By Magidu Nyende and Luka Okumu,
EVIDENCE-based assessment of fiscal policy in Eritrea is severely constrained by lack of transparency and availability of basic information on fiscal operations and management, including, of course, the budget.
Estimates by various sources, including the IMF, however, indicate a continued improvement in the overall fiscal deficit (after grants) from about 13.2% of GDP in 2011 to an estimated 10.3% in 2013, reflecting improved tax collection from the 2012 level, lower expenditure on safety nets and a contraction in public investment (see table below).
The government argue that the fiscal balance will improve further with continued inflows of the proceeds from the Bisha mine.
The fiscal deficits, however, need to be brought further under control. The Eritrean government has been adhering to a tight budget for several years by reducing expenditure and prioritizing investments, especially under the development budget. It has made respectable efforts to streamline expenditure, in particular by reducing defence outlays and by focusing increasingly on improving food security, human-capital development and infrastructure investments.
As a share of GDP, total expenditure and net lending was estimated at 28.6% in 2013, compared to 56.5% in 2005. The expenditure projection for 2014 puts the figure at 29.5%, which may be boosted, however, by increased revenues from the mining sector.
Total revenue including taxes, non-tax and grants fell from 32.3% of GDP in 2005 to an estimated 18.4% in 2013. The decline in overall revenue with respect to the period from 2005 to 2010 is largely attributed to a reduction in grants and shrinkage in economic activities.
Tax revenue is projected to increase to 11.2% of GDP in 2014 from 10.7% in 2013. The government is optimistic about the impact of the mining investments as they present new opportunities for Eritrea to generate revenue. Fiscal inflows should however be invested in sectors considered to have the greatest impact on the population’s living conditions and the economy as a whole.
Remittances and financial inflows from a 2% “diaspora tax” were an important source of revenue before declining drastically to less than 10% of GDP in 2012 as countries began to implement the 2011 UN sanctions and scrutinize the methods used to collect this tax.
The decline in financial inflows was also caused by the suspension of imports of consumer goods, which authorities considered to be misuse of the foreign currency required for critical imports. It should be noted that imports of goods such as fuel, food, major building materials, etc. are made with direct involvement of the government.
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Magidu Nyende and Luka Okumu are authors of the 2014 African Economic Outlook – Eritrea Report that was sponsored by AfDB, OECD and UNDP
