RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - ERITREA

UNCLAS SECTION 01 OF 03 ASMARA 000236

SIPDIS

SIPDIS
SENSITIVE

LONDON AND PARIS FOR AFRICA WATCHERS
DEPT FOR AF/E, EEB/TPP/ABT/ATP FOR JANET SPECK

E.O. 12958: N/A
TAGS: ECON EAGR PGOV ER
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - ERITREA

REF: STATE 39410


1. (SBU) The following answers are keyed to reftel. Point of
contact is Brian Shelbourn, shelbournbl@state.gov, 291-1-120004.

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2. (SBU) DEMAND
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Wheat, sorghum, and teff are the most important agricultural
commodities in Eritrea and are extremely scarce. World Food Program
(WFP) statistics show the price of wheat quadrupled since 2004,
including a 62% increase since February 2007, as well as an
unexpected increase immediately after the latest harvest. Eritrea
is a net importer of these commodities. In 2007 the Ministry of
Agriculture (MoA) claimed 80% of Eritrea's food needs were produced
locally, but the WFP places this estimate at only 60%.

Despite being desperately short of hard currency the Government of
the State of Eritrea (GSE) directly controls all food imports,
leaving supplies randomly intermittent. Eritreans adapt to specific
grain shortages by combining or substituting wheat, sorghum, teff,
and maize as necessary. Most Eritreans consider bread made solely
from wheat flour to be a luxury.

Farmers are forced to sell their entire harvest to GSE grain traders
and are not allowed to retain stock for personal use, leaving rural
areas in even more desperate condition than the cities. A MoA
official recently told WFP director Rahman Chowdhury (protect) that
certain (unspecified) areas of the country were experiencing "near
famine-like conditions." There have been reports that during July
and August many rural residents subsist mainly on the abundant
prickly-pear cactus fruit known as belez.

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3. (SBU) SUPPLY
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Eritrea's economy, including the agricultural sector, is directed by
the government. WFP reports show a 15% increase in the number of
hectares (ha) under cultivation in the past 4 years, as well as an
average yearly production increase of 12% to 20%. There is no known
foreign direct investment in the agriculture sector due to the GSE's
policy of self-reliance and quest for independent food security.
There are no known bottlenecks in the supply chain. Eritrea
confiscated 90,000 metric tons (MT) of foreign donor food aid in
spring 2006, leaving no operating food assistance programs.

Eritrea is currently facing a chronic diesel fuel shortage, but post
has received no reports this is affecting either the harvest or the
GSE's food transportation. Rainfall in the region has been very
good for the past three years, but if one of the Horn's frequent
droughts coincides with current high import costs, WFP and other
in-country food experts have expressed concerns a food crisis could
emerge.

Eritreans in Asmara report nearly all grain houses are empty, but
some grain is available on the black market. There are reports of
ample grain supplies available in Tessenai near the Sudan border
(where there is a thriving grey market),but the GSE maintains
multiple checkpoints on the roads out of the city and confiscates
all smuggled commodities. Sorghum and teff distributed through the
Hidri Shops (the government-run food rationing system) have recently
disappeared. An Eritrean family of five received 40 kg of either
grain (whichever was available) until February, when the ration was
cut to only 10 kg before disappearing altogether.

Seasonable vegetables are readily available and relatively
inexpensive. The price of goats and sheep has held steady due to
decreased incomes caused by the deteriorating economy, leading to
decreased demand.

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4. (SBU) POLITICAL IMPACT
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Eritrea has a totalitarian government that vigorously represses all
dissent. Although discontent with food prices and availability is
growing and is often told in confidence to Emboffs, dissatisfaction
with GSE policies is never expressed publicly in ways that threaten
host government stability. The GSE-controlled media blames current
conditions on the unresolved border with Ethiopia, and by extension
on policies of the U.S. and UN. Large segments of the Eritrean
population accept the GSE's account, given lack of alternative media
and many people's unquestioning loyalty to a government that
achieved Eritrean independence.


ASMARA 00000236 002 OF 003


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5. (SBU) ECONOMIC IMPACT
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Eritrea's international reserves can only support between two and
four weeks of imports, forcing the government to prioritize.
Emboffs have noted cycles where at least one commodity is always
unavailable, suggesting a GSE effort to avoid the appearance of
shortages. The GSE has also forced most non-governmental
organizations out of the country, including those working in food
aid. The country's current account deficit is approximately 30% of
GDP excluding remittances and transfers from international
organizations, and the IMF projects Eritrea's trade deficit to
remain above 20% of GDP through 2010. These indicators denote a
country with few extra resources available to shift to food
purchases.

Eritrea has a command economy with minimal private sector
development. Farmers are forced to sell their crops to GSE traders
below market prices. Commodity price increases create no host
country beneficiaries other than GSE-tolerated smugglers importing
food from Ethiopia, Sudan, and Yemen and black market sellers.

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6. (SBU) ENVIRONMENTAL IMPACT
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Eritrea was heavily deforested during the 30-year struggle for
independence, and wood-based charcoal is culturally the primary
source of cooking fuel. In addition, Eritrea has historically faced
water shortages and erosion problems. The few NGOs and UN
organizations, such as UNICEF, still operating in country focus many
of their projects on country-wide water and sanitation needs, which
is also a high priority for the government. There are no
indications that these pre-existing, wide spread problems are
exacerbated by current conditions.

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7. (SBU) GOVERNMENT POLICY RESPONSE
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On April 17, the GSE made an official statement it would soon
announce "an efficient consumption program that puts into
consideration future challenges and their consequences." The
statement also noted the consumption of the 2007 harvest would have
to extend beyond the year, indicating the government recognizes, to
some extent, the present food security challenge. Given that
Eritrea cannot cover its own food needs even in the best
circumstances, this announcement is a cause for concern.

The GSE extended its control over the economy by recently
confiscating grain from many private wholesalers and traders.
Although grain was seized, much of it disappeared into the black
market. The GSE has also forced farmers to sell their harvest to
government traders at deeply discounted prices. Again, government
policy forced much of the food supply into the black market.

The price of bread, when available, is strictly set at $.025/100
grams (pre-baked). This price control has led to austere rationing
and frequent unavailability. The government also either runs or
tacitly accepts a "free trade zone" in Tessenai. Although the zone
alleviates some shortages, its full purpose and operations remain
unclear.

The IMF and World Bank note the government's emphasis on fiscal
tightening, although the GSE has not publicly released budget by
which policy changes can be judged.

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8. (SBU) IMPACT ON POST PROGRAMS
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Current conditions will have minimal impact on post programs. The
GSE ordered USAID to leave Eritrea in July 2005, terminated all
development and food assistance programs by the end of the year, and
confiscated 14,500 MT of USG food aid already in country in spring

2006. The USG continued to support limited humanitarian,
therapeutic feeding programs funded by USAID/OFDA and implemented
through the local UNICEF office. However, GSE restrictions of all
food aid have closed avenues for food assistance, with the exception
of these humanitarian programs available only to a small minority of
the most at-risk populations.

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9. (SBU) POLICY PROPOSALS
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In light of USAID's departure and the GSE's current intransigent
stance towards accepting food aid, the USG can provide minimal
assistance to Eritrea in its struggle for food security -- at least
until the government's policies change. Nonetheless, a poor harvest
would create severe hardship on a populace which is barely
subsisting under current conditions. Post recommends a serious
analysis of any GSE request to provide assistance if an Eritrean
food emergency occurs.

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10. (SBU) LIST OF PREVIOUS REPORTING CABLES
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ASMARA 221
ASMARA 225
07 ASMARA 509
07 ASMARA 806
MCMULLEN