Eritrea - Politics, government, and taxation

Eritrea has enjoyed internal political stability since its independence. In 1993, a splinter group of senior members of the Eritrean Liberation Front (ELF) joined the Eritrean People's Liberation Front to become a political party, the People's Front for Democracy and Justice (PFDJ), which has ruled the country ever since. The Eritrean constitution provides for a multiparty political system, but the reality is a one-party system dominated by the PFDJ, which, while so far unable to rescue the economy, keeps a tight rein on internal order, sometimes by measures such as the restriction of press freedom, that ensures domestic political stability. The opposition groups are all in exile (in Sudan) and include the Eritrean Islamic Salvation party and dissenting ELF factions, but they have no impact on Eritrea's economy.

Despite its liberalization policies, the government still dominates the economy. However, corruption is en-viably low by the standards of many third world countries, and the government encourages industrial growth and exports. It has introduced low customs duties (2 percent in 2000) on capital goods , intermediate industrial spare parts, and raw materials, side by side with high tariffs (50-200 percent) on luxury goods (liquor and tobacco). Nevertheless, by 2001, efforts to create a viable free-enterprise economy and stimulate sustainable growth had not yet succeeded. The major barriers to meeting these objectives include limited financial resources, the absence of adequate infrastructure , lack of expertise and management, and a high illiteracy rate. These factors, with an environment made unattractive by war and drought, have conspired to discourage investment.

It is difficult to gather accurate statistics regarding revenues obtained by the Eritrean government, but it is evident that taxes and tariffs contribute little. In 1996, when the economy showed some growth, taxes contributed 30 percent of national income. However, the worsening economic situation and low international trade figures do not yield sufficient taxable profits or incomes, and the 1996 figure undoubtedly took a sharp fall in 1999 and 2000 when economic growth halted. From 1998, the war with Ethiopia and the drought proved disastrous to the economy. With drastic reductions in port fees and exports, the share of port-generated revenue dropped from 16 percent of revenues in 1996 (about $32 million) to almost nil in 1999 and 2000, while export earnings decreased from about 48 percent in 1996 ($95 million) to about 12 percent in 1999 (just under $26 million).

The gap between Eritrea's annual income and its expenditures is enormous (expenditures outstripped income by more than half in 1996), thus forcing the government to finance its deficit through foreign loans and grants and money from expatriates. In 1999 expatriate purchases of government bonds generated $400 million. Eritrea has been mostly successful in securing favorable loans, enabling it to keep its foreign debt low ($242 million in 1999).