IMF’s blunt warning to Eritrea: “The macroeconomic situation is dire.”

2019-07-26 22:48:19 Written by  Martin Plaut Published in English Articles Read 198 times

July 25, 2019 News

IMF Executive Board Concludes 2019 Article IV Consultation with the State of Eritrea

Source: IMF

July 23, 2019

On July 22, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with the State of Eritrea.

Eritrea has recently emerged from a long period of conflict and international sanctions, which together deprived the country of vital investment, trading opportunities and external support, and left the economy in a difficult situation. Notwithstanding these challenging conditions, the Eritrean authorities have made considerable progress on some development goals, notably in the health and education sectors.

The macroeconomic situation is, however, dire. A sustained period of high deficits, financed through monetization and external borrowing, left Eritrea in debt distress. The banking sector is in a highly vulnerable position due to weak asset quality, scarce foreign currency and tight monetary controls. The economy, dominated by agriculture and mining, is highly vulnerable to shocks and has experienced several episodes of large negative growth in recent years. Reported inflation for the Asmara region has been negative in 2016–18 but has started to stabilize in recent months.

The near-term outlook for real GDP growth is challenging due to the tight fiscal situation and existing restrictions on economic activity. Over the medium term, prospects for a pick-up in growth are promising, including due to new mining projects that are well advanced coming on stream. Moreover, the peace agreement with Ethiopia in July 2018 and removal of sanctions by the United Nations Security Council in November 2018 provide a welcome opportunity for Eritrea to build an impetus for economic development, restore capacity and begin implementing much needed reforms.

Executive Board Assessment [2]

Executive Directors welcomed the authorities’ efforts to reengage with the international community and notably with the Fund through the Article IV consultation process. Directors noted that prolonged conflict had exacerbated Eritrea’s economic difficulties and that the macroeconomic situation and near‑term growth prospects are challenging. They underscored the importance of securing macro‑financial stability, addressing the unsustainable debt burden, and removing impediments to private sector‑led growth. Directors emphasized the important role of technical assistance in supporting the country’s development and encouraged close cooperation with the Fund.

Directors noted that the peace agreement and removal of international sanctions provide an opportunity for Eritrea to build an impetus for development and bring vital aid and investment resources to the country. They encouraged the authorities to begin implementing reforms to accelerate the development process, and welcomed the authorities’ intention to pursue an economic development strategy that envisages a strong role for the private sector. Directors underscored that significant reforms and investment, public and private, are necessary to diversify the economy and reduce its dependence on agriculture and mining.

Directors welcomed the authorities’ recent efforts to adjust the fiscal position and their intention to limit budget financing and focus on securing grants and concessional loans. Nonetheless, they stressed that continued fiscal pressures could complicate macroeconomic management and warranted continued vigilance. Directors encouraged the authorities to pursue fiscal restraint not only by spending cuts, but also by improving tax collection and broadening the revenue base, while making room for social spending.

Directors noted that Eritrea remains in debt distress with a weak external position. They noted that arrears accumulation, weak debt‑servicing capacity, and relatively low foreign exchange reserves call for strong measures to put debt back on a sustainable path. Accordingly, they called on the authorities to develop a comprehensive debt resolution strategy, including regularizing arrears to unlock external support and ease macroeconomic adjustment efforts.

Directors noted that financial sector stability is crucial to establish the basis for banks to engage in financial intermediation and for the Bank of Eritrea (BOE) to conduct monetary policy. They advised the authorities to update holistically the legal framework, including to restate the BOE’s independence. Directors also encouraged steps to align the AML/CFT framework with international standards.

Directors emphasized that restrictions impeding the private sector should be eliminated and recommended that the authorities reduce state monopolies, impose hard budget constraints on public enterprises and banks, ease foreign exchange restrictions, improve access to financial services, and strengthen property rights. They underscored that actions to improve governance and reduce vulnerabilities to corruption would also be important.

Directors stressed the need for capacity building tailored to country circumstances, particularly the production and analysis of data. They encouraged the authorities to make use of technical assistance from the IMF and other partners in a well sequenced and coordinated manner.

Last modified on Saturday, 27 July 2019 00:55