Do Ethiopia's Recent Claims and Allegations on the Economic Relationship That Existed
Between Eritrea and Ethiopia Hold Water?

by Gebremichael Mengistu

Since the eruption of the border conflict, Ethiopia has been making incredible claims regarding the economic relationship
that existed between the two countries in the past seven years.

Ethiopia's assertions and allegations include, inter alia:

- Eritrea had unfair economic advantages in its relationship with Ethiopia;
- Eritrea had been economically bleeding Ethiopia and had the sinister design to continue to do so;
- Ethiopia paid Birr 1.2 billion per annum to Eritrea in port dues and fees;
- Eritrean ports had been more expensive to Ethiopia than Djibouti;
- Eritrea closed Assab to Ethiopian cargo;
- Eritrea repurchased Ethiopian crude oil imports in Birr despite frequently insisting on payment for Eritrean port services
in US dollars; and
- By re-exporting the coffee it imported from Ethiopia for its home market, Eritrea had been listed as the 13th major
coffee exporting country.

These most startling assertions and allegations would make one question if the cooperation agreements were really
between two sovereign states. They would make one wonder why a government like that of Ethiopia that boasts of being
fiercely independent and that would not under any circumstances compromise or sacrifice the interests of its people would
succumb to the pressure of the government of the State of Eritrea and enter into such one-sided arrangements.

The intended message of Ethiopia's outrageous claims is clear: that the Eritrean economy is an appendage of the Ethiopian
economy, that Ethiopia subsidized that Eritrean economy, and that it cannot survive independent of the Ethiopian
economy.

Only the uncritical and the uninformed can be taken in by these assertions and allegations. To the people of Eritrea and
those that have good knowledge of the recent history of Eritrea, these claims are very familiar. They are reminiscent of the
claims made by Emperor Haile Selassie and his cohorts at the United Nations in the late 1940s: that an independent
Eritrea "cannot be economically feasible."

Is there any evidence to corroborate the Ethiopian claims? To see if there is any basis to these assertions and allegations,
we will take, as an example, an agreement signed between Eritrea and Ethiopia on transit and port services.

The Transit and Port Services Agreement

On September 29, 1993, a transit and port services agreement was signed between the government of the State of Eritrea
and the then Transitional Government of Ethiopia. The highlights of the agreement can be summarized as follows:

- Assab and Massawa to serve as transit ports for Ethiopia, speedy movement of goods in transit to be expedited and
transit documentation and procedures to be simplified and harmonized;
- Ethiopian goods transiting through Assab and Massawa to be free of taxes and customs duties;
- Eritrea to provide all necessary port handling and agency services to ships owned by and cargo destined to and/or
originating from Ethiopia;
- Eritrea to have the right to inspect transiting goods;
- payments for services rendered to Ethiopian ships and cargo to be effected in Birr except where the handling costs were
paid for by shipper or consignee in hard currency;
- payment for Eritrean freight cargo boarded on Ethiopian ships to be effected in Birr and the rate of payment to be
according to the agreed governing international freight rate;
- food aid cargoes and emergency relief aid to be free of port dues and storage penalty charges.

The above are the main features of the said agreement. In what follows an attempt will be made to briefly examine the
contents of the agreement and its implementation and the realities thereof.

Implementation of Agreement: Following the outbreak of hostilities, Ethiopia has been making critical comments about the
quality of port services and payments in port dues and fees. Lamenting the supposedly unsound decision and missed
opportunity, they make assertions that now they have been able to get better services at lower cost in other neighboring
ports.

Regarding payments in port dues and fees, they assert that huge benefits had been accruing to Eritrea at the expense of
Ethiopia. They unabashedly claim that Ethiopia's payment in port dues and fees alone constituted over 25% of Eritrea's
gross domestic product and contributed about 60% to the country's revenue!

But do these claims tally with the realities and the facts and figures? Let the facts and figures speak for themselves.

Consistent with its policy of promoting mutual cooperation, the government of Eritrea in the implementation of the transit
and port services agreement had scrupulously adhered to the spirit and letter of the agreement.

At the port of Assab, Ethiopia had active and full participation in the processing of transit cargoes. As an integral part of
this arrangement, Ethiopian Maritime and Transit Services Enterprises (MTSE), Ethiopian Customs Authority and
Ethiopian Shipping Lines (ESL) had branch offices in Assab. ESL, in addition to a branch office "for the day to day follow
up of activities," also maintained warehouses "for the keeping up of dunnage and used spare parts" at the port of Assab.

To oversee the implementation of the cooperation agreements and to periodically review, in light of experiences and
developments, the agreements themselves, joint ministerial commissions for the different sectors and areas of cooperation
were formed, following the signing of agreements.

As cargo handling destined to or originating from Ethiopia was the joint responsibility of MTSE and the Eritrean Shipping
and Transit Agency Services (ERSTAS), MTSE was represented in the daily operational planning staff meeting.

Customs inspection of all goods in transit was carried out in Assab by Ethiopian Customs Authority. Although this
procedure was causing delays in the movement of transit cargoes and creating congestion at the port, it was tolerated until
the end of 1997.

At the port of Assab, adequate services were also provided to Ethiopian ships. To foster a harmonious relationship,
Eritrea, after it formally became an independent and sovereign state, without adhering to the UN Convention on the Law
of the Sea (1982) and the UN Convention on Registration of Ships (1986), allowed Ethiopian ships to make Assab their
home port and to continue to register in the port of Assab and sail under the Ethiopian flag.

In some ways, the transit and port services agreement favored Ethiopia. For instance, in most cases, the dwelling time for
transit goods rarely exceeds 30 days. In the ports of Djibouti, Mombassa and Dar Es Salaam, the grace period for transit
cargoes is 60 days, 15 days and 15 days respectively, whereas, in the ports of Assab and Massawa it was 180 days.

Port Tariff: As it is in their best interest, Eritrean ports aim at providing efficient services at competitive rates to their
customers.

Since 1991 port tariff rates have been revised three times with a view to making the port competitive. Every time some
improvement had been made. Except for the last time, the first two revisions were carried out with the full participation of
the concerned Ethiopian authorities.

The introduction of the new tariff rates in January 1998 was made with two objectives in mind: first, to offer competitive
and fair rates, and second, to provide efficient services.

As can be seen from Table 1, the new tariff rates are relatively more attractive than the old ones. Except for one item,
substantial reduction was made in all the tariff heads. In operational terms, the new tariff rates are also much more
simplified.

Table 1:
ERITREAN PORTS TARIFF RATES OVER THE YEARS IN US DOLLARS

OLD NEW
TARIFF HEAD TARIFF RATE TARIFF RATE

Conservancy per Grt/call 0.1400 0.0950 (-32.0%)

Pilotage, towing and
mooring/unmooring per Grt/operation 0.1180 0.1140 (-3.0%)

Dockage and bouyage
per Grt/hour 0.0019 0.0017 (-10.5%)

Stevedoring per ton 8.1600 6.5600 (-20.0%)

Shorehandling per ton 8.7300 8.7600 (0.3%)

Ports use different basis/factors in formulating tariff. It is thus not easy to make comparative analysis. However, as Tables
2 and 3 show, by and large, Eritrean tariff rates are more attractive than those in neighboring ports.

The competitiveness of a port depends on many factors. For the export and import of goods and commodities, one of the
most important factors that has to be taken into consideration is the cost of land transportation, as it constitutes a major
cost component. In relation to Ethiopia, from the cost of land transportation point of view, the Eritrean ports are on the
whole more cost effective. It is true that for some parts of Ethiopia some neighboring ports may, other things being equal,
compete with Eritrean ports.

The cost effectiveness of Eritrean ports has been attested to by Ethiopia itself just months before the current crisis. The
general manager of MTSE in an interview with the Reporter stated that the port of Djibouti was "at least 400% to 500%
more expensive than Assab." Similar views were also expressed by Ethiopian import-export agencies.

Table 2:
CONTAINER TARIFF RATES
ERITREA, DJIBOUTI AND KENYA IN US DOLLARS

TARIFF HEAD ERITREA DJIBOUTI KENYA

Stevedoring

20' 71 115 (62.0%) 120 (68.0%)

40' 123 143 (16.3%) 144 (17.0%)

Shorehandling

20' 67 197 (194.0%) 150 (123.9%)

40' 117 395 (237.6%) 180 (53.8%)

Table 3:
DRY CARGO TARIFF RATES
ERITREA AND KENYA IN US DOLLARS

TARIFF HEAD ERITREA KENYA

Conservancy per Grt/call 0.095 0.130 (36.8%)

Pilotage, towing & mooring/

unmooring per Grt/operation 0.114 0.118 (3.5%)

Dockage & buoyage per

meter/hour 0.100 0.160 (60%)

Stevedoring per ton 6.56 8.000 (22.0%)

Shorehandling per ton 8.760 12.000 (37.0%)

Port Services: Various yardsticks are used in assessing port services and their efficiency: tariff, cost of transportation, time,
capacity, security, etc.

With respect to port services, it can be said that the two Eritrean ports had been providing sufficiently efficient services to
Ethiopia during the period under consideration. Expressing satisfaction at the quality of services Ethiopia was getting from
the Assab port administration, the general manager of Ethiopian MTSE said, "We are getting all the services that we
would have gotten if we had our own port." "This," he remarked, "makes us happy." Similar views were expressed about
the efficient services provided by the Massawa port administration by Ethiopian import and export agencies. At the port of
Massawa, transit cargoes were processed within three to four days and transported to the border.

The port of Assab, unlike other ports in the region, basically serves Ethiopia (about 90%). This enables the Assab port
administration to better satisfy the needs and requirements of Ethiopia, a fact that had been appreciated and attested to by
the general manager of Ethiopian Shipping Lines. Moreover, the fact that Assab is better equipped for handling general
cargo makes it more attractive to Ethiopia for the bulk of Ethiopia's imports and exports are conventional cargo.

Other factors, such as familiarity with port rules and procedures, language, etc., also give the Eritrean ports competitive
edge over other ports in the region.

In comparative terms, although it is not possible to make, with the available data, detailed productivity/efficiency analysis,
taking all factors into consideration and from the above brief assessment, a safe claim can be made that the Eritrean ports
are as efficient as most neighboring ports.

It would be foolhardy, however, to claim that the Assab and Massawa port administrations had been providing optimal
services to their customers. Not at all. Undoubtedly, due to subjective and objective factors there were deficiencies in port
services.

Constraints on the ports' efficiency included inadequacy of facilities, shortage of equipment and machinery, provisions in
the transit and port services agreement (the 180 days dwelling time, the exemption of food aid cargo from storage penalty
charge), lack of know-how, and inappropriate procedures (complete customs inspection of all transit goods at Assab
port, MTSE's monopolistic position in the clearing and forwarding business). Endeavors have been made by the
Government of Eritrea to enhance the ports' efficiency by minimizing, if possible by removing, these constraining factors,
and to date significant work has been accomplished.

While some of the problems can be attributed to the Eritrean side, most have to be imputed to the Ethiopian side. If we
take for example the inadequacy of facilities, and the shortage of equipment and of machinery, who is to be blamed?
Certainly, Eritrea cannot and should not be blamed. The blame falls squarely on Ethiopia, especially in the case of
Massawa for it was Ethiopia that administered the two ports for forty years (1952-1991). The federal arrangement gave
Ethiopia the right to administer the two ports and to collect port dues and fees. It was during this period, due to willful
neglect and wanton acts of bombardment, that the port of Massawa deteriorated from one of the major ports in the Red
Sea area to become what it was at liberation -- a completely dilapidated place.

The provisions in the transit and port services agreement and the inappropriate procedures mentioned above were the
cause of congestion at the ports, and were also constraints on the efficiency of the ports. All attempts at corrective
measures were blocked by Ethiopia. For instance, to increase efficiency at the port of Assab, Eritrea had advocated, on
different occasions, for the privatization of clearing and forwarding businesses. But, as this was completely unacceptable to
Ethiopia, nothing came out of that effort.

Revenues Collected from Port Dues and Fees: From Table 4 it is clear that the total revenue that Eritrea collected from
transit cargoes in port dues and fees and transit fees in the past seven years was always under Birr 200 million per year.
Thus, Ethiopia's claim that it paid Eritrea Birr 1.2 billion per annum in port dues and fees is pure fabrication; even the total
amount over the seven year period does not add up to that staggering figure.

This stupendous claim deserves special comments: first, it goes to show concretely how unscrupulous the Weyane regime
is in its misrepresentation of facts; and second, it is unconscious admission of the magnitude of benefits that accrued to
Ethiopia from Eritrea during its forty years rule of the country.

Table 4:
PORT REVENUES IN THOUSANDS OF BIRR

YEAR PORT

ASSAB MASSAWA TOTAL

1992 118,904 - 118, 904

1993 179,535 - 179,535
1994 151,781 - 151,781
1995 154,723 4,501 159,224
1996 194,513 5,051 199,564
1997 163,218 5,015 168,233
to 5/1998 73,556 - 73,556

TOTAL 1,036,230 14,567 1,050,797

NB. The data for the Port of Massawa are incomplete and include only revenue collected from transit fees. The Assab
Port revenue are from port dues and fees.

Official Assessment of Agreement: The Ethio-Eritrean economic agreements were periodically reviewed by the joint
review committee and the joint ministerial commission. In these review meetings each side raised issues of concern to it.

In the joint review committee that dealt with the transit and port services agreement, Ethiopia had not registered any major
complaints regarding the contents of the agreement and its implementation. With respect to the transit and port services
agreement problems raised by the Ethiopian side worth mentioning include: a) the issue of port liability for pilferage and
damage, and b) the 1.5% transit fee on Ethiopian transit goods passing through Massawa.

The Eritrean law and regulation inherited from Ethiopia with respect to port operation did not make the port liable for
pilferage and/or damage. Cargoes in port premises were kept at the risk and responsibility of the ship or the owner. This
practice continued after the liberation of Eritrea in 1991. But when Ethiopia raised the issue and requested that the port
accept liability and responsibility in connection with handling and storage of goods, Eritrea, after carrying out appropriate
study, agreed that on proven negligence on the part of the port to accept liability for loss of and damage to cargo in the
ports of Assab and Massawa.

Regarding the 1.5% transit fee levied on transit goods passing through Massawa, Eritrea had expressed its readiness to
address the issue in a new trade agreement. It should be noted here that the money collected from the 1.5% transit fee,
which was only about Birr 25 million, was used to rehabilitate the port city of Massawa in general, and to
improve/upgrade the port's facilities, equipment and machinery in particular. Given the extent of the damage that the port
sustained during the forty year rule of Ethiopia, and the magnitude of resources required to rehabilitate it, the Ethiopian
side should have had the scruples not to raise it.

From the foregoing discussion on the implementation of the agreement, it can be stated that Ethiopia did not at any time
have reservations worth mentioning about the contents of the agreement, and that it was satisfied with its implementation.
The conclusion of the joint review committee does not differ from ours. In its final report of January
1997, it stated that "on the whole, it can be concluded the agreement in the port and transit area has largely been
implemented."

Ethiopia's Allegation on the Closure of Assab: Lately, Ethiopia is accusing Eritrea of closing the port of Assab to Ethiopian
cargo. In its hate campaign aimed at fostering animosity between the two peoples, it is raising hue and cry about Eritrea
trying to strangle the country. But nothing is further from the truth.

It was Ethiopia that decided to boycott the Eritrean ports immediately after the outbreak of hostilities. In a circular of May
12, 1998, the management of MTSE urged all shipowners to divert all Ethiopian bound cargo to Djibouti. In the said
circular it stated that "it has been decided that with immediate effect all import cargo destined to Ethiopia via Assab and
Massawa ports must be diverted and discharged at Djibouti port." In a similar circular of 16 May, 1998, Ethiopian
Shipping Lines management instructed all its vessels to "call only Djibouti." The circular stated, among other things, "Due
to force majeure ESL vessels will not be calling Assab and Massawa until further instruction to the contrary."

Findings: From the above brief account of the contents of the agreement and its implementation, it is no exaggeration to
say that there is no shred of evidence to support Ethiopia's outrageous claims, and that the economic cooperation that
existed between the two countries was based on mutuality of interests and benefits. More specifically it can be stated that:

- the economic cooperation arrangements did not give Eritrea unfair advantages;
- the economic cooperation agreement did not violate internationally accepted principles and norms;
- at no time did Ethiopia pay Eritrea 1.2 billion Birr per annum in port dues and fees; as a matter of fact, the total revenue
collected from port dues and fees over the seven years was less than 1.2 billion Birr;
- that Eritrea did not close Assab to Ethiopian cargo; it was Ethiopia that decided to boycott the Eritrean ports;
- Eritrea was insisting on payment in hard currency for cargo service only when such costs were paid by the shipper or
consignee in hard currency, as stipulated in the agreement; and
- that under the prevailing condition there is no port in the region that can provide better services at lower cost to Ethiopia
than the two Eritrean ports.

Because Ethiopia's assertions and allegations do not tally with hard facts, and because they are completely at variance with
views expressed on the cooperation arrangement by Ethiopian officials on different occasions prior to the eruption of the
conflict, Girma Birru, Ethiopia's Minister for Economic Development and Cooperation, in an interview with various papers
in the first week of August, 1998, was forced, despite his insinuating remarks, to reluctantly admit that the cooperation
agreements concluded between Eritrea and Ethiopia were based on the principle of mutual benefits and ensured the
national interests of the two countries. He stated that "the various agreements signed between the two countries stemmed
from the principle of safeguarding the common national interests of the two countries." He went on to point out that
"the agreements were in the best interests of the country [Ethiopia]."

Basis of the Cooperation Agreement

Eritrea never had any plan to develop its economy at the expense of Ethiopia, as the Ethiopian Government and the
chauvinist elements have been claiming. All along, Eritrea wanted to have a relationship and cooperation with Ethiopia on
the basis of genuine partnership, its guiding principle.

The economic cooperation agreements signed between Eritrea and Ethiopia were formulated and negotiated by joint high
level committees, and were designed to promote a closer relationship that would be of mutual benefit to the two
economies.

Eritrea's desire to have close links with Ethiopia stems from two objective realities. First, due to history, proximity and
culture, Eritrea and Ethiopia have special ties.

Eritrea was under Ethiopia for forty years. During this period, the two economies were integrated and interdependence
was created. Eritrea believes that this historical link, and the resulting economic integration and interdependence can be
used as a building block to forge deeper ties with Ethiopia.

Second, in this increasingly interdependent world the search for closer cooperation among countries, especially developing
countries like Eritrea and Ethiopia, is self-evident. That is, the need to create larger markets through sub-regional and
regional integration has become a policy imperative in the present day reality of globalization of production and trade
liberalization.

As pointed out earlier, the Ethiopian Government, as partner and actor in the whole process, knows full well the basis and
intention of and the background to the cooperation agreements. Why is it then making these incredible assertions and
allegations at this juncture?

It is true that chauvinist elements who harbor deep-seated hatred against Eritrea, and who are intent on driving a wedge
between the two peoples, were making similar claims in the past. At that time, the Ethiopian Government was not only
characterizing the chauvinists' assertions and allegations as baseless and malicious, and dismissing them as such, but was
also trying to present the cooperation agreements between Eritrea and Ethiopia to the Ethiopian people in their true light.

At the time of the signing of the agreements, Seyoum Mesfin, Ethiopia's Foreign Minister, said that "the basis and objective
of the agreements" are "to safeguard the interests of the two peoples." He went on to state that the cooperation
agreements have opened a "new chapter of cooperation" and "will contribute to the laying of a foundation to the eventual
socio-economic integration of the neighboring peoples."

Tamrat Layne, then Ethiopia's Prime Minister, also expressed similar views. "For us Ethiopians," he said, "the most
important aspect of the agreements we just signed is the provision that permits free movement of people." "In the
economic field," he further stated, "we have concluded cooperation agreements that would enable us to jointly develop our
economies and to find solutions to problems facing the people."

Moreover, in its final report of January 1997, the joint review committee expressed its belief that "the economies of both
countries have benefited from the implementation of the agreements."

Reasons for a Turn About

But why a complete turn about now, and stooping so low?

The whole thrust of the Ethiopian Government's unfounded and base propaganda is to confuse the real issue involved in
the present Ethio-Eritrean conflict: that the crisis is about a border dispute.

By complete misrepresentation of the facts regarding the economic cooperation that existed between the two countries in
the past seven years, the Ethiopian Government is trying:

- to make the world believe that the underlying cause for the current crisis is not the border dispute, but economic. With
the introduction of the Nakfa (Eritrea's currency), the Ethiopian Government's theoreticians purport, Eritrea has lost all the
economic benefits accruing to it from the "unfair" economic relationship it had with Ethiopia in the past. The loss, they
assert, has resulted in serious socio-economic problems in Eritrea, forcing the Government of Eritrea to start the current
crisis to cover up the real problems presently facing the country, and to divert the attention of the people away from them.

- to win over world public opinion. By making such patently false claims as 'Eritrea closed the port of Assab to Ethiopian
cargo,' 'Eritrea is trying to strangle Ethiopia,' etc., it hopes to gain the sympathy of the international community.

- to use the economic issue as a red herring. In the wake of the border conflict, a major crisis is looming over Ethiopia. By
allowing its propaganda machine to churn out the most startling assertions about the socio-economic situation in Eritrea,
the government hopes that the Ethiopian people can take comfort from such propaganda as to make them forget about the
economic and other problems they presently face. In other words, it is trying to use the economic issue to divert the
attention of the Ethiopian people from a dark cloud that hangs over the country.

- to mobilize the Ethiopian people in its war against Eritrea. By preaching venomous and hateful messages to the Ethiopian
people, it is trying to create enmity between the Eritrean and Ethiopian peoples, and

- to drum up, through appeasement, political support from chauvinist elements in the Ethiopian body politic.

These deceptive maneuvers are, therefore, concocted to confuse the real issues. But such cheap propaganda will not and
cannot take them anywhere. They should recognize before it is too late that the only way out from the predicament they
are in is to come to their senses and accept the basic facts: that economic issues have no bearing on the crisis, that the
conflict is about a border dispute, and that they should try to seek a corresponding solution to the problem at hand.

References

"Assab or Djibouti? Or Both?," Reporter (Amharic edition), December 1990 E.C. (December 1997)

"Interview with Bedru Adem, member of the Ethiopian Parliament," Voice of America (Amharic program)

"Transit and Port Services Agreement Between the Transitional Government of Ethiopia and the Government of the State
of Eritrea," 29 September
1993

Djibouti, Port Autonome International Djibouti, Port of Djibouti Port Tariff

Eritrea, Department of Maritime Transport, Eritrean Ports Tariff, January 1998

Eritrean Shipping and Transit Agency Services, "Business Tour Report of Mombassa and Dar Es Salaam Ports (9-27
April 1997)"

Girma Birru, Ethiopian Minister of Economic Development and Cooperation, Press Conference, 1 August 1998

Joint Review Committee, Final Report of the Joint Review Committee on the Implementation of the Ethio-Eritrean
Economic Agreements, January
1997

Kenya, Kenya Ports Authority, Tariff, 1995

Radio Woyane (Tigrinya program), "What is the underlying cause for the aggression committed against us by the
government of Sha'ebia?," 6 August 1998

The author, Gebremichael Mengistu, is an economist working for the Eritrean Government. During Eritrea's independence
struggle, he was an official of the Eritrean Relief Association. He has served as Eritrea's ambassador to the European
Community and several European countries.

Veronica Rentmeesters, Information Officer

Embassy of Eritrea to the US
1708 New Hampshire Ave NW, Washington DC 20009, USA TEL: 202 319 1991 FAX: 202 319 1304
E-M: veronic-@embassyeritrea.org

Veronica Rentmeesters, Information Officer
Embassy of Eritrea to the US
1708 New Hampshire Ave NW, Washington DC 20009, USA
TEL: 202 588 7587 FAX: 202 319 1304
E-M: veronica@embassyeritrea.org