Eritrea gained independence from Ethiopia in 1991 and declared statehood in 1993, but its underdeveloped economy had suffered greatly from the 30-year war of independence with its neighbor. Conditions were worsened by a serious drought in the late 1990s, and the outbreak of a new war with Ethiopia that arose over a territorial dispute in 1998 and reached an uneasy, internationally brokered peace in mid-2000. This combination of adverse conditions further destroyed Eritrea's already limited agricultural and industrial capabilities and exhausted its inadequate financial resources, leaving the economy in ruins. Consequently, the country's foreign debt rose from $76 million in 1997 to $142 million in 1998, and to $242 million in 1999.
Eritrea is in transition from a deteriorating socialist economy to a market economy. The government has
The country's industrial, agricultural, and service sectors are small-scale and underdeveloped. Exports are limited and the country relies heavily on imports, including foodstuffs. Unsurprisingly, the balance of trade has recorded a large annual deficit since independence— $534 million in 1999. Since 1952, Eritrea has depended on 2 strands of economic activity to provide employment and revenue: port services at Assab and Massawa and agricultural exports. Landlocked Ethiopia conducted most of its international trade through these ports until the outbreak of war in 1998. Agricultural exports to a few African and Middle Eastern countries have been a major source of income for Eritrea.
The Eritrean economy grew during the first few years of independence. However, since this growth was due to its earnings from port services, it proved unsustainable as a consequence of hostilities with Ethiopia. Ethiopia placed an embargo on Eritrea's ports, while the heavy cost of war between the 2 countries and a sharp decline in agricultural production caused by war and drought have since damaged the economy. Economic contraction began in the late 1990s, with the growth of Eritrea's gross domestic product (GDP) falling from 7 percent in 1997 to 4 percent in 1998, and to nil in 1999 and 2000. This disaster has made Eritrea dependent on foreign assistance for its survival. The Persian Gulf countries, Italy, Japan, the United States, the World Bank, the African Development Bank (ADB), and the European Union (EU) have collectively been the country's main source of loans, grants, and food aid. Eritreans who have dispersed to live in other countries have become the main hard-currency providers since 1998.