The Dysfunctional Eritrean Economy according to the Wiki Leaks American Embassy report from Asmara

I invested my Labor Day free hours in reading the latest extensive Wiki Leaks of the diplomatic reports from the American Embassy in Asmara. There is much to digests – it will take an ordainment amount of time to comment on most of the released diplomatic cables. I decided to focus my readings on the cables that were dealing with economic issues bedeviling the Eritrean regime.

The political bankruptcy of the regime has become so ordinary and universally recognized the detailed documentation presented by the cables gives us a chance to sneak a pick on how professional diplomatic reporting is done but it does not add any extra value to those already aware of the fact that the authoritarian regime is a political failure: a political supernova in the making.   

Our struggle is so focused on the political side, rarely do we see Eritreans discussing the nitty-gritty of the economic challenge- the total mismanagement of the Eritrean economy, by the ruling regime, beyond the generic condemnation. The frequent visit of the Eritrean president to Barka followed by the usual photo of the president in untucked shirt standing in front of a dam has become the symbol of a turbo-economy catapulting to pass Singapore’s growth rate within a year according to 03 agents of the regime. The truth is 180 degrees different than the word smart- content poor broadcast coming out of the vulgar media from Asmara and its diaspora agents.

The command (Marxist) economy under the hand of few trusted unaccountable agents of the President is tattering to collapse. You can’t fool economic principles with acidic remarks.. You can’t turn slogans into foreign currency. Even with the “expropriated” youth labor you can’t defeat the cardinal rules of economic growth. You can’t build a functioning economy without rules of law and without integrating yourself with the global economy and playing by the rule. Even then it is not easy.

Of all the cables I read I wanted to share the one entitled: Investment Climate Statement- 2010. The summary presented by Ambassador MCMULLEN is a concise loaded observation:

“Eritrea remains a strict command economy, with government activities crowding out most private investment.  Investors in Eritrea face significant risks, including:  lack of transparency in the regulatory process, severe limits on the possession and exchange of foreign currency, lack of objective dispute settlement mechanisms, difficulty in obtaining licenses, large-scale use of conscripted labor, and expropriation of private assets.  The Government of the State of Eritrea (GSE) uses the judicial system as a coercive tool to promote its own interests, making the courts a biased arbiter in legal disputes.  These risks discourage domestic private investment not conducted under the GSE's auspices”.

The summarized economic report once again confirms, with more specific information, the fact that Isaias and his clique are playing fast- and- loose with future of the country. They have waged a concentrated assault on the entrepreneurial class and destroyed all businesses that do not submit to the ruling party co-ownership. They own the land, labor, capital and political system: The reincarnation of a Marxist Albania in the Horn of Africa. When this crap does not work the strategy is to blame the world and the world wide jealous elements who are trying to stop the spectacular Eritrean economic achievement.

Eritrea’e enemies are inside the country. Fortunately those who can bring the fundamental solution to this madness are also inside the country. For the sake of the nation and the people I hope they find the will and strength to do what has to be done and salvage the country from the hedonistic Marxist Mafias who have no ethics, redeeming values or spiritual core.

If the President of Eritrea attends the upcoming UN yearly meeting( there is rumor that he might) his speech should be very brief: He should say something like this- No need for a long constructive speech. Let habit takeover and do what comes easy:

“ Enemies and Friends, Our economy is the fastest growing economy in the world. You are all jealous of us. There is no democracy in the world. It is all lies. Lies! Lies. It is all fabrication. Where is the evidence? Did Langley give you these questions? There is no hunger in Eritrea. It is all final and binding. We are not isolated. There are no political prisoners in Eritrea. They are going on a picnic. America is our number one enemy. Before I leave the platform  I want you to know that Brother Kaddafi and Hogo Chavez have authorized me to speak on their behalf as well. Aytezarebunna”. Deafening silence.   

Good reading.                   

Viewing cable 10ASMARA9, INVESTMENT CLIMATE STATEMENT 2010

Created: 2010-01-13    

Released: 2011-08-30    

Classification: UNCLASSIFIED

Origin: Embassy Asmara

Openness to Foreign Investment

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2. Eritrea remains a strict command economy, with government activities crowding out most private investment.  Investors in Eritrea face significant risks, including:  lack of transparency in the regulatory process, severe limits on the possession and exchange of foreign currency, lack of objective dispute settlement mechanisms, difficulty in obtaining licenses, large-scale use of conscripted labor, and expropriation of private assets.  The Government of the State of Eritrea (GSE) uses the judicial system as a coercive tool to promote its own interests, making the courts a biased arbiter in legal disputes.  These risks discourage domestic private investment not conducted under the GSE's auspices.

3. The exception to this trend appears to be the mining sector. Fourteen small and mid-size mining and exploration companies have signed license agreements with the GSE, many of them have already set up offices and begun exploring.  Representatives from the mining companies claim companies receives preferential treatment, including blanket travel permits, personal security details in the field, liberal import and export agreements, and easy access to government officials.

4. The World Bank's 2010 "Doing Business" ranking of 181 countries rates Eritrea in the bottom 10 in the following categories:  overall ease of doing business (175), starting a business (181), obtaining credit (177), dealing with construction permits (183), and closing a business (183).  Eritrea was also near the bottom for registering property (171) and trading across borders (164).  Eritrea was ranked in the upper half in only two of a possible eleven categories: employing workers (86) and enforcing contracts (48).

5. The Heritage Foundation's 2009 Index of Economic Freedom labeled the Eritrean economy as "repressed," ranking it 175 out of 179 countries, with an overall score of 38.5.  The index also ranks Eritrea 45th out of 46 countries in the region.  Eritrea scored far below the world average in the following categories: business freedom (18.3; world avg 64.3), government size (9.9; world avg 65.0), investment freedom (10.0; world avg 48.8), financial freedom (20; world avg 49.1), property rights (10.0; world avg 44.0), and freedom from corruption (28.0, world avg 40.3). Eritrea did score above the world average, however, for labor freedom (73.9; world avg 61.3) and fiscal freedom (86.4; world avg 74.9).

6. The Transparency International's 2009 Corruption Index ranked Eritrea 126 out of 180 countries for corruption perception, "the degree of corruption as seen by businesspeople and country analysts."

7. The Millennium Challenge Corporation's 2009 scorecard ranked Eritrea unfavorably in the following categories: government effectiveness (24%), rule of law (29%), fiscal policy (1%), regulatory quality (7%), business start up (28%), and natural resource management (13%).  Eritrea scored high marks in the following categories: control of corruption (72%), trade policy (54%), and land rights and access (86%).

8. The GSE enacted a number of commercial laws purporting to allow for private enterprise, but these laws are not consistently implemented.  The Foreign Financed Special Investments (FFSI) Proclamation issued in April 2007 established a framework for investments greater than $20 million.  The proclamation's stated objectives are 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 establishes a more general framework for investment. This proclamation's stated objectives are to encourage investment, expand exports, expand employment, and encourage the use of new technology.  It also provides tax incentives for investors, as well as a framework for dispute resolution.

9. Proclamation 114 issued in August 2001 gives the Ministry of Trade and Industry the authority to negotiate the sale of public enterprises, but details of the process are unspecified.  In practice, investors require approval from the Ministry regulating the specific project before investing, but there may also be other unpublished approval requirements.  The Office of the President must approve all large-scale projects.  The GSE has selectively and narrowly courted foreign investors to explore under-utilized resources, primarily in mineral extraction, but also in energy, fisheries, and tourism.  Despite the investment proclamation's assurance against expropriation, the GSE has nationalized many foreign-owned businesses and other assets.

 
Conversion and Transfer policies

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10. Proclamation 115 issued in August 2001 allows for unrestricted investment and repatriation of foreign currency.  In addition, Legal Notice 44 issued in July 2000 states that the Bank of Eritrea is responsible for all foreign exchange, and no other entity can transfer funds into or out of Eritrea.  The Bank of Eritrea has maintained an artificial Nakfa/dollar exchange rate at 15:1, but the black market exchange rate may be as high as 40:1.  The GSE has extremely low foreign currency reserves and requires using a government-owned monopoly for all foreign exchange.  Foreign business owners are unable to convert locally generated profits to hard currency.  For example, the GSE notified Lufthansa in July 2001 that it would no longer be allowed to convert profits from nakfa to euros.

 
Expropriation and Compensation

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11. The GSE has shown a pattern over many years of expropriating businesses without notice, explanation, compensation, or recourse. For example, 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.

 
Dispute Settlement

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12. Eritrea does not have neutral dispute mechanisms, although there are several unimplemented laws on the books regarding dispute settlement.  Article 15 of Investment Proclamation No. 59/1994 provides a framework for investment dispute settlement and pledges the GSE to enter into bilateral and multilateral protection treaties.  Foreign investors also have the option to resolve disputes through mechanisms specifically stipulated in investment agreements with the GSE, or 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, and there are no known cases in which the GSE accepted international arbitration for business disputes.

 
Performance Requirements and Incentives

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13. Although laws and regulations provide for investment incentives, in reality the GSE provides them only rarely and 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 due to the lack of businesses operating in Eritrea, Post is unaware of any businesses receiving such relief.  The GSE restricts travel within Eritrea, requiring explicit written permission for foreigners with a minimum ten-day advance notice. The GSE frequently denies foreigners permission to travel, often by not replying to the application, and explanations are rarely given. Eritrea also has an opaque visa regime, and foreigners of many nationalities have reported difficulties obtaining entrance visas, including lengthy and unexplained delays.  Eritrea is not a member of the WTO.

 
Right to Private Ownership and Establishment

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14. The FFSI 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 the remittance of net profits and has guarantees against nationalization or confiscation, except for public purposes and with due process of law.  Investors should be aware, however, that most medium-to-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 those owned by the GSE or PFDJ in operation.

 
Protection of Property Rights

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15. 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

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16. Eritrea has not convened a parliament for over a decade, and all laws are issued by proclamation from the executive branch.  The GSE also does not operate a clearly organized regulatory system; what procedures are in place appear to be of haphazard creation and irregularly enforced.  The GSE often does not announce new regulations prior to implementation, and they are often unequal in application and subject to sudden change.  In addition, the GSE neither publishes accounts of its decision making process nor offers a public comment period for proposed laws or regulations.  Local business owners report extensive difficulties with obtaining import and export licenses, customs clearances, telephone and mobile phone lines, land leases, and work permits.  The central and regional governments often do not coordinate policies and procedures, adding to the opacity of conducting business outside of Asmara.  The International Monetary Fund (IMF) reported investor confidence is undermined by the state's growing role in commercial activities and the lack of a transparent regulatory environment.

 
Efficient Capital Markets and Portfolio Investment

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17. Eritrea has neither a stock exchange nor a stock market, and the state owns all financial institutions.  Although the IMF states that the banks have a high proportion of non-performing loans, the banks 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.

 
Political Violence

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18. The threat from domestic insurrection, civil disturbances, and political violence is low, although there are reports of opposition movements operating in remote areas.  Eritrea's borders with Ethiopia and Djibouti are tense due to unresolved border issues. The GSE uses the unsettled border dispute with Ethiopia to justify drafting large numbers of Eritreans into national and military service for unlimited terms of service, as well as extensive restrictions on country's economic and political freedoms.

 
Corruption

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19. Eritrea has historically been known as a country with low corruption, but there are indications that corruption does exist. Civil court cases are often directly influenced by the Office of the President, or by former fighters obtaining decisions in their favor (fighters, soldiers from the struggle for independence, have high social standing and considerable influence within the GSE). High ranking military officials have also been known to confiscate houses and other property. The GSE controls all foreign exchange, making it virtually the only legal source of imports and creating illicit profit opportunities for smugglers (who are often high-ranking Eritrean military officers).  Eritrea is not known to be a party to any international anti-corruption agreements.

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