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APPENDIX I

Eritrea Summary of the Tax System as of March 1996

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Source: Data provided in the Eritrean authorities

APPENDIX II Eritrea: The Exchange and Trade System (position as of end-March 1996)

1. Exchange arrangement

The provisional legal tender of Eritrea is the Ethiopian birr, which is issued by the National Bank of Ethiopia. Prior to July 30, 1995, an official exchange rate, the marginal auction rate (determined in the fortnightly foreign exchange auctions conducted by the National Bank of Ethiopia), and a preferential exchange rate prevailed in Eritrea. Effective July 30, 1995, the official rate and the marginal auction rates were unified and, as of end-March 1996, stood at Br 6.32 per US$1. The preferential exchange rate for that date was Br 7.2 per US$1.

The marginal auction rate applies to most transactions between Eritrea and Ethiopia, to government imports, and all aid-funded imports. The preferential exchange rate is used for most private imports, all exports, and the conversion of foreign exchange remittances by Eritreans living abroad. The Bank of Eritrea (BE) undertakes transactions with authorized dealers, who in turn carry out transactions with the public on its behalf. There are also a limited number of unofficial, but sanctioned, dealers who buy and sell foreign exchange at the preferential rate.

Exchange rates for currencies other than the U.S. dollar 1/ are communicated daily by the BE to the authorized dealers on the basis of same day early morning cross quotations in the London market against the U.S. dollar. For all foreign currency transactions, except transactions involving foreign currency notes, the BE prescribes a commission of 0.5 percent for purchases of foreign exchange and 1.5 percent for sales of foreign exchange. The authorized dealers are permitted, but not obliged, to levy a service charge for their own account of up to 0.25 percent buying and 0.75 percent selling and, for currencies other than the U.S. dollar, to include a margin charge that is applied by the correspondents abroad. There are no taxes or subsidies on purchases or sales of foreign exchange, and no forward cover is provided in foreign exchange by the BE or the authorized dealers.

2. Administration of control

The BE is working to ensure that all foreign exchange transactions are effected through the authorized dealers who are licensed in accordance with the Monetary and Banking Proclamation No. 32/1993. Under this proclamation, the BE may from time to time issue regulations, directives, and instructions on foreign exchange matters. Comprehensive foreign exchange regulations, as well as a new Central Bank Act, have been prepared and submitted for the Government's approval.

The Foreign Exchange Department of the BE issues permits only for those imports that require foreign exchange from the banking system. The National Licensing Office issues licenses for importers, exporters, and commercial agents, while the Ministry of Trade and Industry has authority to regulate foreign investments (Investment Proclamation No. 59/1994); it vets and licenses technology transfer agreements, as well as investment projects (including joint ventures) that are eligible to take advantage of the tax, foreign exchange, and other concessions of the Investment Proclamation. The Asmara Chamber of Commerce issues certificates of origin for exports.

3. Prescription of currency

Settlements may be made in currencies quoted by the BE or in any other convertible currency it deems acceptable. All transactions with Ethiopia, except for those related to the imports of spare parts for the refinery in Assab, are settled in Ethiopian birr.

4. Trade and payments with Ethiopia

Under the agreement of friendship and cooperation, signed by the Presidents of Eritrea and Ethiopia in September 1993, the two countries undertook to cooperate closely and develop common policies concerning a wide range of issues, including matters pertaining to their exchange and trade systems. A joint ministerial commission is entrusted to ensure the implementation of the provisions of the agreement, notably Article 9, which calls for mutual consultation on the use of the Ethiopian birr and the exploration of the possibilities of adopting a common currency by both countries. An agreement with the objective of establishing a free trade area (FTA) between Eritrea and Ethiopia was signed on April 4, 1995.

Payments are generally made in Ethiopian birr, although the Government of Ethiopia has required payments in foreign currencies for Eritrea's purchases of some of Ethiopia's traditional exports, as well as for goods that are in short supply in Ethiopia. Under an intergovernmental agreement between Eritrea and Ethiopia, Eritrea pays Ethiopia in birr for its domestic requirements of petroleum products. The refinery in Assab is reimbursed in birr for the costs of refining the derivative products consumed by Ethiopia, except that the portion corresponding to the depreciation of equipment is paid for in foreign exchange.

As stipulated under an intergovernmental transit and port services agreement as well as a customs arrangement (amended annually), the port of Assab is a free port for Ethiopia, with its own Ethiopian customs branch office, and goods shipped to or from Ethiopia remain exempt from the Eritrean customs duties and related charges. Procedures for the clearing of goods and the exchange of documentation are to be coordinated, and the port and shipping charges are paid in Ethiopian birr.

5. Foreign-currency denominated accounts

With the approval of the BE, nonresidents may open accounts denominated in U.S. dollars or in Ethiopian birr with the Commercial Bank of Eritrea. The BE has authorized the maintenance of interest-bearing accounts denominated in U.S. dollars for Eritreans residing abroad since November 1, 1993. Effective May 9, 1995, all residents are allowed to maintain foreign currency accounts in Eritrea. Nonbank residents may not open accounts abroad, except where they are specifically authorized by the BE.

6. Imports and import payments

All importers must possess a valid trade license issued by the National Licensing Office. These licenses must be renewed each year at a fee of Br 200-500. Import payments made through the banking system require permits that are issued by the BE upon presentation of pro forma invoices providing information as to type, quantity, unit price, and freight cost (where applicable). A commission of 2 percent is collected on imports that do not require official foreign exchange and are not aid funded. The BE ensures full collection of franco valuta commissions by requesting the display of a payment document to customs at the time of the import declaration. Imports of cars and other motor vehicles require prior permission from the Ministry of Transport to ensure their suitability for existing infrastructure and other similar considerations.

In 1995, the BE introduced a negative list for imports that are financed through the banking system; however, goods included in this negative list can still be imported through the franco valuta system. As of March 30, 1996, the BE does not provide foreign exchange for the import of goods in the following categories: perfumes and cosmetics; hair wigs and dyes; toys and games; plastic shopping bags; jewelry and other ornaments; dishes and similar kitchen equipment, except for hotels; ready-made clothing; biscuits and confectionery items; fresh fruit, fruit juices and vegetables, except for hotels and duty-free shops; live animals, except for reproduction; fresh or tinned meat, eggs, and fish; liquor and soft drinks, except for hotels and duty-free shops; salt; articles of decoration and Christmas trees; postcards, Christmas or other greeting cards, and collectors' postage stamps; ivory and smoking articles.

As a further import restriction, a public enterprise producing tobacco and matches continues to hold a monopoly over the import of these products. Most imports requiring official foreign exchange are effected under letters of credit or on a cash-against-documents basis. Suppliers' credits must be registered by the BE. Effective November 11, 1995, importers are no longer required to submit customs declarations to the BE for discharging purposes.

7. Payments for invisibles

With a foreign exchange permit, which is issued free of charge by the BE, payments for invisible transactions could be made to any country. Effective May 9, 1995, the travel allowance for business trips outside the birr area was raised from US$50 a person a day for up to 20 days to US$250 a person a day for up to 30 days. In bona fide cases, these limits may be exceeded with the approval of the BE. Also, exporters may freely use their foreign currency denominated retention accounts for this purpose. For personal travel, the allowance has remained at US$100 a person (adult or minor) for up to two trips a year. The allowance for medical treatment outside the birr area was raised from US$2,000 to US$10,000 upon the recommendation of the Medical Board of the Ministry of Health. Residents may remit premia on life insurance policies that were taken out before May 1991. Generally, the BE gives approval in all bona fide cases that exceed these limits for invincible transactions. Effective November 11, 1995, the requirement to submit bills of settlement by authorized dealers of foreign exchange (e.g., hotels, duty-free shops) has been suspended, and the BE notified the general public that all Eritrean nationals could purchase air travel tickets in local or foreign currency.

Following the Investment Code (Proclamation No. 59/1994), foreign investors may freely remit net profits and dividends accrued from investment and fees and royalties in respect of any technology transfer agreements. Foreign employees may remit up to 40 percent of their net earnings each month, and up to 60 percent of their cumulative earnings upon completion of their term of service in Eritrea.

8. Exports and export proceeds

Exporters must be licensed by the National Licensing Office. The annual licensing fee is Br 300 for producers and Br 500 for the commercial agents of foreign companies. All exports require documentation by the BE, which examines the sales contracts as to type of product, quantity, and unit price. Certain commodities may require clearance from specific government bodies (e.g., the Eritrean Institute of Standards). In particular, livestock and cereals require the permission of the Ministry of Agriculture, and marine products require the permission of the Ministry of Marine Resources. Exports of unprocessed hides and skins have been suspended since mid-1993 in an attempt to improve the supply to domestic tanneries and processors.

Exports may be made under a letter of credit or on an advance payment basis; in some cases, exports can be permitted on a consignment basis. All export proceeds must be repatriated to an authorized bank within 90 days of shipment; where justified, this deadline can be extended by another 90 days. Exporters may retain up to 100 percent of the sales proceeds.

9. Proceeds from invisibles

Travelers are not required to declare their foreign exchange holdings at the point of entry into Eritrea, and they are allowed to reconvert their balances back into foreign currency upon departure, provided that documentation can be provided that the foreign exchange has been converted into birr through a licensed foreign exchange dealer.

10. Capital

Foreign exchange proceeds representing capital inflows must be registered at the BE in order to ensure the smooth transfer of profits, dividends and interest, amortization of principal, and proceeds of the sale of shares to residents or from the liquidation of investments.

Direct foreign investments (including joint ventures) in Eritrea are governed by the provisions of the Investment Code (Proclamation No. 59/1994). Foreign direct investment is permitted in all sectors, except that domestic retail and wholesale trade, and import and commission agencies are open to foreign investors only when Eritrea has a bilateral agreement of reciprocity with the country of the investor; the latter condition may be waived by the Government. Under the foreign exchange regulations submitted to the Government, foreign investors may freely remit proceeds received from liquidation of investment and/or expansion, and payments received from the sale or transfer of shares. Petroleum contractors and subcontractors may freely transfer abroad funds accruing from petroleum operations and pay subcontractors and expatriate staff abroad.

Foreign borrowing by residents in Eritrea has to be registered with the BE. Authorized banks are permitted to purchase and hold foreign bank notes up to the equivalent of US$500,000. Amounts exceeding this limit must be surrendered to the BE or deposited in the correspondent accounts abroad. With the approval of the BE, authorized banks may borrow abroad or overdraw their correspondent accounts abroad. They may acquire securities under similar conditions.

11. Gold

Residents may own gold jewelry without restrictions. Beyond this, ownership or possession of gold or other precious metals or ores requires the authorization of the Ministry of Energy, Mines and Water Resources.

Appendix III

Table I.

Eritrea: Gross Domestic Product by Sector, 1992–95 1/

(In millions of birr)

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Source: Staff estimates based on information provided by the Eritrean authorities.

Provisional estimates.

Estimated at 50 percent of private remittances.

Table II.

Eritrea: Gross Domestic Product, 1992–95 1/

(Annual percentage change)

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Source: Staff estimates based on information provided by the Eritrean authorities.

Provisional estimates.

Table III.

Eritrea: Sectoral Composition of Gross Domestic Product at Current Factor Cost, 1992–95 1/

(In percent of GDP)

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Source: Staff estimates based on information provided by the Eritrean authorities.

Provisional estimates.

Table IV.

Eritrea: Agricultural Production, 1993–95 1/

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Sources: Ministry of Agriculture; and staff estimates.

Preliminary estimates.

Includes mainly horsebeans, groundnuts, and lentils.

Table V.

Eritrea: Regional Structure of the Agricultural Sector, 1994

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Source: Ministry of Agriculture.

Includes barley, wheal, peas, sesame, and maize.

Includes Asmara.

Table VI.

Eritrea: Gross Value of Industrial Production, 1993–95

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Source: Ministry of Industry and Trade.
Table VII.

Eritrea: Food Grain Position, 1994–96

(In metric tons)

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Sources: Ministry of Agriculture; and staff estimates.

Official estimate of consumption requirement in 1994, thereafter assumed to increase in line with the estimated population growth rate of 3 percent.

Projected grain deficit in 19% could be met from higher levels of food aid and/or commercial imports.

Table VIII.

Eritrea: Assab Refinery Production and Purchase by Eritrea, 1993–95

(Quantity in metric tons; value in millions of birr; ratio in percent)

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Source: Petroleum Corporation of Eritrea.
Table IX.

Eritrea: Ex Refinery and Retail Prices of Petroleum Products, 1992–95

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Source: Petroleum Corporation of Eritrea.
Table X.

Eritrea: Asmara Price Index, 1992–95 1/

“Sorry–the quality of the source document is insufficient to render this image into text.”

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Sources: Ministry of Industry and trade, and staff estimates

Index has been constructed using estimated weights Indices for subgroups have been constructed by using simple authmeta averages.

Table XI.

Eritrea: Annual Catch and Sales of Fish, 1994–90 1/

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Source: Ministry of Marine Resources.

Industrial or commercial fishing is almost exclusively for export.

Table XII.

Eritrea: Investment Projects by Sector, 1993–95

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Source: Eritrean Investment Center.
Table XIII.

Eritrea: Summary of Government Operations, 1992–95

(In millions of birr)

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Sources: Ministry of Finance: and staff estimates and projections.

In 1995, including about Br 50 million of special revenue, i.e., deductions from gross retroactive wage payments to ex–combatants.

In 1995, including payments to martyrs' families (Br 296 million), civil service retrenchment (Br 51 million), and retroactive salary payments to ex–combatants working for the Government (Br 70 million).

In 1992 and 1993, only food aid; in 1994 and beyond, also including other externally financed recurrent expenditures.

Table XIV.

Eritrea: Selected Indicators of Government Operations, 1992–95

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Sources: Ministry of Finance: and staff estimates and projections.
Table XV.

Eritrea: Government Revenues and Grants, 1992–95

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Sources: Ministry of Finance; and staff estimates.

Agricultural income tax and land use fee: taxes on dividends and rental income

Including stamp duties.

Including stamp duties, license fees, and penalty payments and “unspecified revenues.”

Includes voluntary contributions for rehabilitation purposes.

In 1994, proceeds from sale of Nyala Hotel.

In 1992 and 1993, only food aid; in 1994 and beyond, also including other externally financed expenditure.

Table XVI.

Eritrea: Government Current Expenditure by Economic Classification, 1992–95

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Sources: Ministry of Finance; and staff estimates.

In 1993 and 1994, excluding costs for reintegration of ex–combatants.

In 1992 and 1993, only food aid.

In 1995, including payments to martyrs' families (Br 2% million), civil service retrenchment (Br 51 million), and retroactive salary payments to ex–combatants working for the Government (Br 70 million).

Table XVII.

Eritrea: Government Current Expenditure by Functional Classification, 1992–95

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Sources: Ministry of Finance; and staff estimates.

Including subsistence costs for ex–combatants, in 1994, also including National Service Program (Br 128.7 million)

Including President's Office. Ministry of Justice. Auditor General, and CERA.

Including Ministry of Marine Resources.

Including Standards Office and Land Commission.

Including Ministry of Information and Culture.

In 1993 and 1994, excluding costs for reintegration of ex-combatants.

In 1992 and 1993, only food aid.

In 1994, including reclassification adjustment (-23.8 million bur) from recurrent to capital expenditures.

Table XVIII.

Eritrea: Government Capital Expenditure, 1992–95

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Sources: Ministry of Finance; and staff estimates.

Including Ministry of Marine Resources.

Including Ministry of Information and Culture.

Table XIX.

Eritrea: Provisional Monetary Survey, 1991–95 1/

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Sources: Eritrean authorities: and staff estimates.

The consolidated statement is based on the balance sheets of the Bank of Eritrea (BE), the Commercial Bank of Eritrea (CBER), and from December 1994, of the Housing Bank of Eritrea (HBE), which has universal bank features and plans to request a commercial banking license in the near future.