Recapitalizing and enhancing the capacity of the Eritrean Investment and Development Bank will be critical.

Eritrea’s economic performance and outlook amid the COVID-19 pandemic found to be weak after revisions of the growth projections and outlook for 2020 and 2021 were done.

BY EDIRISA NSEERA | THE AFRICAN DEVELOPMENT BANK

Eritrea reported its first case of COVID–19 on 21 March 2020, and total cumulative cases stood at 39 by 7 May, with 30 recoveries and no deaths. To contain the spread of the pandemic, the government imposed a national lock-down starting on 2 April. All citizens are required to stay at home except those engaged in indispensable security and development tasks.

Health sector preparedness

Eritrea beefed up its preparedness and response actions to fight the pandemic in line with the WHO strategic preparedness and response plan. The 2019 Global Health Security Index ranked Eritrea 178 among 195 countries, with a score of 22.4 of 100, below the global average of 40.2.

Macroeconomic prospects

Real GDP growth is projected at 0.3% in 2020 if the pan-demic is contained by the third quarter (baseline), compared with the previous estimate of 3.9%, and to contract by 1.1% if the pandemic persists to the end of 2020 (worst case) (table).

The COVID–19 crisis is expected to adversely affect Eritrea’s economic outlook through commodity prices and trade, foreign direct investment, and travel and tourism.

Metals are Eritrea’s leading export and account for an average of 85% of merchandise exports and 17% of GDP. Between February and March 2020, prices for zinc fell by 6.7% and for copper by 3%. The fall in metal prices will affect foreign exchange earnings and public revenues, which may hold back the implementation of transformative infrastructure, with adverse impacts on GDP growth.

Foreign direct investment in 2018 was estimated at $600 million (about 9.6% of GDP), with most investments are focused on mining. Global economic uncertainty is likely to slow FDI flows as investors postpone major investment decisions. This could affect investments in Eritrea’s mining sector.

Tourism is an emerging source of foreign exchange, though its contribution to GDP is still low at about 1%. Global travel restrictions and national containment measures have reduced tourism and hospitality.

Lower merchandise and service export earnings are expected to reduce the country’s current account surplus in 2020 from the previous projection of 13.2% to 10.3% of GDP (baseline) and 8.1% (worst case).

Containment measures, like the national lockdown, and cautious consumer and investor sentiment will reduce demand, and disruptions in global and regional supply chains will affect supply. These shocks are projected to reverse real GDP growth in 2020 although a strong recovery is expected in 2021 as the pandemic is contained.

The supply shocks are likely to more than offset the impact of subdued demand, increasing inflation to 5% in the worst-case scenario in 2020 relative to previous estimates.

Increased public spending in response to the COVID–19 crisis amid depressed revenues will worsen the fiscal balance, which is projected to widen to –4.7% of GDP in 2020 (baseline) and to –5.7% with the pandemic persisting to year’s end (worst case).

African Development Bank statistics on Eritrea 2020
Note: The baseline scenario assumes that the pandemic subsides in July, and the worst-case scenario, that it continues through December. (Source: African Development Bank statistics)

Policy responses

A national COVID–19 pandemic response plan is yet to be announced. However, the authorities should continue to mobilize citizens within the country and the diaspora to support the National Fund for COVID–19 pandemic.

The swift responses from volunteers have allowed the government to address the immediate health needs with-out neglecting the most vulnerable. The authorities have also continued to follow WHO’s preparedness guidelines and response actions.

Increasing access to credit for the micro, small, and medium enterprises will prevent business closures and support a quick economic recovery once COVID–19 is contained. In this context, recapitalizing and enhancing the capacity of the Eritrean Investment and Development Bank will be critical.


Eritrea Economic Outlook 2020 Amid COVID-19

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