Eritrea’s Economic Freedom

Eritrea’s economic freedom score is 38.5, making its economy one of the least free in the 2014 Index. Its overall score is 2.2 points better than last year due to improvements in the control of government spending, labor freedom, and monetary freedom that offset a decline in freedom from corruption. Eritrea is ranked 45th out of the 46 countries in the Sub-Saharan Africa region.

Eritrea’s economic freedom was first assessed in the 2009 Index and has remained stagnant near the bottom of the Index rankings. Score improvements in government spending and business have been completely offset by deteriorations in six of the 10 economic freedoms including investment freedom, labor freedom, and fiscal freedom. Scores for financial freedom and property rights have not changed. The country continues to be stuck in the “repressed” category, but its 2014 score tied its highest level ever over the six-year period.

GDP

Strong GDP growth has been led by increased foreign investment in the mining industry, but substantial mineral revenues benefit only a narrow segment of the population. The public sector remains the largest source of employment. Chronic deficits due to large military spending plague public finance, worsening already fragile monetary stability. A repressive central government continues to marginalize the domestic private sector, perpetuating an uncertain investment climate.

RULE OF LAW

Corruption is a major problem. The president and his small circle of senior advisers and military commanders exercise almost complete political control. The politicized judiciary, understaffed and unprofessional, has never ruled against the government. Protection of property rights is poor. The government has a history of expropriating houses, businesses, and other private property without notice, explanation, or compensation.

LIMITED GOVERNMENT

The top individual income and corporate tax rates are 30 percent. Other taxes include a 2 percent tax on dual citizens, targeted at Eritrea’s large diaspora. The overall tax burden is 50 percent of GDP. Government spending has moderated to 34 percent of GDP. Public debt is large relative to the size of the economy, at over 125 percent of gross domestic output, but has fallen slightly.

REGULATORY EFFICIENCY

Inconsistent enforcement of regulations and other institutional shortcomings often impede business activity and undermine economic development. Launching a business takes more than 80 days and is costly. The labor market remains underdeveloped, and much of the labor force is employed in the informal sector. Monetary stability has been weak. Subsidies and price controls are core features of the country’s command economy.

OPEN MARKETS

Eritrea’s average tariff rate was 5.4 percent as of 2006. It can take several weeks to import goods. State domination of the economy acts as a deterrent to foreign investment. The financial system, consisting mainly of a small banking sector, remains severely underdeveloped and subject to heavy state control. Private-sector participation in the system remains constrained.