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2013 Investment Climate Statement - Eritrea


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
April 2013
Report
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Openness To, and Restrictions Upon, Foreign Investment

The Government of the State of Eritrea (GSE) maintains a command economy, with government activities predominating over private enterprise. Many key firms are party- or military-owned. In the course of 2012, the GSE began encouraging some types of international investment, thus ending, as a matter of doctrine, years of adherence to self-imposed isolation and strict self-reliance. The government is seeking to privatize some state-owned firms, but at present Eritrean dual nationals are the main targets of investment encouragement. The GSE sponsored two investment conferences for diaspora returnees in the course of 2012. Eritrea’s national development priorities are clearly spelled out in policy statements related to infrastructure, human resources, and food security. Still, the government has not implemented specific measures that would truly reform the command aspects of its economy or spur broad-based growth and market development, nor has it taken steps to loosen business practices, correct macroeconomic imbalances or address foreign currency shortages.

Problems with consistent government commitment to structural reform continue to hamper Eritrea’s economic prospects. The country performs poorly with regard to public finance management. Its legal and regulatory frameworks are underdeveloped, and its judicial system is not sufficiently experienced or independent to protect the sanctity of contracts. Weak enforcement of property rights and uneven rule of law have driven many people into informal sectors. The inefficient public sector remains the largest source of paid employment. (Eighty per cent of the population is engaged in subsistence agriculture.) Monetary stability is fragile, largely reflecting excessive money creation to fund chronic fiscal deficits.

Eritrea’s labor pool is well qualified compared with that in neighboring states, and Eritrea is making progress on Millennium Development Goals related to public health and education. But the country’s mandatory national service program, and tendency of the GSE to encourage use of persons performing national service in commercial enterprises, may leave businesses open to charges of relying on conscripts as a labor force. Overall, investors in Eritrea face risks including lack of transparency in the regulatory process, limits on possession and exchange of foreign currency, lack of thoroughgoing dispute settlement mechanisms, difficulty in obtaining licenses, potential expropriation of private assets, and infrastructure challenges such as high fuel prices and inconsistent provision of electricity and water.

The nation’s most successful economic sector is mining. Through collaboration with a number of reputable international concerns, the nation is developing an industry that provides not only direct economic benefits but also skill enhancement and supply chain expansion. 2011, the first year that mining revenues began to accrue, was a watershed for the Eritrean economy, with growth estimated by the African Development Bank (AfDB) at 8.2 per cent, compared with 2.2 per cent in 2010. At least 24 small and mid-size mining companies have signed license agreements with the GSE; many have set up offices and begun exploring. Canada-based Nevsun Resources, Inc., through the Bisha Mining Share Company, was the first firm to start producing gold (near the town of Barentu in January 2011). Australia-based Chalice Gold Mines signed an agreement with the GSE in November 2011 to commence mining for gold at Zara; in September 2012 Chalice sold its assets to China’s SFECO Group for US$ 78 million, plus a differed payment of US$ 2 million upon commencement of commercial production at the Koka Mine, part of the Zara project, in 2013. Representatives of mining companies generally receive preferential treatment from the GSE, including blanket travel approvals, personal security in the field, liberal import and export agreements, and easy access to government officials. In large part thanks to continued minerals productivity, the GSE forecasts GDP growth levels between seven and ten per cent in the 2012-2015 period.

The GSE has courted diaspora and other foreign investors in additional sectors including energy, fisheries and tourism, although these areas remain underdeveloped at present. Firms slated for privatization include the electric and telephone companies and the state-run soft-drink and beer bottling concession.

The World Bank's 2013 "Ease of Doing Business" ranking for Eritrea, out of 185 economies in total, is 182 overall. Eritrea’s specific rankings according to the index are as follows:

Starting a Business

183

Dealing with Construction Permits

185

Getting Electricity

93

Registering Property

181

Getting Credit

180

Protecting Investors

117

Paying Taxes

146

Trading Across Borders

165

Enforcing Contracts

51

Resolving Insolvency

185

The Heritage Foundation's 2012 Index of Economic Freedom terms the Eritrean economy "repressed," assigning it a ranking of 175 out of 179 countries, with an overall score of 36.2. This score is 0.5 point lower than that of 2011, reflecting declines in fiscal and labor freedom. Heritage ranks Eritrea 45 out of 46 countries in the sub-Sahara Africa region. The nation scored far below world averages in the following categories:

Trade Freedom

69.1

Property Rights

10

Monetary Freedom

52.9

Labor Freedom

63.2

Investment Freedom

0

Government Spending

46.8

Freedom from Corruption

26

Fiscal Freedom

57

Financial Freedom

20

Business Freedom

17.1

Transparency International's 2011 Corruption Index ranked Eritrea 134 out of 182 countries for corruption perception, "the degree to which corruption is perceived to exist among public officials and politicians by business people and country analysts."

In a policy address on New Year’s Day 2013, Eritrea’s President, Isaias Afwerki, specifically rejected the reliability of international economic indices, asserting that real indicators of economic growth ought to comprise measures of assets, resources, creativity and innovation, administration and management, economic interrelationships and internal stability. The President further claimed that standards of living, quality of life and sustainability had not been measured in reports produced by international organizations analyzing Eritrea’s economic wellbeing. The nation’s ratings were based on speculation, he argued, aimed at serving vested political interests.

Over the years, the GSE has enacted a number of commercial laws designed to facilitate conduct of private enterprise, but these laws are rudimentary and not consistently implemented. The Foreign Financed Special Investments (FFSI) Proclamation of April 2007 established a framework for investments greater than US$ 20 million. The proclamation aims to achieve self-sustaining growth, facilitate the rapid expansion of exports, expand employment, and promote and protect foreign investment. The Eritrean Investment Proclamation issued in 1994 established a more general framework for investment. This document’s stated objectives were to encourage investment, expand exports, expand employment, and encourage the use of new technology. It also provided tax incentives for investors as well as a limited framework for dispute resolution. Proclamation 114 issued in 2001 gave the Ministry of Trade and Industry authority to negotiate the sale of public enterprises, but in practice, other ad hoc approval requirements, particularly for large-scale projects, may be levied of new investors. President Isaias, in his New Year’s interview at the beginning of 2013, stressed that his government was striving to lay necessary legal groundwork for expanded investment in many sectors, pointing out that weaknesses tended to characterize implementation more than policy. He emphasized his commitment to enhancing investor awareness, which he said would encourage development of a more detailed and viable framework to protect investors.

Low Income Countries & Indicator Scores FY 2012:

Measure

Year

Index/Ranking

TI Corruption Index

2011

2.5 out of 10

(134 out of 182 countries)

Heritage Economic Freedom

2012

Overall score of 36.2

175 out of 179 countries

World Bank Doing Business

2012

182 Out of 185 economies

MCC Gov’t Effectiveness

2013

-0.55 (-2.5 to +2.5, +2.5 = best)

MCC Rule of Law

2013

-0.37 (-2.5 to +2.5, +2.5 = best)

MCC Control of Corruption

2013

0.32 (-2.5 to +2.5, +2.5 = best)

MCC Fiscal Policy

2013

-15.67

MCC Trade Policy

2013

69.1

MCC Regulatory Quality

2013

-1.46 (-2.5 to +2.5, +2.5 = best)

MCC Business Start Up

2013

0.849

MCC Land Rights Access

2013

0.848

MCC Natural Resource Protection

2013

31.28 (0 – 100, 100 =best)

MCC Access to Credit

2013

6

MCC Inflation

2013

13.34

Note: MCC is Millennium Challenge Corporation.

Topic Ranking

DB 2013 Rank

DB 2012 Rank

Change in Rank

Starting a Business

183

183

No change

Dealing with Construction Permits

185

185

No change

Getting Electricity

93

93

No change

Registering Property

181

180

-1

Getting Credit

180

180

No Change

Protecting Investors

117

114

-3

Paying Taxes

146

142

-4

Trading Across borders

165

166

1

Enforcing Contracts

51

51

No Change

Resolving Insolvency

185

185

No Change

Conversion and Transfer Policies

The GSE places limits on possession and exchange of foreign currency and lacks transparency in conversion and transfer policies. It is generally illegal for Eritrean citizens to hold or exchange foreign currency. At the beginning of 2013, black market exchange centers valued the local currency (nakfa) at 45 to one USD, whereas the legal rate – legal transactions could only be performed by foreigners in a few official exchange locations – was 15 nakfa to one USD. Foreign companies have sometimes found themselves unable to convert nakfa into foreign currencies: for example, foreign air carriers say they have hundreds of millions of unconvertible nakfa in local banks. In addition, companies have reported that signed contracts allowing for payment against certain services in nakfa have been violated, with the GSE insisting on payment in U.S. dollars or other hard currency. (A hard currency shortage motivates the GSE to seek payment in U.S. dollars but provide income in nakfa.)

The Central Bank of Eritrea (CBE) was established under Proclamation 32/1993 and later modified under Proclamation 93/1997. The Proclamation pertaining to foreign exchange bureaus was introduced in 1998. The CBE is the only body authorized to maintain and account for foreign currency reserves and mange foreign exchange activities. Despite this, quasi-governmental exchange services charged with processing tax payments of diaspora Eritreans and gifts from those abroad to relatives in country (Himbol and Ericomerce) have placed some incoming foreign currency reserves in a legal no man’s land, without accountability or transparency.

Expropriation and Compensation

The GSE has a history of expropriating profitable businesses without notice, explanation, compensation, or recourse. In October 2008 the GSE abruptly terminated the Intercontinental Hotel Corporation's management contract for a government-owned hotel in Asmara. The hotel later reopened as a GSE-operated establishment. Legal provisions for such expropriations, other than eminent domain for public purposes, do not exist, and the GSE liberally interprets the idea of public purpose.

Article 13 of Investment Proclamation No. 59/1994 requires the government to compensate investors who have been denied rights to property if the denial is related to government action. Compensation, if and when it happens, must legally involve the concepts of: (1) full and fair compensation; and (2) due process of law. In practice, compensation is seldom paid under any conditions.

Dispute Settlement

Eritrea does not have thoroughgoing or neutral dispute mechanisms, although there are several laws regarding dispute settlement. Article 15 of Investment Proclamation No. 59/1994 provides a framework for investment dispute settlement and pledges that the GSE will enter into bilateral and multilateral protection treaties. Foreign investors sometimes report that they are treated in a discriminatory manner by local courts, and that in comparison with citizens of the host nation, they receive inefficient judicial services. Theoretically, foreign investors also have the option to resolve disputes through mechanisms created by multilateral treaties such as International Center for Settlement of Investment Disputes (ICSID). Eritrea has neither ratified nor signed the ISCID Convention, although it has said it intends to do so, and it has joined regional economic and financial institutions such as the Multilateral Investment Guarantee Agency (MIGA). There are currently no known cases in which the GSE has accepted international arbitration for business disputes.

Performance Requirements/Incentives

Although laws and regulations provide for investment incentives, in reality the GSE offers these relatively rarely and chiefly on an ad hoc basis. The Customs Proclamation of 2000, Part X, provides for relief from duties and taxes for imports receiving value-added processing prior to export, but whether any businesses have received such relief is not clear. The GSE restricts travel within Eritrea, requiring explicit written permission for foreigners with a minimum ten-day advance notice. (The GSE does not always reply to travel requests.) Eritrea also has a relatively opaque visa regime, and foreigners of many nationalities have reported difficulties obtaining entrance visas. Eritrea is not a member of the WTO.

Right to Private Ownership and Establishment

The Foreign Financed Special Investments (FFSI) Proclamation specifically limits foreign investment in financial services, domestic wholesale trade, domestic retail trade, and commission agencies, but permits investment in other sectors. The FFSI makes allowances for remittance of net profits and has guarantees against nationalization or confiscation, except for public purposes and with due process of law. This said, most medium and large businesses in Eritrea are controlled by either the GSE or the ruling party, the People's Front for Democracy and Justice (PFDJ). In 2005 the GSE suspended all private construction activity, leaving only state-run firms in operation for this purpose.

Protection of Property Rights

Eritrea's civil law protects private property, but the GSE has a history of expropriating houses, businesses, and other private property without notice, explanation or compensation. Trademarks, patents, and copyrights are available through a procedure involving a public advertisement in the local press, but Eritrea is not a party to any international conventions on intellectual property rights.

Transparency of the Regulatory System

Eritrea has not convened a parliament for over a decade, and all laws are issued by proclamation from the executive branch. The nation’s constitution was ratified in 1997 but has not yet been implemented. The GSE does not operate a clearly-organized regulatory system; procedures appear to be of haphazard creation, with irregular enforcement. The GSE does not always announce new regulations prior to implementation, and they may be subject to abrupt change. The GSE neither publishes accounts of its decision-making process nor offers a public comment period for proposed laws or regulations. Asmara’s only law school reopened in the fall of 2010 after being closed for three years; the first class graduated in 2012. There are new training programs for paralegals under way, but no persons have yet graduated.

Local business owners report difficulties with obtaining import and export licenses, customs clearances, telephone and mobile phone lines, land leases, and work permits. Central and regional governments may not coordinate policies or procedures, adding to the opacity of conducting business outside of Asmara. The GSE has no current program with the IMF, and is in arrears to the World Bank, which suspended disbursement of funds because of nonpayment of outstanding obligations and closed shop in 2011.

Eritrea ranks 134 of 183 countries in Transparency International’s 2011 Corruption Perception Index.

Efficient Capital Markets and Portfolio Investment

Eritrea has neither a stock exchange nor a stock market, and the state currently owns all financial institutions. Banks appear to have a high proportion of non-performing loans, but some financial institutions may be profitable due to income from foreign currency transactions. The GSE's complete control of foreign exchange makes repatriation of profits difficult or impossible.

Competition from State-Owned Enterprises (SOEs)

The GSE claims that the border conflict with Ethiopia at the end of the 1990s interfered with Eritrea’s goal of making the transition from a centrally-planned economy to a market-based economy through privatization of formerly state-owned enterprises and liberalization of investment and trade. In the course of 2012, a number of state-owned firms were put up for privatization, but shares were initially offered only to diaspora returnees.

At independence, part of Eritrea’s economic reform was to create a development strategy based on self-reliance as well as integration into the world market. The government began to privatize state-owned enterprises, but ceased doing so for a period out of stated desire to balance out regional disparities. The GSE continues to pressure large private enterprises with high taxes and import duties.

Foreign investment is discouraged in some sectors. Following the loss of Ethiopia as a trading partner as a result of the border war at the end of the 1990s, industrial production decreased due to a shortage of raw material, power and fuel affecting both private and government-owned enterprises. The military and PFDJ sometimes used persons performing national service as a low-cost labor force, disrupting free competition in the labor market.

Corporate Social Responsibility (CSR)

There is awareness and concern for corporate social responsibility among some private enterprises operating in Eritrea. Entities using national service members as labor are coming under increasing pressure from international partners and NGOs to stop the practice. There are no known entities that adhere to OECD Guidelines for Multinational Enterprises.

Political Violence

The government suppresses civil unrest, political violence, and actions seen as threatening the stability of the regime, although some remote areas of the nation are not entirely under GSE control. Eritrea's regions neighboring Ethiopia and Djibouti are tense due to unresolved border issues, and extremists operate on the Sudan side of that border.

Corruption

Eritrea has historically suffered less from corruption than many other nations on the African continent, but there are indications that corruption does exist. Some persons claim that civil court cases may be influenced by the Office of the President, or that decisions are rendered based on political factors. Military officials have in the past confiscated houses and other property of private individuals. The GSE controls all foreign exchange, virtually the only legal source of imports, creating illicit profit opportunities for smugglers. Eritrea is not yet a party to international anti-corruption agreements. The GSE does not publish a national budget or national accounts.

Unstable political conditions, strict regulations regarding imports, and lack of consistency regarding granting of exit visas have encouraged bribery and money laundering, specifically with respect to those responsible for customs and immigration.

Bilateral Investment Agreements

Eritrea's only known bilateral investment agreement is with Italy, although formalized arrangements may exist with Qatar, the UAE, and/or China.

Total number of Bilateral Investment Agreements concluded as of 1 June 2012:

Partner

Date of Signature

Date of Entry into Force

Italy

February 6, 1996

July 14, 2003

Netherlands

December 2, 2003

 

Qatar

August 7, 2000

 

Uganda

June 30, 2001

 

OPIC and Other Investment Insurance Programs

OPIC programs do not currently operate in Eritrea. Due to the poor state of bilateral relations with the United States and lack of bilateral trade, the GSE has little interest in such arrangements.

Labor

Technical experts, highly skilled professionals, and managers are in relatively short supply. Many highly-skilled workers have left Eritrea due to limited economic prospects domestically and to internal political conditions. Eritrea is not a signatory to ILO agreements, although it is working with the organization to bring its labor protections into conformity with ILO standards. As much as one-third of Eritrea's workforce may be performing national service; for some, there is no defined end date or job mobility, and compensation is limited. National service workers generally are paid 500-700 nakfa ($34-$47 USD at the official exchange rate) per month, a sum that President Isaias acknowledged was inadequate when he addressed the subject in his New Year’s address at the beginning of 2013. The government sets most wages for other paid professionals, with a published minimum wage of 1000 (US$ 67) nakfa per month. (This minimum is not always observed in practice.)

Foreign Trade Zones/Free Ports

The GSE constructed a free trade zone in the port city of Massawa in 2001, and promised to issue the first licenses in 2006, but few foreign companies operate in the zone. Of those expressing an interest, most are Chinese. Proclamation 115 issued in August 2001 declares that in the zone there will be: 1) no taxes on income, profits, or dividends; 2) no customs duties on imports; 3) no currency convertibility restrictions; 4) no minimum investment; 5) 100 percent foreign ownership; and 6) 100 percent repatriation on profits and capital. The majority of Eritrea’s imports come from Sudan; smuggling of consumer goods occurs regularly across that border.

Foreign Direct Investment Statistics

Data on foreign direct investment (FDI) is not available from the Bank of Eritrea. Although the Investment Proclamation of 1994 governs all foreign investment, it contains no specific definition of FDI. The UN Conference on Trade and Development’s 2011 FDI report states that Eritrea had US$ 56 million in FDI inward flows and US$ 438 million in FDI stock (accumulated inflows) in 2010, the most recent year for which data is available. No data is available on outflows. FDI in the mining sector increased substantially in 2009, with Nevsun's Bisha mining project having begun production in 2011.



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