Eritrea has undergone a prolonged period of drought that has seriously hindered agriculture and resulted in major food shortages, affecting a population of 4 million (2002). Grain production in 2002 was down 75% of what it was in the previous year.A border conflict with Ethiopia (1998 Ã¢â‚¬â€œ 2000) resulted in the large-scale destruction of infrastructure. Although sporadic violence continues, there is a push towards the establishment of a peacetime economy. The government has initiated a demobilisation process in which 130,000 combatants will be reintegrated and hopefully fulfill the urgent need for a work force.
Even though, the government has maintained a firm hold on the economy, since the war ended, it is committed to a free-market economic system and has announced plans to reduce its holdings in some 40 public enterprises. Domestic output is boosted by worker remittances. The country retained the Ethiopian currency, the Birr, after independence.
The Eritrean mining and oil industries are key elements in the economy. Eritrea has considerable mineral and oil potential although there has been little exploration activity in this regard. The downstream oil industry is also well-developed following government policies to encourage its development. The refinery at Assab supplies the local market as well as neighbouring Ethiopia. Electricity is provided by the parastatal utility, Eritrean Electricity Authority.
The economy is agriculture based and employs a large percentage of the population through farming and herding. In 2002 agriculture made up 20% of GDP, industry 21% and services 57%. The industrial sector is small and further developments are expected in the offshore oil, fishing and tourism industries. FDI into the country in 2001 was US$34.2 million.
Even though, the Eritrean-Ethiopian War had affected the agricultural sector and other sectors of the economy severly, it was during the war that Eritrea developed its transportation infrastructure, asphalting new roads, improving its ports, and repairing war-damaged roads and bridges.
Growth in 2002 was 1,2% and the government is hoping to increase revenue in 2003 with the sale of government housing and apartments as well as the privatisation of three hotels. Inflation in 2002 was at 24% and exports were worth US$54 million in 2002. GDP in 2002: $US 0.6 billion.
EritreaÃ¢â‚¬â„¢s export commodities include livestock, sorghum, textiles, food, small manufactures and the countryÃ¢â‚¬â„¢s import commodities consist of machinery, petroleum products, food and manufactured goods.
A dual exchange rate system exists in the country and there is a substantial difference between the official and parallel market rates. Official transactions and other priority needs are conducted in the official market, while the vast majority of private transactions, including bona fide current transactions, are channeled through the parallel market. The government has made progress in the areas of trade liberalisation, bank supervision, tax reform and public expenditure.