Eritrea continued to use the Ethiopian currency in its first few years of independence, then operated its own currency under various exchange rate arrangements, before fixing it clearly to the USD in 2005. The domestic and external political context repeatedly hindered the adoption of better economic and monetary policies and developments.

YearsTargets and attainmentClassification
1993-97at independence (from Ethiopia) economy suffering from years of war and droughts, and need to reintegrate refugees and former combatants; initially Eritrea continues to use Ethiopian currency (fixed to USD but with multiple rates), without policy input or seigniorage, with Ethiopian-set official and fortnightly-auction-determined exchange rates, but also Eritrean ‘preferential’ rate close to parallel market used in trades by forex dealers; new central bank set up from local branch of Ethiopian central bank, but acute shortage of skilled personnel and of statistical data; limited state- or ruling party-owned banking system, largely from previous Ethiopian banks, including dominant commercial bank; some reforms aimed at move from central planning to market economy; some use of interest rates (generating negative differential vs Ethiopia), no other instruments; 1995 unification of official and auction exchange rates, in both Ethiopia and Eritrea; issues of repeated large budget deficits financed by central bank and high excess reserves of banks; 1997 legal framework for central bank and other financial institutions, preparations for issue of national currency, unification of official and preferential rates; statistical data very poor, e.g. no national accountsuse of another sovereign’s currency UASC
1998-2004late 1997 introduction of own currency, initially at parity but from May 1998 rate set in market made by forex bureaux as well as commercial banks; formalisation of previously informal reserve requirements, but banks still hold large excess reserves; worsening of relations with Ethiopia, border dispute turns into full war 1998-2000, leading to severe economic damage, major population displacement, temporary exchange controls and large deficits fuelling high monetary growth; continuing state of no war/no peace follows, with continuation of wartime recourse to range of direct controls; 2001 suppression of dissent within ruling party creates rift with EU (key aid donor), while authorities implement tax reform package different from that agreed with IMF; as of 2003, goals of monetary policy are unarticulated, independence of central bank is heavily limited in practice, instruments are direct (in absence of developed money or securities markets), and monetary growth is driven by large fiscal deficits, while exchange rate is far from freely floating and parallel market premium now 60-70%; banks have large amounts of non-performing loans; late 2003 exchange restrictions tightened, dual exchange rates vs USDloosely structured discretion LSD
2005-17[Note: no Article IV reports after 2009] 2005 dual exchange rates unified and fixed vs USD, restrictions tightened further; 2008 severe economic effects from world food and fuel price hikes and local drought, monetary funding of deficits (which had receded) resumes; rising overvaluation and parallel market premium; 2009 UN and EU sanctions on Eritrea (in place until 2018); high fiscal deficits financed by domestic banking system, but less so from 2014; development of mining activities from 2011; 2016 payment system reform, including replacement of local currency by new banknotes to tackle illegal activities, replacement 1:1 but partial, parallel market premium declines; statistics weak, still no regular national accounts, especially poor after 2009augmented exchange rate fix AERF

Selected IMF references: RED 1994 pp22-4 33-4, 50; SR 1994 p13; RED 1996 pp16-19, 21, 24, 36; SI 1997 pp14-24; SR 1997 pp15-17; SI 1998 pp4, 8-11, 16-18; SR 2001 pp5-10, 14, 17-18; SISA 2003 pp34-44, 47-52, 57-8; SR 2003 pp11, 15-17; SR 2004 pp6-10, 13; SR 2006 pp5, 12; SISA 2008 pp14-17; SR 2008 pp12-13; SR 2009 pp7-8, 11, 18-21; Economic Developments 2016 pp2-11.

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