In 2016, the Eritrean government made a draconian decision to combat inflation by introducing new regulations on currency control. The measure targeted large sums of Nakfas circulating outside the formal economy, rendering them virtually worthless. Additionally, the central bank appreciated the currency by implementing a fixed exchange rate against foreign currencies to address inflation resulting from weak exports and expensive import costs. The introduction of new 50 and 100 Nakfa bills and regulations on money transfer and withdrawal mechanisms, allowing people to withdraw only 5000 Nakfas per month unless necessary, had disastrous effects on the domestic market and production capacity. This led to economic stagnation, loss of competitiveness, and the emergence of a coupon economy.
States typically adopt either market-based or command-based economic systems. Market-based economies, also known as free market economies, are self-regulated, responding to consumer demand for goods production and distribution. Conversely, command-based economies are regulated by a government body determining the delivered goods, their quantities, and prices. In the modern world, few economies are purely market-based or command-based. However, the Eritrean government adheres to a command-based economy, controlling production levels, pricing, and the distribution of goods and services. Over the last 23 years, the government aggressively banned almost all private sector businesses, bringing them under complete control of the party and military. Strict governmental control, lack of legal frameworks to protect businesses, and restricted access to foreign currency make private investment in Eritrea challenging, time-consuming, and financially risky, resulting in a significant decline in the country’s economic development and living standards.
It is essential to recognize that currency appreciation can reduce inflation by lowering import prices, benefiting households, especially in countries like Eritrea, heavily reliant on imported consumer goods. However, currency appreciation significantly impacts the country’s global market competitiveness, making exports more expensive. Consequently, Eritrea faces economic challenges due to the adverse effects on competition.
In conclusion, Eritrea possesses the potential for economic development, and the government can take several steps to achieve this goal. Investing in education is crucial to enhancing the workforce’s skills, ultimately benefiting the nation’s economy. The policies of currency appreciation, fixed exchange rates, and a state- and party-controlled economy have not led to the anticipated prosperity and economic development. Therefore, a gradual depreciation of the local currency could enhance the competitiveness of local products in the export market and improve the nation’s trade deficit over time. The government must also undertake significant reforms in the banking sector, promoting legal and unrestricted circulation of money, digitalization, and liberalization of the banking and financial sector. This would create a secure environment for local and diaspora Eritreans to invest, with laws protecting investors, introducing labor policies, strict anti-corruption measures, and facilitating business to attract foreign direct investment. Additionally, promoting the free movement of people and goods can enhance the nation’s competitiveness in the global market and attract more investments. The government must take decisive action in these areas to foster economic growth and improve the people’s living standards.