ERITREA'S THREADBARE ECONOMY

C O N F I D E N T I A L SECTION 01 OF 02 ASMARA 000954

SIPDIS

SIPDIS

LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: DECL: 12/17/2017
TAGS: EFIN ECON PREL MASS ER
SUBJECT: ERITREA'S THREADBARE ECONOMY

REF: A) ASMARA 158 B) MCMULLEN-SKORUPSKI E-MAIL
12/12/07

Classified By: Ambassador Ronald K. McMullen for reasons 1/4 (b) and (d
).


1. (C) Summary: As Eritrea's exports total less than USD 20
million per year, how does the government fund one of the
largest standing armies in Africa and keep the threadbare,
statist economy from collapsing completely? A fairly modest
amount of revenue accrues from the two percent diaspora tax,
but the real windfall has come from controls on hard currency
inflows. With these traditional revenue sources in jeopardy
from counter-productive Eritrean economic policies, transfers
from North African and Gulf countries, perhaps with strings
attached, may be increasingly crucial to the cash-strapped
Isaias regime. End Summary.


2. (C) Diaspora Tax
--------------

The Eritrean government attempts to levy a two percent income
tax on overseas Eritreans. Overseas Eritreans are sometimes
also asked to make special contributions to the motherland.
As reported refs, a portion of the diaspora tax funds embassy
operations. Some of this tax revenue finds its way via Malta
to Eastern European arms vendors. Some cash is carried back
in the luggage of travelers. How much is involved? How much
is collected from individuals in the United States with
Eritrean links?


3. (C) The Diaspora Distribution
--------------

The director of the MFA's newly created Division of Diaspora
Affairs told the ambassador December 12 that Saudi Arabia,
with 60,000 Eritreans (mostly domestic workers),has the
largest overseas Eritrean community. The former Eritrean
ambassador to Saudi Arabia verified the 60,000 figure, adding
that it was down from 85,000 a few years ago. Germany is the
next largest with 20,000 and Sweden has just over 10,000,
according to the director. She was uncertain about the size
of the community in the United States but estimated "between
15,000 and 20,000." A check of Post's consular records back
to 1997 indicates an estimate of 20,000 may be reasonable.


4. (C) Seven Million Dollars?
--------------

If the estimated 20,000 individuals in the United States
constitute 7,000 households, and considering that the U.S.
median household income is a bit under 50,000 dollars, then
two percent of these households' income would total seven
million dollars. If Eritreans in Germany and Sweden have
similar incomes, and Eritreans in Saudi Arabia make only half
as much (being mostly domestics),then the total potential
revenue from this two percent tax would be about 28 million
dollars from Eritreans in the United States, Germany, Sweden,
and Saudi Arabia. Smaller communities in other countries may
boost the total to around 35 million dollars.


5. (C) Expensive MiGs
--------------

The Russian ambassador recently said that last year Eritrea
purchased USD 50 million worth of products from Russia.
"Mainly MiGs and Sukhois?" we asked. "No, the Sukhois are
Ukrainian, the MiGs are Russian - and they bought from us two
of the most advanced model," the Russian ambassador replied
with some pride. Post has also heard credible reports of
Russian security and aviation contract personal working for
the Eritrean military. Thus, if the GSE bought materiel from
Russia worth USD 50 million, it would have to spend the
equivalent of all of its diaspora tax revenue plus the value
of nearly all of Eritrea's pitifully small exports. Clearly
something else is at work here.


6. (C) Monopoly Money and Shortages
--------------


ASMARA 00000954 002 OF 002


Outsiders (overseas Eritreans and others) transferring money
to Eritrea are obliged to trade hard currency to the
government for non-convertible nakfa. The IMF estimates that
hard currency inflows averaged over USD 400 million per year
in recent years. The GSE reported that 80,000 overseas
visitors brought in USD 60 million this year. While the
nakfa's official value is fixed at 15 to the dollar, the
black market rate is a surprisingly low 19 to the dollar,
probably more reflective of draconian enforcement than sound
underlying economics. The government and its affiliated
party have a monopoly on imports. In Asmara today nearly
every staple is in short supply; there is almost no milk,
flour, sugar, edible oil, or natural gas for cooking.
Gasoline is available in some gas stations for over eight
dollars per gallon, although diesel is hard to find. Perhaps
a quarter of the labor force sits in trenches facing
Ethiopia, barely fed and rarely paid. By most reports, the
economy is in the worst shape since independence.


7. (C) Unfinished Ghost Town
--------------

Driving from central Asmara toward the southwest, one passes
some strange sights. First is a vast graveyard of Soviet
bloc vehicles that were destroyed in the final throes of
Eritrea's 30-year war for independence. A little further out
is a swanky new suburb consisting of hundreds and hundreds of
large homes -- nearly all unfinished. All work was stopped
on these expatriate-financed houses about two years ago when
the government insisted that only GSE-affiliated construction
companies be utilized. This ghost town suburb is not unique;
hundreds of millions of dollars worth of foreign-funded
projects have been frozen across the country due to the GSE's
increasingly strict control of the economy. What foreigner
or overseas Eritrean would risk investing money inside
Eritrea now?


8. (C) Regional Sugar Daddies?
--------------

Diplomatic contacts, both Arab and Western, point to Qatar as
a key financial backer of the Isaias regime. The Egyptian
ambassador (please protect) said the Emir of Qatar has "more
money than he knows what to do with" and is looking to extend
his influence in the region. Influential Qataris reportedly
enjoy short recreational breaks in Massawa, and Isaias
frequently travels on aircraft provided by Qatar. A
low-ranking MFA employee (strictly protect) alleges that the
government of Eritrea has received money from Libya, Saudi
Arabia, UAE, Qatar, and various wealthy individuals.
Further, the GSE has purportedly been offered financial
pledges from the above-listed donors tied to anti-Ethiopian
activity in Somalia and within Ethiopia proper. This source
claims that shipments of rice and sugar from Libya and flour
from UAE are on the way to help sustain Eritrea's military
deployment against "Christian" Ethiopia.


9. (C) Comment: Asmara, with its quaint sidewalk cafes,
clean streets, and charming colonial architecture, is a
mirage city hovering without visible means of economic
support above a rocky plain. A sizeable portion of the
Eritrean diaspora and many members of the domestic business
community have had second thoughts about pumping money into a
country with no rule of law and poor prospects for fair
return on investment. While the GSE may be counting on gold
mining to fill its coffers from 2010 onward, financial
assistance from anti-Ethiopian and/or Islamist regional
actors in the meantime, may strike some within the GSE as
their best bet for a near-term financial lifeline. Given
that half or more of Eritrea's population consists of
severely oppressed Muslims, Isaias may be playing with fire.
End Comment.
MCMULLEN