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2015 in Review: Economic Restructuring (Part 5)

In past articles in our series we covered the 2015 status of the attrition war against Eritrea and the use of migration, human rights and biased media coverage as part of an isolation strategy to diplomatically isolate Eritrea and implode its economy. With Eritrea escaping isolation attempts, that strategy has failed, which has led enemies of the Eritrean state push for the end goal, economic collapse, by to shifting their focus on the economic war against Eritrea. In response Eritrea has employed a strategy of its own: economic restructuring.

In a seventeen-year-long attrition war, everything has been done to Eritrea to not only cripple the Eritrean economy but to also create the perception in the minds of the citizens and international community that the Eritrean economy under the ruling government is crippled and destined for imminent death. Economics is a soft science and psychology plays a critical role in the market.

In 2007, Chatham House declared in a paper entitled Eritrea’s Economic Survival that “the private sector has collapsed”. Calling the Eritrean economy “dirigiste”, the report explained that “the signs are that Eritrea’s economy is slowly grinding to a halt.”
However, it would only be three years later, in December 2010 that The Economist Magazine’s Economic Intelligence Unit would predict that Eritrea would be the fastest growing economy in the world; that Globe & Mail would call Eritrea a “growth giant”.
As outlined in previous parts of this series, we must recall that Eritrea is in a war of attrition predicated on the collapse of the economy, which makes economic growth in Eritrea a dangerous development for the US-backed TPLF regime in Ethiopia.

More specifically, it is relative growth that is most feared. In a zero sum game, Eritrea cannot succeed relative to Ethiopia, according to the US and its proxy state, as doing so would lead to the collapse of the US-backed TPLF regime. The improvement of the standard of living of the Eritrean people will not go lost on the Ethiopian people who have faced mass famine, genocide, election violence, protest violence and looting of the national treasury by an ethnic minority regime. Regime change would soon follow. This is the threat of a successful Eritrea.

Few things suggest the durability of a ruling national government in the public consciousness more than the success of the national economy under that regime.

With the growth of Eritrean economy, it was imperative that the US-backed TPLF regime in Addis Ababa create the image that Ethiopia was leading the world in economic development. It for this reason that we saw the rise of the “fastest growing economy” myth that was slaughtered and put to rest in 2015.

We were told that Ethiopia was starting a space exploration program and that the nation would be middle income country by 2020. However, just last year we also found out that 10-20 million Ethiopians would need emergency food assistance. Many an article were written in 2015 to debunk the myth of the “fastest growing economy” with most highlighting the practice of the regime, the same one which was caught in 2010 stuffing the national bank with millions in fake gold-painted steel bullion, to regularly cook its books. It became obvious to most in 2015 that the regime was building a Potemkin Village.
At the same time, much was done to destroy the Eritrean economy.

This came through the creation and expansion of a black market, counterfeiting, illegal movement of Nakfa notes across borders, the funding of illicit trades and industries, money laundering and the encouragement of bribery and theft of state resources.
Essentially, a “black bank” was created that could contract and expand the money supply free of government intervention. Funds could not be tracked and proper taxation was not possible.

In the end, the ability of the Eritrean government to regulate the economy was weakened, causing money to be syphoned out of the public interest into the hands of criminals and subversive entities, like human traffickers and hostile regimes.

It is within this climate that the Eritrean government implemented a host of measures in 2015 to bring about “economic restructuring” of the nation to improve the standard of living of the Eritrean people. We first saw hints of some these measures being soon implemented during the Eritrean investment conferences in 2012.

One of these measures was the issuing of a new currency. In November the government issued Legal Notice Number 124/2015, which issued a recall of all outstanding Nakfa currency notes in exchange for newer notes over a six week period. The exchange period started on November 4th and by January 1, 2016, the old notes would officially expire.

Given the short period, criminals reluctant to come forward with their illegally acquired funds rushed to store value in commodities, leading to mass commodity buying and temporary price inflation. However, with the tightening of monetary policy and the state-assisted boost of supply in the market, prices of many goods have begun to drop with the start of 2016.
For example, this week, the price of chicken in Asmara has dropped to 100 Nakfa from 500 Nakfa last year.

With control over the currency, money and income can now be properly tracked and taxed. Proper tariffs on imports can now be levied so that people will think twice about importing a luxury car over farm irrigation equipment. Inflation and deflation could be properly regulated.

According to officials here, these measures aren’t meant to create an omnipresent hand of government in the market but rather to assist the market in arising areas of need through effective legal regulations. In order to draw in business and investors, Eritrea must be ruled by strong and effective laws that are properly enforced such that business community will work in an environment of public trust.

With the latest currency note changes, it is important to recognize attempts to make it appear as though the government seeks to control every facet of the economy.

The private exchange of dollars was never seen by government as the problem. As we recall the period between 1997 to 1998, the government actually made room for decentralized “bureaus” for private exchange of dollars to complement dollars that were officially exchanged via the National Bank of Eritrea.

Private bureaus provided new opportunities to the business community and convenience to buyers while helping to keep government leaner and meaner. The bureaus were able to purchase dollars from the national bank. Surplus dollars by days end were then auctioned.

The official rate was approximately 7.30 while the private rate was 7.45 Nakfas per dollar. Very little difference. Compare that to black market last year, which drove the unofficial rate up to about 80 Nakfa.

This mechanism in the early Nakfa days allowed government to “float” the currency on the local market instead of using a fixed rate such that it could bring inflation under control when needed by making money more plentiful or less plentiful on the market (cheaper or more expensive).

This policy of supporting the private sector dates back to the government’s macro-policy document during the 1996 business forum. There has been a desire to grow the private sector with the government filling the gaps where the private sector falls short.

However, given the war of attrition, heavy military mobilization of labor and post-war/ post-sanction investment decline the government has been forced to fill many gaps. This is not the wish and intent of the government.

Another significant change that was planned over the course of 2015 as part of economic restructuring was the raising and scaling of salaries on the basis of merit. The idea is to keep youth in country and provide them a brighter socioeconomic future with a higher standard of living.

Monthly salaries, which have been sitting around 500 Nakfa, are slated to see a rise based on one’s merit, ranging from four-fold to almost ten-fold, which does not even include years of experience. High school graduates get one salary while college graduates get another and doctors yet another. This is may perhaps be seen as a key financial shift towards of a more meritocratic basis for Eritrean society.

It is to be recalled that salaries in 1994 were approximately 1,400 Birr (Ethiopian currency equivalent at the time). With inflation low, one was able to use the purchasing power to buy much more from market and better provide for one’s family than they are today.

Thus, the latest measures to restructure the economy seek to once again increase both salaries and purchasing power of the currency such that people are able to enjoy a higher standard of living.

If one takes a bus ride in Asmara, chatter from riders about recent changes, including the president’s recent interview about these changes, makes it clear that there is a sense of optimism of  future prospects.

However, given Eritrea’s long history and consciousness among her people, optimism does not come without some caution.
There have been multiple threats from many corners. The most significant is the looming threat of tightening sanctions under the pretext of human rights abuses. Many documents according to regime-change activists, dating back to even the mid-2000’s, have indicated that these will target mining companies as was the focus of activism and boycotts during the anti-apartheid movement in South Africa.

Thus, Eritreans must remain vigilant with cautious optimism.

The last article in this series will summarize Eritrean affairs in 2015 and conclude our review series.

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