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July 25, 2019 Martin Plaut 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.

July 25, 2019 Eritrea Hub News

Eritrea road building The British govenment has provided clairity on just how the European Union will approach the issue of the use of National Service conscripts on the road projects that the EU is funding.

In a letter to Lord Alton, Harriett Baldwin, Minister of State for Africa at the Foreign and Commonwealth Office and Minister of State at the Department for International Development laid out how this will work.

“Whilst we must recognise that development cooperation in Eritrea, including recent cooperation on road building, is important to support increasingly sustainable and formalised relations between Eritrea and Ethiopia, we are clear that the general human rights situation in Eritrea, including the terms of national service, remains a substantial concern.

We have therefore been active within the EU to ensure safeguards are in place, including working with the UN to monitor working conditions and fair remunerations of national service workers involved in the road- building programme, and to encourage wider reform of the national service system.

Sustainable reform of the national service needs to happen in tandem with an improved economic situation and job creation that the international community can support.”

You can read the letter here:

Eritrea 1

Eritrea 2

This clarifies just how the programme of road building which the EU is planning to back – at a cost of EU20 million – will be spent.

You can read the plan here:

EU Eritrea Road rehabilitation

The road building programme depends on good relations between Eritrea and Ethiopia. As the French newsagency – AFP – has pointed out, these are hardly on a solid footing at present.

People walk on July 6, 2019 in the streets of Zalambessa, a town where battered buildings highlight the damage wrought by the Ethiopia-Eritrea border war, which erupted in 1998 and left tens of thousands of people dead.

ZALAMBESSA , ETHIOPIA – In the heady days after longtime foes Ethiopia and Eritrea signed a peace deal a year ago, Teklit Amare’s Peace and Love Cafe near the newly-opened border overflowed with customers.

Now, he paces among empty tables, wondering aloud how to keep his business open as optimism fades, with borders again sealed and hopes of progress dashed.

The Zalambessa border crossing closed at the end of last year without explanation as leaders have remained silent. Others crossings followed suit.

“When they shut the border so soon after opening it, that was the saddest moment,” said Teklit, a former teacher who now struggles to pay his rent.

The feeling is widely shared in Zalambessa, a town where battered buildings highlight the damage wrought by the Ethiopia-Eritrea border war, which erupted in 1998 and left tens of thousands dead.

During the stalemate that followed the end of active hostilities in 2000, Zalambessa was all but abandoned, deprived of infrastructure and other investments.

“After the opening it was very obvious that everybody was happy. They want to trade, to have these connections,” said Hadush Desta, Zalambessa’s top municipal official.

“But now, because of no reason, it’s closed. People are emotional about it. They say, ‘Why is this happening to us?'”

‘Devil in the details’

The border opening was just one breakthrough in the whip-fast rapprochement between Ethiopian Prime Minister Abiy Ahmed and Eritrean President Isaias Afwerki that began just over a year ago.

Following Abiy’s initial overtures, the two sides embarked on a rapid mending of ties that caught even close observers by surprise, re-opening embassies, resuming flights and taking meetings across the region.

But enthusiasm for the deal has given way to frustration — and not just near the border.

On other goals too — from inking new trade deals to granting Ethiopia access to Eritrea’s ports — high initial hopes have gone unmet.

The lack of communication from both governments makes it difficult to pinpoint why the peace process appears stuck.

Abiy paid a two-day visit to Asmara last week and pledged to “further enhance” the peace process, but no detail was given of their discussions.

“As they say, the devil is in the details. We are not so clear what is going on,” said Abebe Aynete, an Addis Ababa-based senior researcher with the Ethiopian Foreign Relations and Strategic Studies think tank.

Many analysts and diplomats suspect Eritrea is guilty of foot-dragging.

Opening up to Ethiopia would force Isaias to surrender a measure of control, something his critics say he is unlikely to do.

“I personally believe that as long as the current group in Asmara stays in power, I don’t think the border will open and the two countries will not proceed to normal relations,” said Mehari Tesfamichael, chairperson of the opposition Eritrean Bright Future Movement.

Isaias’ notoriously iron-fisted government has long cited the standoff with Ethiopia in justifying harsh policies like compulsory national service, which forces citizens into specific jobs at low pay and bans them from traveling abroad.

Last October, the UN refugee agency noted a seven-fold increase in refugees fleeing Eritrea after the borders opened, with around 10,000 refugees registered in one month.

The peace deal “provided some hope that restrictions on national service would be lifted, but so far there has been little change” in Eritrea, said Human Rights Watch.

Abiy’s woes

Ethiopia’s domestic politics could also be part of the problem.

Abiy’s ambitious reform agenda has run into roadblocks, a fact underscored by the assassination last month of five government and military officials.

The changing landscape has inflamed tensions between Abiy and the Tigrayan People’s Liberation Front (TPLF), the party that dominates the northern Tigray region and was the strongest political force in the country before Abiy came to power.

Tigray’s administration of Ethiopian border areas means the TPLF should be a major player in normalizing ties with Eritrea, provided it plays along.

“Solving issues related to the border ideally needs the full cooperation of Tigray and the TPLF. That isn’t what we have right now,” said William Davison, senior analyst at the International Crisis Group think tank.

“We have significant rifts between TPLF and its ruling coalition partners and also disputes between the Tigray region and the federal government in Addis.”

‘A better place’

However observers say it’s important not to lose sight of the progress that’s been made.

“Up front we have to acknowledge that we’re in a much better place than we were before the rapprochement, when the possibility of state-on-state conflict was quite high,” said Michael Woldemariam, an expert on the Horn of Africa at Boston University.

Even at the border, the news is not all bad.

Though the Zalambessa crossing closed completely in December, soldiers on both sides have since loosened restrictions. Ethiopian traders say that on some days they cross into Eritrea unimpeded, and on others they can often get through using unofficial crossings.

Back at the Peace and Love Cafe, owner Teklit said he is not giving up just yet.

He said he is encouraged by the fact that ties between the two countries are still officially warm.

“There are rumors that the Eritrean government is fixing the road,” he said. “This gives us hope that they might one day reopen again.”