RECENT DEVELOPMENTS IN THE ERITREAN ECONOMY AND
THE CHALLENGES AND PROSPECTS FOR LONG-TERM GROWTH
Opening Remarks to the Meeting of Eritrea's Development Partners
Asmara, Eritrea , November 2, 1998
by
Isaias Afwerki
President of the State of Eritrea

Excellencies and Distinguished Guests,

Welcome to our development partners' meeting, which is being held for the first time in Asmara. Let me begin by
expressing my gratitude to the World Bank, the International Monetary Fund, the International Finance Corporation, the
European Union, the UN family, and all our bilateral partners for attending; a particularly warm welcome to all our friends
and colleagues who came from outside Eritrea. I hope that this meeting will serve as an effective forum for all of us to
share experiences, expand knowledge of each other, and agree on the steps that need to be taken to further strengthen
our development partnership. I hardly need to emphasize the importance that we attach to this forum of periodic
consultations with our development partners by which we can exchange ideas with openness and frankness.

Before outlining our development policies and priorities, let me address first the current crisis between Eritrea and
Ethiopia, which must be foremost in your minds. I wish to express in this regard our appreciation for the concern and
anguish felt by our partners, who have the continued welfare of our peoples at heart, regarding the looming cloud of war
and conflict. Nobody could have contemplated a year ago that the exemplary alliance that we had managed to cultivate
with Ethiopia - forgiving and forgetting the past history of conflict and animosity - would collapse so abruptly and bring the
two countries to the brink of war.

Perhaps due to the utmost trust that we had and the efforts that we had expended to cultivate the best of relations with
Ethiopia, we were the last to suspect any ingrained desire for foul play from those whom we considered to be our closest
allies. This was the reason why we did not over-react or take the necessary diplomatic measures or other legitimate acts
of self-defense when regular Ethiopian troops crossed our border to dismantle our administration in Adi Murug last July
with concurrent incursions in the Badme area. We tried to keep the dispute in-house; doing all we could to resolve quietly
and speedily through bilateral talks what we thought were minor differences essentially emanating from low-level officials.
But, realizing the potential problems that such provocative excesses could entail, I wrote to the Ethiopian Prime Minister
two letters at the time, requesting him to intervene personally to check these unwarranted acts and suggesting that we form
a Joint Border Commission at a sufficiently high level of authority from both sides with full powers to resolve on the spot
the problems that were cropping up from time to time.

Now in retrospect, it is clear that these were not isolated incidents, but part of a well thought out territorial design against
Eritrea. The map that the Tigray Administrative Region issued - though not officially circulated - in October 1997 not only
incorporated the areas that the Ethiopian authorities have been attempting to seize under various pretexts but also
illustrated that this work had been underway since 1994 with the involvement of the central government. In the meantime,
the Joint Border Commission was paralyzed, meeting only once before May 1998 and unable even to agree on the ground
rules for performing its job.

It was against this backdrop that Ethiopian army contingents attacked our patrol unit in the Badme area on May 6 and
provoked a chain reaction of spiraling clashes until May 12. Rather than attempting to contain the problem, the Ethiopian
Parliament passed a declaration of war on Eritrea on May 13, propelling the two countries toward unnecessary
confrontation while effectively obstructing the prospects of early peace.

In spite of these ultimatums and threats of war, we have not to-date spared any effort to resolve this crisis peacefully. We
have suggested - from day one of the conflict - that we expedite the process of demarcation, as this is the only solution to
the border dispute. In the meantime, we have called for a cease-fire and the cessation of all hostilities. We have stated,
repeatedly, that we are ready for a mutual disengagement in as much as this is necessary to prevent the eruption of a
conflict and to facilitate the technical work of demarcation. I can firmly say that there is overall consensus that these
parameters constitute the fundamental ingredients of a peaceful solution. Still, peace is being kept hostage by Ethiopia's
preconditions. And the lack of resolve by the international community is only encouraging Ethiopia's intransigence, and to
that extent postponing early peace while increasing the likelihood of military confrontation. These are the real facts, and I
believe that we must recognize them for what they are in our endeavors to enhance the peace process.

One grave issue that I wish to further underline is the deliberate acts of permanent animosity that the Ethiopian government
is trying to foment between the two brotherly peoples. This border conflict will pass and be resolved one way or the other.
But creating a permanent hatred among the peoples is morally reprehensible and unacceptable. The international
community must not, accordingly, tolerate the witch-hunt that the Addis Abeba government is perpetrating on Eritreans.

Economic Policy, Performance and Prospects
As you all know, Eritrea is a new nation that has emerged from the ruins of a long and costly struggle for independence.
Upon liberation in mid - 1991, we found our infrastructure and productive capacity almost completely destroyed, the
private sector decimated, and our people exiled and scattered all over the world. The challenges were immense, and our
prospects seemed poor. Except for the Eritrean people themselves, very few others, if any, expected us to emerge so
soon as a dynamic and enterprising nation in Sub-Saharan Africa.

In the short time that I have, I would first like to review for you briefly Eritrea's achievements during the last seven years
and also share with you my own view of Eritrea's challenges and prospects. Secondly, I would like to highlight the areas of
focus of our development program in the next three years, and invite you to continue to be partners in our efforts.

Economic Policy
Our economic development policy is anchored upon the establishment of a dynamic private sector-led, outward-looking
market economy. Our commitment is to make the private sector the lead actor in the economic life of our country. We are
limiting the role of the government to creating a conducive environment for development by maintaining law and order,
sound macroeconomic policies, and by providing the social overhead capital that is necessary to facilitate development. It
will undertake critical investments in strategic sectors of the economy only when private investors are either unwilling or
unable to make the needed investments. Even in such sectors as infrastructure, the government encourages private sector
involvement. Our policy position is that the creation of production capacities in all contestable markets will be left to the
private sector - both domestic and foreign. I would like to emphasize here that our policy is to treat foreign investors
exactly in the same manner as we treat domestic investors. Furthermore, we are committed to maintain macroeconomic
stability by limiting budgetary deficits to levels that could be managed without inflation, and to provide the necessary
political, legal and institutional framework and safeguards to promote investment. Promotion of competition through
greater reliance on market forces in all segments of the economy is the hallmark of our economic development strategy.
We are committed to adhere to this strategy because we believe this is critical for successfully embarking our economy on
a growth path consistent with our growth potential.

Our trade and investment policies are liberal and forward-looking. We encourage free trade internally and across borders
within the region. Through active membership in regional organizations such as the Intergovernmental Agency on
Development (IGAD) and the Common Market of Eastern and Southern Africa (COMESA) we remain committed to
expand the market for our exporters and importers. In the area of investment, all sectors of the economy are open to both
domestic and foreign investors. Under Eritrean law, private property or investments are protected against nationalization
or confiscation. In the event that there would be a compelling public interest that requires expropriation, the law provides
for a fair and full compensation by the government. Eritrea is a member of bilateral and multilateral investment protection
or guarantee treaties such as MIGA that provide further protection of foreign investors.

Economic Performance (1992-1997)
Since mid-1991, we have formulated and implemented policies and strategies that promote economic development. Steps
have been taken to rehabilitate, upgrade and expand transport, communications, power, and water supply facilities.
Significant progress has been made to improve the capacity of government and development institutions in such areas as
health, finance, and education. We have restored the productive capacity of the economy, especially in agriculture and
fisheries, tourism, construction, mining and manufacturing industries. We have adopted broad-based fiscal, monetary, and
trade policy regimes aimed at maintaining macroeconomic stability, mobilizing government revenues, and facilitating
efficient allocation and utilization of resources. Recognizing the crucial role that an efficient financial sector can play in our
development, we have put in place appropriate laws that pave the way for the establishment of an independent central
bank and the formulation of a sound monetary policy. Based on these, we successfully introduced our national currency.

Overall, in the last seven years, we have made real progress in all the areas pertaining to infrastructure development,
production, employment, price stability, fiscal discipline, and accumulation of external reserves. During the period
1992-1997, real output growth averaged about seven percent, thus reflecting an improvement in per capita income. Along
with this growth rate, significant employment opportunities were created. The annual average rate of inflation was
maintained at less than five percent. In preparation for the introduction of our national currency, we made determined
efforts to improve our fiscal position, and succeeded. We reduced expenditures and took concrete measures to enhance
revenues. As a result, we reduced the deficit from over 16 percent in 1996 to 5.5 percent of GNP in 1997. To instill and
maintain confidence in our currency, our commitment to maintain the deficit at sustainable levels remains firm. Since its
introduction in November 1997, our currency has shown stability and acceptability that we are pleased with. Our gross
reserves in months of import of goods and services increased to over six months in 1997.

In summary, in the period up to the unexpected encroachment on our territorial integrity by Ethiopia, we were able to gear
our economy on to a sustainable growth path under a stable macroeconomic environment. Our economy was indeed
poised to take-off, and we are determined to maintain that momentum. We strongly believe that the conflict with Ethiopia
is only a temporary distraction. We want you to know that, because our development vision is clear and focussed and our
commitment is firm, we are determined to pursue our development policies and achieve our targets in spite of the
deliberate distractions imposed on us by Addis Abeba.

Growth Sectors
Now let me say a few words about the sectors where the prospects for growth are evident. Agriculture, fisheries and fish
processing, general manufacturing, communications, banking, transport and tourism hold great promise. There are good
prospects also for discovering economic deposits of gold, silver and copper, and energy resources that can be exploited
to generate growth. However, our people are our most important development asset and source of growth.

Agriculture is the mainstay of the Eritrean economy and employs the large majority of the workforce. However, the sector
operates at very low levels of technology and productivity. While Eritrea has plenty of arable land and significant water
resources, it needs capital and modern agricultural technologies to increase existing crop yields, develop new crops and
increase overall factor productivity. We believe that large productivity gains can be obtained from relatively modest
investments in new farming methods. To realize the agricultural potential, we have embarked on an integrated agricultural
development program using both traditional and modern inputs. In this context, foreign investors are especially encouraged
to participate in establishing modern agricultural estates. We believe that fruits, vegetables, flowers and greenhouse plants,
industrial crops, and livestock (dairy and meat) for both the domestic and export markets are particularly attractive for
local and foreign investors. Incidentally, I would like to mention that this year we are fortunate to have bumper crops that
have not been experienced in the recent past.

Fisheries is another area where there are unexploited potentials for development. Eritrea's coastal waters contain the most
productive fishing grounds in the Red Sea. We are actively seeking joint-venture investments with foreign investors to
develop modern fish processing, distribution and marketing facilities.

In manufacturing and industry, Eritrea has a long history and tradition which in large part is a legacy of its previous ties with
Italy. While much of the sector is in need of substantial investment for rehabilitation and expansion, we are convinced that
a vibrant industrial base can be re-established. Promising manufacturing opportunities can be found in textiles, leather
products, general agro-processing, cement and other construction materials, and a wide range of chemical and mechanical
manufacturing that can supply the domestic and regional markets.

Privatization is an important aspect of our government's strong commitment to private sector development and we are in
the process of privatizing all state-owned enterprises. We believe that our privatization program offers attractive
opportunities for those investors who are interested in acquiring established enterprises which, with further investment in
modernization and capacity expansion, could become competitive suppliers in the export market. Our privatization
program is driven by our strong conviction that commercial production of goods and services should be the domain of the
private sector. We do not impose special conditions on buyers. For the government, the most important thing is to
rehabilitate and develop the potential of privatized enterprises. Both local and foreign investors are welcome.

Tourism in Eritrea is in its infancy. The enormous potential has yet to be exploited. There are excellent prospects for both
private and foreign investors. Our offshore islands in the Red Sea and parts of the mainland along the coast offer great
promise for tourism development. Therefore, we are encouraging domestic and foreign investors to take advantage of
these opportunities.

As I have indicated earlier, the infrastructure has been improved substantially. Nevertheless, more investment is needed
over the next few years if economic growth is not to be constrained; and we would like to see the private sector involved
in this. Most critically, there is a need for substantial investment in power generation, telecommunications and
transportation, including continuous development and modernization of the ports of Assab and Massawa.

Finance plays a pivotal role in economic growth and private sector development. In Eritrea we recognize that much needs
to be done to develop our banking system so that it can meet the financial needs of the private sector. Accordingly, as part
of our modernization strategy, we have enacted a comprehensive "Bank and Financial Institutions Act." This permits the
licensing of private financial institutions, including the establishment of foreign banks.

In closing, I would like to emphasize that in order to achieve our development objectives your support and active
participation in our development efforts is critical. I will, therefore, appeal to you to support our development program and
to work with us. All our ministers and policy makers will be with you to further clarify our macro and sector policies and
programs and to answer questions that you might have.

I wish you success in your deliberations during the next two days. Have a pleasant stay in Eritrea.


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