Introduction

Eritrea’s substantial debt burden significantly hinders its economic growth and development:

Unsustainable Debt Levels

Eritrea’s debt-to-GDP ratio is alarmingly high, estimated at 211% in 2024.

This is far above the African average of 63.5% and places Eritrea among the most indebted countries globally.

The country is considered to be in debt distress by international financial institutions.

Impact on Government Spending and Investment

The heavy debt burden forces Eritrea to allocate a large portion of its budget to debt servicing. In 2022, 33.4% of the national budget was spent on debt repayment. This severely limits the government’s ability to invest in crucial areas for economic growth, such as:

Infrastructure development

Education and human capital

Healthcare

Productive sectors of the economy

Restricted Access to Finance

Eritrea’s high debt levels and international sanctions have limited its access to foreign financial markets. This restricts the country’s ability to obtain new financing for development projects or to refinance existing debt on more favorable terms.

Macroeconomic Instability

The debt burden contributes to macroeconomic instability:

It puts pressure on the country’s foreign exchange reserves

It can lead to currency depreciation

It increases inflation risks

These factors create an unfavorable environment for both domestic and foreign investment, further hampering economic growth.

Reduced Investor Confidence

The high debt levels, combined with Eritrea’s political and economic isolation, erode investor confidence. This limits foreign direct investment and private sector growth, both of which are crucial for economic development.

Vulnerability to External Shocks

The debt burden makes Eritrea more vulnerable to external economic shocks, such as fluctuations in commodity prices or global economic downturns. This vulnerability is exacerbated by the country’s reliance on mining exports and agriculture.

Conclusion

Eritrea’s massive debt burden acts as a significant drag on its economic growth potential. It limits government spending on development, restricts access to new financing, creates macroeconomic instability, reduces investor confidence, and increases the country’s vulnerability to external shocks. Addressing this debt issue is crucial for Eritrea to achieve sustainable economic growth and development.