Eritrea finds new ways to earn hard currency

FEATURE-Eritrea finds new ways to earn hard currency
By Ed Harris
Updated: 9:04 p.m. ET June 20, 2006
ASMARA - It may look like a truck park by Asmara's Halibet Hospital on the edge of town, but the Eritrean government, keen to tap the hard currency held by the large Eritrean diaspora, has other plans.
The poor Red Sea state plans 766 "new residential-style" two and three-bedroom apartments there, with shopping centres and sports facilities, the project's Web site halibet.com says.
The prices, between $97,000 and $139,000, are low by London and New York standards, but out of reach for most Eritreans whose average income is just $130 per year.
Glossy brochures are available in Eritrean embassies abroad and payment can be made in U.S. dollars, euros and British pounds but not in nakfa, the national currency.
The government has hard currency reserves equal to only one month of imports, according to the International Monetary Fund (IMF), and must find innovative ways of earning crucial cash.
"This economy lives off two things: diaspora and loans," an Asmara-based analyst told Reuters, adding that Eritrea paid 50 times more for imports in 2003 than it earned from exports.
The currency crunch is due partly to a collapse of trade with neighbours Ethiopia and Sudan, a fixed exchange rate and the fact that most foreign exchange transactions take place outside official channels, the IMF says. Reduced donor loans have also contributed.
The crisis may ease in 2008, when Eritrea is expected to start mining gold and other minerals worth tens of millions of dollars a year.
Meanwhile Eritrea, whose mantra is self-reliance, suffers from tension with its giant neighbour Ethiopia, with which it fought a border war in 1998-2000 and rising world oil prices.
It needs hard cash to pay for food, oil and arms.
DIASPORA
Total public debt reached 214 percent of gross domestic product (GDP) by end-2004, divided almost equally between external and domestic liabilities, according to the IMF.
Eritrea has been exploring the possibilities for debt relief in discussions with the IMF but no agreements have yet been signed, diplomats say.
Loans have come from financial institutions such as the World Bank and bilateral donors, including the United States, China, Italy and Middle Eastern countries.
A key source of foreign currency is Eritrea's sizeable diaspora, many of whom live in the United States and Europe.
They make donations to the families of those killed in the border war, and pay a two percent income tax to qualify for privileges back home, like the right to buy housing and land.
But payments are declining as younger Eritreans' interest in their homeland dwindles, analysts say. "Payment is restricted to a minority of diaspora members who want to maintain financial and economic links to the homeland," one analyst said.
Another cash earner is private family transfers.
"Without remittances, I don't think anybody could get by," said a young woman, who did not wish to be named. "Most people in Eritrea have somebody outside (the country)."
Economists estimated that in 2003, remittances were worth around 70 percent of Eritrea's GDP. Diplomats say they fell from $462 million in 2003 to $420 million in 2005.
Some Eritreans abroad still want to help their country.
"As a kid, I remember EPLF delegates coming to update us on developments in the field," said Senai Maesho, 39, who lives overseas, referring to the guerrilla group which led a 30-year struggle for independence from Ethiopia, won in 1993.
"We were made aware that if we didn't contribute (to the struggle) then our political independence would be hijacked by surrounding countries," he said, while holidaying in Asmara.
CONTROLLING EXCHANGE PROCESS
Eritrea also uses strict controls to boost its foreign currency holdings. "You get dollars sent to your bank account here, but you can only withdraw in nakfa," an analyst said. Unauthorised use of foreign currency is punishable by confiscation, a two million nakfa ($133,000) fine and two years in prison.
Government approval is required to pay for international transactions with foreign currency. A maximum $150 per day can be taken out of the country for foreign travel and companies with foreign exchange earnings need permission to remit them.
The World Bank says Eritrea's economy has the potential to grow by 4 percent annually, well above rates of under 2 percent recorded in the last two years. "Poverty remains pervasive, defence spending large and fiscal deficits and government debt are at unsustainable levels," the IMF says.
The unresolved border dispute with Ethiopia keeps defence spending high. Eritrea blames the international community for not forcing Ethiopia to demarcate the border under the terms of the peace deal that ended a war which killed 70,000 people.
For some Eritreans, the Halibet project is an example not of a cash-strapped economy seeking solutions to a currency crisis, but of a proud young nation proving itself to the world.
"Whenever our enemies ... pray for our failure, we always surprise them with extraordinary achievements," boasts a comment posted on the project's Web site.
The country representative for the project's South Korean contractor, Keangnam, said customers were coming. "They're buying, paying money, registering," Nam-Hun Kang said. "Very promising."
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