the overall deficit this year, according to government officials. But the conflict is bound to have a medium-term effect on finances.
``Most resources will come from the budget,'' said a senior government financial expert. But he added: ``The deficit could rise slightly due to the need to defend ourselves from foreign aggression.''
Eritrea's budget deficit dropped to 4.2 percent of gross domestic product in 1997 from 18 percent in 1996, as the government cut spending sharply to prepare for the launch of the nakfa currency. Previously the country had used the Ethiopian birr.
The deficit of 18 percent was itself a hangover of war, as the country struggled to rebuild and recuperate after a 30-year fight for independence from Ethiopia. In 1996, the government of President Isayas Afewerki made one-off payments to war veterans and gave cash to rehabilitate disabled veterans and resettle refugees.
Eritreans fought against Ethiopian Emperor Haile Selassie and then the dictator Mengistu Haile Mariam, helping to topple Mengistu in 1991. The country became independent in 1993 after a referendum.
The highest foreign exchange earner in Eritrea is remittances from nationals abroad, which bring in around $300 million annually. These inflows are rising as an organised network of Eritrean expatriates send money home to finance the war effort. The Eritrean News Agency reported two weeks ago that patriotic Eritreans -- at home and abroad -- were giving up one month's salary to back their government against Ethiopia.
This extra money from abroad will help to limit the budgetary impact of the current conflict, officials say. At the same time, the government will continue to look to the West to improve the country's infrastructure, particularly its roads, ports and telecommunications networks, says Asmara University professor John Distefano.
Although the government's philosophy is to shun external aid, it hopes infrastructure development will help promote and sustain private sector investment, Distefano says. Eritreas main lenders comprise the Gulf States, the World Bank, the African Development Bank, the European Union and Italy.
Italy has invested $21 million in improving the facilities at the Eritrean Red Sea ports of Massawa and Assab, with the World Bank promising another $57 million.
Financial officials say that the country is running a large trade deficit, as the young Eritrean nation imports the technology and other items it needs in its rush to develop.
Qualified staff are also scarce and Eritrea has been urging its citizens abroad to return home and take up available jobs. Eritrea's unemployment rate stands at 5.0 percent, although some 100,000 workers come from Ethiopia.
Dear netters:
Following are some notes on the above article. They are simply my own observations based on looking over IMF data for Ethiopia and comparing it with the available data from Eritrea, largely from Economist Intelligence Unit reports (Economist magazine), the US Embassy in Eritrea - commercial section, and from published interviews by Tekie Beyene - Eritrea central bank governor. I am not an economist so correction of any errors is welcome.
- Dagmawi
Note 1: Eritrea's budget numbers cannot be verified because incredibly, Eritrea has yet to publish an official budget. The IMF strongly urged Eritrea in 1996 to publish a budget so that it could assess Eritrea's economy.
Note 2: The BUDGET deficit of 18 percent was accompanied by a CURRENT ACCOUNT deficit of 22 percent of GDP in 1996. The current account takes into consideration all inflows to the country (including external aid and remittances). Because they ran a huge defict, they had to borrow the money from somewhere. A current account deficit of 22 percent would send a country's economy into a tailspin if it had to be financed from within the country. Eritrea must have borrowed substantial sums from Ethiopia's central bank (although this was not publicised in Ethiopia). They were planning to repay this debt after they changed their currency using the old worthless birr notes. To put it bluntly, they were trying to cheat Ethiopia.
Note 3: Click on this link to see details on foreign aid to Eritrea. This idea of shunning external aid is empty propaganda from the Eritrean government. On a per-capita basis, Eritreans are among the most foreign-aid dependent people on earth.
Note 4: Eritrea's trade deficit is largely due to (a) lack of anything to export, and (b) excessive levels of imported consumer goods financed by remittances. Remittances are known as problematic to a country's development because they encourage "First world spending habits in a country that earns less than the average for the Third World" - as one Eritrean economist sadly stated, referring to Eritrean spending habits.
Note 5: Eritrea's unemployment rate is probably at least four times higher than 5 percent. The economic data provided by the Eritrean government has not been thoroughly reviewed by international organizations. Compare to Ethiopia where the IMF produced a statistical appendix, and provides detailed analysis and recommendations in line with the structural adjustment program. (See the economic page at my site for more info including a series of ten slides depicting the Ethiopian economy)
Note 6: Eritrea's bank governor himself states that the remittances totaled 200 million from 1991 to 1996 (approx 40-50 million per year). Not 300 million per year as stated above.