This Selected Issues paper and Statistical Appendix examines the sustainability of the public finances in Eritrea. The paper analyzes monetary policy and management. It points out that the period since gaining independence in 1993 has not been long enough for the authorities in Eritrea to gain a full understanding of the functioning of the economy and develop the necessary skills and expertise to successfully implement the complex mix of economic, financial, and development policies needed to strengthen growth and reduce poverty. The paper also analyzes the determinants of inflation in Eritrea.
The paper examines fiscal sustainability issues for the case of Eritrea but has wider implications for addressing fiscal and debt sustainability. It begins with a formal definition and explanation of analytical sustainability indicators, followed by an assessment of the causes of fiscal deficits and their impact on the usual indicators of fiscal and external debt sustainability. The paper then goes beyond the usual analytical indicators by attempting to identify how and through which channels fiscal and other economic policies have affected the behavior of endogenous variables that in one way or another influence sustainability.
The Eritrean economy continues to be adversely affected by the effects of the border conflict with Ethiopia. In other structural reform areas, the government seems to have further increased state control over the economy. The authorities confirmed their commitment to strengthen the role of the private sector, but they believed that the sector was not yet ready to take the lead in a number of critical areas. The preparation of a medium-term macroeconomic outlook was beset by a number of difficulties, including, in particular, the lack of timely and reliable data.