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Country Commercial Guides FY 2000: Eritrea Report prepared by U.S. Embassy Asmara, released July 1999 Note*

CHAPTER II: ECONOMIC TRENDS AND OUTLOOK

MAJOR TRENDS AND OUTLOOK:

THE GOVERNMENT PUBLISHED A MACROECONOMIC POLICY IN 1994, WHICH PLANS FOR ECONOMIC RECOVERY AND DEVELOPMENT THROUGH INVESTMENT RATHER THAN FOREIGN AID AND EXCESSIVE BORROWING. THE MACRO-POLICY STATEMENT MAY BE OBTAINED FROM THE COMMERCIAL OFFICE OF THE U.S. EMBASSY OR ERITREAN EMBASSIES ABROAD. A STRONG WORK ETHIC AND LACK OF GOVERNMENT CORRUPTION ARE INCENTIVES FOR FOREIGN COMPANIES TO CONSIDER INVESTING IN ERITREA. THE INTERNATIONAL MONETARY FUND (IMF) REPORTED IN THE "JULY 1997 SELECTED TOPICS - ERITREA" THE GDP GREW AT 6.8% IN 1995/1996 AND BY 8% IN 1997. IN 1998, ECONOMIC GROWTH DROPPED TO A MERE 3%, DUE TO THE DECLINE IN ECONOMIC ACTIVITIES CAUSED BY A BORDER WAR WITH ETHIOPIA.

IMPEDIMENTS FOR INVESTMENT INCLUDE EXTREME POVERTY, WIDESPREAD ADULT ILLITERACY, A WEAK TRANSPORTATION AND COMMUNICATIONS INFRASTRUCTURE, AS WELL AS THE NEED TO COMMIT SIGNIFICANT RESOURCES ON REPAIRING WAR DAMAGE AND ASSISTING RETURNING REFUGEES. RECENTLY THE GSE TOOK STEPS TO IMPROVE RELATIONS WITH SUDAN. THE GOVERNMENT HAS SO FAR SUCCESSFULLY NEGOTIATED SOME OF THESE HURDLES, AND BOTH THE WALL STREET JOURNAL AND THE CHRISTIAN SCIENCE MONITOR HAVE REPORTED THE COUNTRY AS BEING A STABLE AND PROMISING ENVIRONMENT FOR PRIVATE SECTOR INVESTMENT. HOWEVER, THE BORDER CONFLICT WITH ETHIOPIA HAS NOW ENTERED ITS 15TH MONTH. ALTHOUGH BOTH ERITREA AND ETHIOPIA RECENTLY AGREED TO AN OAU PEACE PROPOSAL, THE SITUATION REMAINS TENSE AND IT WILL TAKE A LONG TIME TO RESOLVE THE BORDER CONFLICT AND RETURN TO NORMAL BILATERAL RELATIONS.

PRINCIPAL GROWTH SECTORS:

--- AGRICULTURE: SOME EXPERTS PREDICT ERITREA WILL ATTAIN FOOD SELF-SUFFICIENCY WITHIN FIVE TO TEN YEARS AND WILL REQUIRE THE DEVELOPMENT OF IRRIGATION SYSTEMS TO COMPENSATE FOR IRREGULAR RAINFALL. REVIVAL AND EXPANSION OF TRADITIONAL AGRICULTURAL PRODUCTS SUCH AS BEEF, MUTTON, LEATHER, CITRUS FRUITS, AND COTTON ARE CRITICAL TO A PROSPEROUS ECONOMY. SERVICING THIS SECTOR REPRESENTS A LONG-TERM INVESTMENT OPPORTUNITY. THE AFRICAN DEVELOPMENT BANK ANNOUNCED IN 1997 THAT IT HAD APPROVED TWO LOANS TOTALING NEARLY U.S. $30 MILLION TO ERITREA - U.S. $13.9 MILLION TO BOOST THE LIVESTOCK SECTOR AND U.S. $16 MILLION TO DEVELOP THE FISHERIES SECTOR. IN 1998 ERITREA RECEIVED U.S. $10 MILLION IN SOFT LOANS FROM USDA'S PL 480 TITLE I PROGRAM. THE GSE PURCHASED AGRICULTURAL PRODUCTS, SPECIFICALLY WHEAT AND SORGHUM, FROM THE U.S. UNDER VERY FAVORABLE CREDIT TERMS: AN INITIAL INTEREST RATE OF 2%, INCREASING TO ONLY 3% OVER 30 YEARS.

--- INFRASTRUCTURE: CONSTRUCTION, COMMUNICATIONS, AND ENERGY ARE THE KEY SECTORS THAT REQUIRE IMMEDIATE INVESTMENT. PROJECT FINANCING, THOUGH INCREASING, IS THE MAJOR LIMITING FACTOR. IN 1997 THE WORLD BANK, THROUGH ITS LENDING AFFILIATE, THE INTERNATIONAL DEVELOPMENT ASSOCIATION, APPROVED A U.S. $30.3 MILLION LOAN TO REHABILITATE ERITREA'S RED SEA PORTS OF MASSAWA AND ASSAB. THE PROJECTS WILL COST A TOTAL OF U.S. $57.6 MILLION, WITH THE ITALIAN GOVERNMENT SUPPLYING U.S. $21 MILLION AND THE GSE THE REMAINING U.S. $6.3 MILLION. THESE TWO PORTS ARE VITAL TO GSE'S ECONOMY, AND WITHOUT UPGRADES THEIR VIABILITY MIGHT BE THREATENED BY COMPETITION FROM THE MORE MODERN PORT OF DJIBOUTI. DUE TO THE BORDER CONFLICT WITH ETHIOPIA THE RENOVATION OF MASSAWA PORT HAS BEEN DELAYED AND IS EXPECTED TO BEGIN IN JULY 1999. HOWEVER, THE RENOVATION OF THE PORT OF ASSAB HAS BEEN POSTPONED PENDING THE RESOLUTION OF THE ERITREAN-ETHIOPIAN BORDER DISPUTE. THE WORLD BANK HAS EARMARKED A TOTAL OF U.S. $100 MILLION IN LOANS TO THE GSE ON PROJECTS THAT WILL DEVELOP HUMAN RESOURCES AND EXPAND HEALTH SERVICES. A KOREAN FIRM COMPLETED THE CONSTRUCTION OF 1,300 APARTMENT AND TOWN-HOUSE UNITS IN ASMARA AND IS CONSTRUCTING SIMILAR FACILITIES IN THE PORT CITY OF MASSAWA. THE FIRM IS ALSO CONSTRUCTING AN 84-MEGAWATT POWER PLANT AND AN AIRPORT IN MASSAWA AND A WATER SUPPLY DAM ON THE OUTSKIRTS OF ASMARA. THE WORLD BANK'S IDA FUNDED PORT RENOVATION PROJECTS HAVE ALREADY BEEN APPROVED AND CONTRACTORS ARE BEING SELECTED. CONSTRUCTION FIRMS SHOULD BE AWARE THAT ERITREAN AUTHORITIES ARE INCREASINGLY FOCUSED ON GENERATION OF LOCAL EMPLOYMENT OPPORTUNITIES, TRANSFER OF SKILL, PROPER CONCERN FOR WORKERS' HEALTH AND SAFETY, AND MODERN CONSTRUCTION PRACTICES APPROPRIATE FOR LOCAL SEISMIC CONDITIONS.

--- MARINE RESOURCES: ERITREA'S COASTLINE, STRETCHING OVER 1,200 KILOMETERS AND EXCLUSIVE FISHING RIGHTS IN AN AREA OF 52,000 SQUARE KM IS RICH WITH COMMERCIALLY IMPORTANT MARINE LIFE. THE MINISTRY OF FISHERIES HAS IDENTIFIED VARIOUS PROGRAMS FOR THE REHABILITATION OF THIS SECTOR. THE FISHING INDUSTRY IS BEING REVITALIZED THROUGH SUPPORT FOR AND DEVELOPMENT OF ARTISANAL FISHING COMMUNITIES. BOTH THE DOMESTIC AND EXPORT MARKETS ARE BEING TARGETED. LONG-TERM CREDIT PROGRAMS ARE ASSISTING FISHERMEN TO BUY FISHING EQUIPMENT AND BOATS. SEVERAL JOINT VENTURES HAVE BEEN SUCCESSFULLY PROMOTED TO BOOST MARINE EXPORTS, AND THE GOVERNMENT IS ENCOURAGING INVESTMENT IN BASIC INFRASTRUCTURE SUCH AS ICE PLANTS AND FISH LANDING FACILITIES. THE JAPANESE GOVERNMENT PROVIDED U.S. $11 MILLION, IN THE FORM OF GOODS AND SERVICES, FOR AN ICE PLANT IN ASSAB; THE ICE PLANT WAS COMPLETED IN MARCH 1998. THE SECTOR HAS ALSO BENEFITED FROM A U.S. $16 MILLION FROM THE AFRICAN DEVELOPMENT BANK. EXPORTS OF FISH, FISHMEAL, AND SHELLFISH COULD BECOME A SIGNIFICANT SECTOR OF THE ECONOMY. DESPITE EFFORTS BY THE MINISTRY OF FISHERIES, VERY LITTLE FISH IS CONSUMED IN THE COUNTRY; THEREFORE IN A COMMERCIAL VENTURE THE MAJORITY OF MARINE LIFE HARVESTED WOULD BE FOR EXPORT MARKETS.

THE CURRENT ANNUAL CATCH OF ABOUT 5,000MT DOES NOT EVEN BEGIN TO APPROACH THE REGION'S PROJECTED POTENTIAL SUSTAINABLE ANNUAL YIELD OF 79,000MT. UNFORTUNATELY, EFFORTS AT APPROACHING THE MAXIMUM YIELD CONTINUE TO BE HAMPERED BY THE LIMITED NUMBER OF STORAGE AND PROCESSING FACILITIES AT THE PORTS OF MASSAWA AND ASSAB. THE COMPLETION OF ASSAB'S PROCESSING AND COLD STORAGE PLANT AND INITIATION OF A 600MT STORAGE FACILITY, HOWEVER, HAVE BEGUN TO IMPROVE THE SITUATION IN THIS CRITICAL AREA. THE ESTABLISHMENT OF A FROZEN FISH PROCESSING PLANT IN MASSAWA IN 1998 BY ITALIAN AND DUTCH INVESTORS AND THE MINISTRY OF FISHERIES IS EXPECTED TO BOAST EXPORTS OF MARINE PRODUCTS. EGYPT RECENTLY CONCLUDED ERITREA'S FIRST FISHERIES AGREEMENT FOR FISHERIES IN ERITREA'S EEZ.

--- ENERGY AND MINERAL RESOURCES: DISCOVERY OF OFFSHORE OIL OR NATURAL GAS COULD DRAMATICALLY ACCELERATE ERITREA'S ECONOMIC GROWTH. THE HOUSTON-BASED OIL COMPANY ANADARKO HAS COMPLETED EXPLORATION IN AN AREA OF 9 MILLION ACRES COVERING THE ZULA AND EDD BLOCKS IN THE RED SEA. GEOTHERMAL ENERGY IS A POTENTIAL SOURCE OF DEVELOPMENT IN THE EASTERN ESCARPMENT AREA OF ERITREA AND IS BEING PURSUED BY A U.S. COMPANY. COMMERCIALLY VIABLE INLAND DEPOSITS OF PRECIOUS BASE AND INDUSTRIAL MINERALS HAVE ATTRACTED A NUMBER OF U.S. AND FOREIGN COMPANIES TO OBTAIN OR SEEK TO OBTAIN MINING LICENSES.

--- TOURISM: THE PROSPECTS FOR INCREASED GROWTH IN TOURISM IS VERY HIGH, GIVEN ERITREA'S CLOSE PROXIMITY TO BOTH EUROPE AND THE MIDDLE EAST, THE ABUNDANCE OF HISTORICAL AND ARCHEOLOGICAL SITES, AND RICH SUPPLY OF NATURAL RESOURCES THAT CAN BE ENJOYED BY ALL VISITORS.

INCREASINGLY, THE GOVERNMENT HAS BEEN PRIVATIZING HOTELS INHERITED FROM THE DERG REGIME, WITH A REPORTED REFINEMENT IN HOTEL SERVICES, AND NEW RESTAURANTS OPENING. TO IMPROVE THE PROFESSIONALISM OF TOURISM INDUSTRY WORKERS, THE GOVERNMENT IS PLANNING A NATIONAL TOURISM, HOTEL AND CATERING COLLEGE FOR THE NEAR FUTURE; CURRENTLY THERE IS A TOURISM AND HOTEL TRAINING CENTER IN ASMARA FOR HOTEL OWNERS AND EMPLOYEES. RECENTLY THE GSE SIGNED AN AGREEMENT WITH HOTEL INTERCONTINENTAL ALLOWING THE U.S. COMPANY TO MANAGE THE FIRST FIVE-STAR HOTEL IN THE CAPITAL ASMARA, PLANNED TO OPEN IN LATE 1999.

IN ITS FAVOR, ERITREA HAS POLITICAL STABILITY, A STRATEGIC LOCATION, PRISTINE BEACHES, AND A MYRIAD OF SMALL, SUNNY RED SEA ISLANDS. A HOST OF INVESTMENT OPPORTUNITIES EXIST IN THE AREA OF WATER-BASED TOURISM, ESPECIALLY IN AND AROUND MASSAWA AND ASSAB. THESE INCLUDE SCUBA DIVING AND SNORKELING VENTURES IN THE EXTENSIVE CORAL REEFS THROUGHOUT THE MORE THAN 300 ISLANDS OFF OF ERITREA'S PRISTINE WHITE-SAND COASTLINE. OTHER OPPORTUNITIES INCLUDE BOAT, SAIL, AND FISHING CHARTERS. IN ADDITION, BOTH BASIC AND LUXURY RESORTS HAVE BEEN PLANNED FOR THE NEARBY DAHLAK ISLANDS.

--- LIGHT INDUSTRY: GIVEN CURRENT LOW LABOR COSTS AND DOMESTIC PRODUCTION OF RAW MATERIALS, LIGHT MANUFACTURING OF FINISHED LEATHER GOODS AND COTTON CLOTHING HAS THE POTENTIAL TO BECOME A SIGNIFICANT SECTOR OF THE EXPORT ECONOMY. IN THE PAST ERITREA EXPORTED FINISHED GOODS TO ETHIOPIA, SUDAN, ITALY, AND SAUDI ARABIA. FUTURE GROWTH DEPENDS ON INVESTMENT TO INCREASE VOLUME AND QUALITY MAINTENANCE THUS ENSURING PENETRATION OF LARGER FIRST WORLD MARKETS.

--- CONSUMER GOODS: THE GROWTH OF A CONSUMER ORIENTED, ENGLISH SPEAKING MIDDLE CLASS WITH A PREDISPOSITION TO AMERICAN PRODUCTS, AND THE EXPANSION OF SMALL BUSINESSES NEEDING A VARIETY OF MODERN SERVICES AND PRODUCTS REPRESENT NEW MARKETS FOR CONSUMER PRODUCTS IN ALMOST EVERY CATEGORY.

GOVERNMENT ROLE IN THE ECONOMY:

FOLLOWING LIBERATION FROM ETHIOPIA, THE GOVERNMENT BEGAN A CAMPAIGN TO RECOVER FROM THE DISASTROUS EFFECTS OF TWO DECADES OF CENTRAL ECONOMIC MANAGEMENT. ITS EFFORTS ARE HAMPERED BY DIFFICULTY OF ATTRACTING AND KEEPING SKILLED CIVIL SERVANTS, LACK OF ECONOMIC PLANNING, AND ACCESS TO COMPUTER-DISSEMINATED INFORMATION. SOME OUTSIDE OBSERVERS BELIEVE THE GOVERNMENT HAS BEEN INDIRECTLY DISCOURAGING ECONOMIC GROWTH IN ITS ZEAL TO APPROVE, REGULATE AND MONITOR PROJECTS AT THE COST OF PROVIDING ESSENTIAL SERVICES. AS A RESULT, PROJECTS OFTEN MOVE SLOWLY, DESPITE THE LIBERAL BUSINESS ENVIRONMENT. ERITREAN DEVELOPMENT AGENCIES ARE CONCENTRATING ON CAPACITY BUILDING WITHIN THE GOVERNMENT AND FINANCIAL INSTITUTIONS TO ALLEVIATE THESE PROBLEMS, THOUGH 1997 SAW THE EXODUS OF MANY NON-GOVERNMENTAL AID ORGANIZATIONS FROM ERITREA AT THE GOVERNMENT'S REQUEST.

BALANCE OF PAYMENTS SITUATION:

THE LACK OF AN OFFICIAL, PUBLISHED BUDGET FOR ERITREA MAKES REPORTING AND ASSESSING THE FISCAL SITUATION DIFFICULT; THE FOLLOWING INFORMATION IS BASED ON THE BEST AVAILABLE INFORMATION. A WEAK EXPORT BASE AND EXTREME DEPENDENCY ON IMPORTS OF MAINLY CAPITAL GOODS NEEDED TO REHABILITATE THE COUNTRY'S INFRASTRUCTURE AND INDUSTRIAL BASE HAVE RESULTED IN A LARGE TRADE DEFICIT IN HARD CURRENCIES. THE BORDER CONFLICT WITH ETHIOPIA HAS GREATLY SLOWED THE ERITREAN ECONOMY DUE TO A DISRUPTION OF TRADE RELATIONS BETWEEN THE TWO COUNTRIES, ETHIOPIA'S BOYCOTT OF THE PORT OF ASSAB, AND A SHARP INCREASE IN DEFENSE SPENDING BY THE GSE. THE TRADE DEFICIT IN 1998 WAS ESTIMATED AT ABOUT 60% OF GNP. THE CURRENT TRADE DEFICIT IS ESTIMATED TO HAVE REACHED U.S. $464 MILLION IN 1998 FOR AN ACCUMULATED AMOUNT OF U.S. $2.5 BILLION SINCE INDEPENDENCE.

FOLLOWING INDEPENDENCE, ERITREA HAD FOLLOWED A DEMOBILIZATION PROGRAM REDUCING THE SIZE OF ITS ARMY AND CUTTING ITS DEFENSE EXPENDITURE. IN 1997 DEFENSE SPENDING AMOUNTED TO 10.6 PCT OF GNP. DUE TO THE BORDER CONFLICT, GOVERNMENT DEFENSE AND RELIEF AND EMERGENCY ASSISTANCE EXPENDITURE IS ESTIMATED TO HAVE REACHED 23 PCT OF GNP IN 1998. MOREOVER, THE SIZE OF THE ARMY HAS INCREASED SEVEN FOLDS, FROM 35,000 TO ABOUT 200,000 THROUGH THE RECALL OF DEMOBILIZED EX-FIGHTERS AND NATIONAL SERVICE RESERVES.

EXCLUDING IMPORTS FROM ETHIOPIA, HARD CURRENCY TRANSACTIONS REPRESENTED SOME 90 PERCENT OF ALL IMPORTS IN 1996. PRIOR TO NOVEMBER 1997 ERITREA USED THE ETHIOPIAN BIRR AS ITS NATIONAL CURRENCY. HOWEVER, SINCE THE INTRODUCTION OF THE ERITREAN CURRENCY, THE NAKFA, IN NOVEMBER 1997 ESSENTIALLY ALL TRANSACTIONS ARE MADE IN HARD CURRENCY. IN 1996 IMPORTS TOTALED U.S. $514 MILLION, WHILE EXPORTS WERE ONLY U.S. $95 MILLION. DUE TO A DECLINE IN ECONOMIC ACTIVITY, AS A RESULT OF THE BORDER CONFLICT, IN 1998 IMPORTS WENT DOWN TO U.S. $494 MILLION WHEREAS EXPORTS DWINDLED TO U.S. $30.4 MILLION. IN 1998 ERITREAN IMPORTS FROM THE U.S. WERE MAINLY HEAVY EQUIPMENT AND AGRICULTURE MACHINES; TELECOMMUNICATIONS EQUIPMENT; AGRICULTURAL PRODUCTS; AND RAW TOBACCO AT A VALUE OF U.S. $25.1 MILLION (UP BY U.S. $8.8 MILLION FROM 1997'S U.S. $16.3 MILLION). THESE FIGURES DO NOT TAKE INTO ACCOUNT REMITTANCES FROM ERITREANS LIVING IN THE UNITED STATES. OVER THE SAME PERIOD, EXPORTS TO THE U.S., WHICH MAINLY CONSIST OF UNFINISHED (NON-EDIBLE) RAW MATERIALS, GARMENTS, AND TEXTILES, DECLINED TO U.S. $0.7 MILLION FROM U.S. $1.3 MILLION.

THE RESULTING TRADE GAP (BETWEEN ALL OF ERITREA'S TRADE) WAS COVERED BY EXTERNAL REMITTANCES, MOSTLY FROM ERITREAN EXPATRIATES WORKING IN THE U.S. AND EUROPE, BANK LOANS, AND GRANTS-IN-AID. IN ERITREA'S OVERALL BALANCE OF PAYMENTS, THERE WERE MODEST SURPLUSES IN 1993, 1994 AND 1997, AND NEGATIVE BALANCES IN 1995 (U.S. $66.3 MILLION), 1996 (U.S. $75.2 MILLION) AND 1998 (EST. U.S. $107.6 MILLION). SHOULD TRADE DEFICITS CONTINUE TO MOUNT, ERITREA MAY INCREASINGLY COME TO RELY ON EXTERNAL FINANCING TO PAY FOR NATION BUILDING AND RECONSTRUCTION PROGRAMS. MULTILATERAL LENDERS, DESPITE THE WAR HAVE BEEN IMPRESSED WITH THE GOVERNMENT'S EFFORTS AT FISCAL DISCIPLINE AND ARE BECOMING MORE GENEROUS IN PROVIDING EXTERNAL FINANCING FOR THE IMPORTS NEEDED FOR RECONSTRUCTION AND DEVELOPMENT. STARTING IN EARLY FEBRUARY 1999, BANKS STOPPED PROVIDING LETTERS OF CREDIT TO FINANCE IMPORTS, DUE TO SHORTAGES OF FOREIGN CURRENCY CAUSED BY THE BORDER DISPUTE WITH ETHIOPIA. HOWEVER, IT IS POSSIBLE TO OBTAIN LETTERS OF CREDIT IF THE FOREIGN CURRENCY IS OBTAINED FROM OTHER SOURCES.

AS NOTED ABOVE, THE END OF THE USE OF THE ETHIOPIAN BIRR AND THE INTRODUCTION OF THE ERITREAN NAKFA IN NOVEMBER 1997 WAS A DELIBERATE DECISION BY THE ERITREAN LEADERSHIP TO TAKE CHARGE OF MONETARY POLICY. IN THE LONG-TERM, ERITREA'S LEADERS ARE CONFIDENT THEY WILL BE ABLE TO END THEIR CHRONIC TRADE DEFICITS AS THEIR INDUSTRIES ARE RECONSTRUCTED AND EXPORTS INCREASE. IN THE SHORT-TERM, ERITREA WILL NEED TO DIVERSIFY ITS SOURCES OF SUPPLY. THE SUSPENSION OF TRADE RELATIONS BETWEEN ERITREA AND ETHIOPIA AND THE SUBSEQUENT BORDER CLASHES IN 1998-99, AS WELL AS THE REQUIREMENT TO CONDUCT TRADE TRANSACTIONS IN HARD CURRENCY LED TO SHARP INCREASES IN THE PRICES OF MANY BASIC FOOD ITEMS IMPORTED FROM ETHIOPIA. PRICES JUMPED 10 TO 140% IN ONE MONTH IN LATE 1997 ON ESSENTIAL FOODSTUFFS AS TEFF (A GRAIN USED TO MAKE THE LOCAL BREAD), SORGHUM, MAIZE, PULSES AND SPICES. CONSUMER PRICES WITNESSED ANOTHER HIKE FOLLOWING THE BORDER CONFLICT IN MAY 1998. THE OFFICIAL RATE OF EXCHANGE PRIOR TO MAY 1, 1998 WAS ONE U.S. DOLLAR TO 7.2 NAKFA. SINCE MAY 12, THE EXCHANGE RATE OF THE NAKFA AGAINST THE U.S. DOLLAR HAS SLIGHTLY DEPRECIATED TO 8 NAKFA TO ONE U.S. DOLLAR IN MID-1999. THE PARALLEL UNOFFICIAL EXCHANGE RATE, HOWEVER, REMAINS OVER 10 NAKFA PER ONE U.S. DOLLAR.

ON MAY 1, 1998 THE NATIONAL BANK OF ERITREA ADOPTED A FREE-FLOATING EXCHANGE RATE. ACCORDING TO THE REGULATION EACH BANK WILL SET THE EXCHANGE RATE WHERE ANYONE CAN CONVERT NAKFA TO HARD CURRENCIES FREELY. THIS ISSUE IS DISCUSSED IN DEPTH IN CHAPTER VII.

INFRASTRUCTURE:

THE ITALIAN-BUILT RAIL LINE THAT ONCE STRETCHED FROM THE PORT OF MASSAWA TO ASMARA AND ON TO AGORDAT WAS TOTALLY DESTROYED DURING THE INDEPENDENCE STRUGGLE. OVER 60 KM OF THE RAIL LINE WAS REPAIRED DURING THE PAST THREE YEARS CONNECTING MASSAWA TO TOWNS ALONG THE ASMARA-MASSAWA ROAD. THE REMAINDER OF THE ORIGINAL LINE IS SLOWLY BEING REPAIRED WITH THE PURPOSE OF DECENTRALIZING MASSAWA'S PORT STORAGE CAPACITY. THE MINISTRY OF TRANSPORT AND COMMUNICATION PLANS TO INCREASE THE STORAGE OF THE PORT OF MASSAWA BY BUILDING A STORAGE AND TRANSFER POINT IN GHINDA FOR TRUCK ACCESS TO ASMARA AND TO A ROAD LEADING TO THE INLAND CITY OF DECAMERE, WHICH HANDLES GOODS INTENDED FOR ETHIOPIA. AMONG OTHER LOGISTICAL PROBLEMS, BETWEEN GHINDA AND ASMARA THERE ARE 16 RAIL TUNNELS THAT HAVE TO BE ENLARGED TO ENABLE STANDARD CONTAINERS TO PASS. UNFORTUNATELY, THE RAILROAD LINE IS BEING REPAIRED IN THE ORIGINAL NARROW GAUGE, INSTEAD OF A STANDARD WIDE GAUGE, REQUIRING THE ORIGINAL LOCOMOTIVES FROM THE 1930'S TO BE REPAIRED AND UTILIZED. THE ITALIAN-BUILT ROAD NETWORK, ADEQUATE FOR PRE-WORLD WAR II NEEDS, SUFFICES TO MOVE GOODS AND SERVICES AT LEAST TO MAJOR POPULATION CENTERS BUT, HAS A SMALL CAPACITY.

THE ROAD THAT PARALLELS THE RED SEA COAST BETWEEN MASSAWA AND THE MAJOR SOUTHERN PORT OF ASSAB IS PARTICULARLY BAD. ASSAB, IS THE LARGER, MORE MODERN, AND BETTER MAINTAINED OF THE TWO PORTS, AND WAS USED MAINLY O SERVICE ETHIOPIA UNTIL ITS BORDER CLASH WITH ERITREA IN EARLY MAY, 1998. IN MANY OTHER AREAS, LAND MINES STILL HAMPER MOVEMENT OFF OF MAJOR THOROUGHFARES, PARTICULARLY NORTH OF KEREN AND WEST OF BARENTU. IN THE PAST SEVERAL YEARS THE ASMARA-MASSAWA, ASMARA-KEREN, ASMARA-SENAFE ROADS HAVE BEEN REPAIRED.

MAJOR INFRASTRUCTURE PROJECTS UNDERWAY

THERE ARE A NUMBER OF MAJOR ROAD CONSTRUCTION PLANS AND PROJECTS UNDERWAY IN ERITREA, FOR WHICH US COMPANIES CAN BE VERY COMPETITIVE IN PROVIDING EQUIPMENT AND MATERIALS. THE CONSTRUCTION AND/OR RENOVATION PROJECTS INCLUDE:

--THE KEREN-TESENEI ROAD (U.S. $31.25 MILLION) CURRENTLY UNDER CONSTRUCTION, --THE NEFASIT-DEKAMERE-TERAIMNI ROAD (U.S. $27.8 MILLION), --THE MENDEFERA-BARENTU ROAD (U.S. $21 MILLION) TO BE COMPLETED BY 2001, --THE ASMARA-ZALANBESA ROAD (U.S. $15.3 MILLION), --THE ASMARA-MEREB ROAD (U.S. $11 MILLION), --THE MENDEFERA-ADIKEIYIH (U.S. $7 MILLION), --THE KEREN-SELA ROAD (U.S. $15.3 MILLION), --THE AGORDAT-SAWA-GIRMAYKA ROAD (U.S. $14 MILLION), --THE MASSAWA-ASSAB ROAD AND --THE MASSAWA-WADILABKA-AFABET ROAD.

AIRPORT CONSTRUCTION AND RENOVATION IS ALSO PART OF THE INFRASTRUCTURE DEVELOPMENT PROGRAM. THE GSE HAS EARMARKED 200 MILLION NAKFA (APPROXIMATELY U.S. $27.8 MILLION) FOR THE RENOVATION OF ASMARA AIRPORT OVER A FIVE-YEAR PERIOD. CURRENTLY THE MASSAWA AIRPORT IS UNDER CONSTRUCTION, AT A COST OF OVER 280 MILLION NAKFA (APPROXIMATELY U.S. $38.9 MILLION). THE IMPORTANCE OF MASSAWA AIRPORT CANNOT BE UNDERSTATED, CONSIDERING THE PORT CITY'S IMPORTANCE AS A TOURIST CENTER, A SOURCE OF EXPORT COMMODITIES INCLUDING SALT AND FISH, AND PLANS TO CONVERT THE PORT INTO A FREE TRADE ZONE.

CONSTRUCTION OF A TERMINAL FOR ASSAB AIRPORT WILL ALSO REQUIRE 42 MILLION NAKFA (APPROXIMATELY U.S. $5.8 MILLION). THESE MAJOR RENOVATION PLANS, BESIDES OTHER AIRPORT REHABILITATION PROGRAMS, INCLUDING DAHLAK ISLAND AIRPORT, ARE EXPECTED TO COST THE GSE ABOUT 680 MILLION NAKFA (APPROXIMATELY U.S. $95 MILLION).

UPGRADING OF THE PORTS IN MASSAWA AND ASSAB IS CRUCIAL TO THE GSE'S DEVELOPMENT STRATEGY OF STAYING COMPETITIVE WITH DJIBOUTI AS A REGIONAL SERVICE HUB. A TEN YEAR 630 MILLION NAKFA (APPROXIMATELY U.S. $87.5 MILLION) DEVELOPMENT PROJECT WAS APPROVED TO UPGRADE THE PORTS OF MASSAWA AND ASSAB. RENOVATION OF MASSAWA PORT IS SET TO BEGIN IN JULY, 1999 WHILE ASSAB PORT WILL WAIT UNTIL THE RESOLUTION OF THE CONFLICT WITH ETHIOPIA. IN ADDITION STUDIES ARE UNDERWAY TO CONSTRUCT A NEW PORT IN TIO, MIDWAY BETWEEN MASSAWA AND ASSAB.

CONSTRUCTION OF HOSPITALS, GOVERNMENT BUILDINGS, RESIDENTIAL HOUSES, SCHOOLS AND OTHER IMPORTANT FACILITIES CONSTITUTE SOME OF THE MAJOR PROJECTS THE GSE PLANS TO UNDERTAKE IN THE NEXT 10 YEARS. BASED ON A STUDY CONDUCTED BY THE MINISTRY OF PUBLIC WORKS, OVER 2,400 MILLION NAKFA (APPROXIMATELY U.S. $333 MILLION) WILL BE NEEDED FOR CONSTRUCTION OF RESIDENTIAL HOUSES WITHIN THE NEXT TEN YEARS. GOVERNMENT EXPENDITURE IN THE BUILDING OF HOSPITALS, SCHOOLS, GOVERNMENT BUILDINGS, HEALTH FACILITIES AND OTHER NECESSARY UTILITIES IS EXPECTED TO AMOUNT TO 1.6 BILLION NAKFA (APPROXIMATELY U.S. $218 MILLION). SIMILARLY THE GSE HAS ALLOCATED OVER 1.3 BILLION NAKFA (APPROXIMATELY U.S. $180 MILLION) FOR CONSTRUCTING FOUR MAJOR WATER SUPPLY DAMS, INCLUDING THE TOKER DAM PRESENTLY UNDER CONSTRUCTION BY A SOUTH KOREAN COMPANY. U.S. FIRMS ARE ENCOURAGED TO PARTICIPATE IN THE SUPPLY OF EQUIPMENT AND MATERIALS.

WITH THE CLOSURE OF THE ASSAB REFINERY, ERITREA IS SHORT OF ASPHALT AND THE IMPORTATION OF ASPHALT OFFERS AN OPPORTUNITY FOR U.S. EXPORTERS TO ENTER THIS NEW MARKET. AT PRESENT, THERE ARE ONLY TWO AMERICAN COMPANIES SUPPLYING HEAVY CONSTRUCTION EQUIPMENT. SOUTH KOREAN AND EUROPEAN COMPANIES ARE AGGRESSIVELY ENTERING THE MARKET AND ARE MAJOR COMPETITORS IN THE SUPPLY OF CONSTRUCTION EQUIPMENT AND MATERIALS.