HomeReportsBureau of Economic and Business Affairs2021 Investment Climate Statements…Eritrea

# 					2021 Investment Climate Statements: Eritrea			

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													EXECUTIVE SUMMARY											

                -  EXECUTIVE SUMMARY 
                -  1. Openness To, and Restrictions Upon, Foreign Investment   
                -  2. Bilateral Investment and Taxation Treaties    
                -  3. Legal Regime   
                -  4. Industrial Policies   
                -  5. Protection of Property Rights   
                -  6. Financial Sector   
                -  7.  State-Owned Enterprises   
                -  8. Responsible Business Conduct   
                -  9. Corruption   
                -  10. Political and Security Environment   
                -  11. Labor Policies and Practices   
                -  12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs   
                -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                -  14. Contact for More Information   

## EXECUTIVE SUMMARY

With the exception of the mining sector, Eritrea’s investment climate is not conducive to US investment. Alleged political repression, along with technological isolation, limit investment.   Most commercial enterprises are state controlled or run by the sole political party, the Peoples Front for Democracy and Justice (PFDJ).  The Government of the State of Eritrea (GSE) is the largest employer in the country, and most citizens are required to participate in the country’s national service program, which often results in indefinite terms of service at very low wages in a wide range of public sector positions.  The national currency, the Eritrean Nakfa, is not convertible and there are restrictions on the repatriation of profits out of the country.  The national budget is not public.  The judiciary is not independent or transparent.  There is limited freedom of the press, international journalists are often barred from entry, and the government maintains control of the media.  Most profitable investments in Eritrea come about through direct negotiation with the government rather than market-based private investment.

							1. Openness To, and Restrictions Upon, Foreign Investment					

**Policies Towards Foreign Direct Investment**

The Eritrean government professes a desire for more and more diversified FDI.  However, governmental control of the economy and the lack of robust business and investment legal code makes private investment difficult and financially risky.

The official 1994 Investment Proclamation No. 59/1994 states that all sectors (excluding domestic retail, domestic wholesale, import, and commission agency companies without a bilateral agreement of reciprocity) are open to any investors.  In practice, this law has been suspended and the ruling Popular Front for Democracy and Justice determines those sectors in which – and defines the terms under which – private investment is accepted.

The Investment Center, established in 1998, operates directly under the Office of the President; it does not publish any information related to its activities. In the past, the Center conducted public outreach to encourage members of the Eritrean diaspora to invest in Eritrea.  The Center has not conducted a large public event since 2012; senior Center officials have stated that the time for investments is not appropriate because investment developments must follow political developments.

There is no business ombudsman in Eritrea or other mechanisms to prioritize retention or maintain dialogue with existing investors.

**Limits on Foreign Control and Right to Private Ownership and Establishment**

In practice, there is no fundamental “right” for either foreign or domestic private entities to establish or run business enterprises free from government interference.  All sectors of the economy are tightly controlled by the GSE, most large enterprises are either entirely or partially owned by the government or the PFDJ, and the government can order a business to close without explanation or legal recourse.

There are both statutory and de facto limits on foreign ownership and control of enterprises.  All foreign-owned mines must give a 10% stake to the Eritrean National Mining Corporation (ENAMCO), and ENAMCO has the option to buy another 30% equity in the project.  Regulations in other fields are not well established.

With some exceptions, such as mining, investment is *de facto*prohibited in most sectors of the economy.  The government has encouraged investment in the mining sector, and mining-specific regulations were adopted in 2011.  There are few other large foreign investments in the country.  The few foreign enterprises operating in Eritrea do so under non-public agreements negotiated directly between the companies or countries and a small group of officials from the GSE and the ruling political party.

There is no transparent GSE screening mechanism for approving inbound foreign investment.

**Other Investment Policy Reviews**

The GSE has undergone no recent third-party investment policy review.

**Business Facilitation**

The government has made no known efforts to facilitate business in Eritrea.  The government does not have a business registration website.  Businesses are required to register with six government offices (the Business License Office, the Ministry of Information, the Inland Revenue Department, the Ministry of Trade and Industry, the Ministry of Labor and Social Welfare, and the local municipality), and the registration process usually takes 84 days, according to the World Bank’s *Doing Business*report.

**Outward Investment**

Given the low level of capital accumulation in the economy, Eritrea is not a likely provider of foreign capital.  As part of its efforts to direct capital towards development, the GSE’s laws strictly control capital flows, currency exchange, and restricts domestic investors from making large investments abroad.  For example, monthly bank withdrawals are limited to 5,000 Nakfa, and dollars are generally unavailable for withdrawal.

							2. Bilateral Investment and Taxation Treaties 					

The GSE has signed Bilateral Investment Treaties (BITs) with Italy, Netherlands, Qatar, and Uganda.  Only the BIT with Italy has entered into force.  The GSE has no bilateral taxation treaty with the United States.

							3. Legal Regime					

**Transparency of the Regulatory System**

The GSE is not transparent.  The World Bank scores Eritrea a zero on its six-point scale for the “Global Indicators of Regulatory Governance.”  Legal and regulatory systems are not transparent.  Ministries are empowered to (and do) issue new regulations with no public debate.  There is no publicly accessible location (online or otherwise) to find key proclamations, laws, or regulatory actions.  There is no public oversight of government actions nor legal recourse against government actions taken.

The seeming arbitrariness of government regulation and action is a drag on the economy.  Businesses are shuttered on occasion without explanation, leaving other businesses to wonder (and often spread rumors) as to what happened.

Public finances and debt obligations are not made public.

**International Regulatory Considerations**

Eritrea is a founding member of the Common Market for Eastern and Southern Africa (COMESA).  It also belongs to the Community of Sahel-Saharan States and the Intergovernmental Authority on Development (though it has not participated in the latter for several years.)  COMESA decisions are binding on all member states, but as they are made by consensus this does not cause conflict.

Eritrea is one of only 10 UN member states that has no affiliation with the WTO.

**Legal System and Judicial Independence**

The Eritrean legal system is based on the Ethiopian system that was in place at the time of independence.  It is primarily a civil law system, though these laws are deeply influenced by traditional law.

Eritrea has a written commercial code, derived from the Ethiopian commercial code in effect at the time of independence along with several proclamations to update the code.  A full rewrite was done as part of a 2015 overhaul of the major legal codes, but these were never implemented.  Any international company doing business in Eritrea will need the assistance of a local attorney versed in the complexities of the Eritrean legal system.

The judicial system is not fully independent of the executive.  Judges are National Service employees, and thus work for the executive branch.  Many enforcement decisions, and especially those that relate to the commercial or labor codes, are adjudicated solely through the national court system and are appealable.

**Laws and Regulations on Foreign Direct Investment**

Eritrea’s legal system plays only a minor role in foreign direct investment. All large-scale foreign direct investment is part of a political process and is managed by non-public agreements negotiated directly with a small group of officials in the government and the ruling party.

Eritrea does not have a  website for foreign investors to learn about relevant laws, rules, procedures and reporting requirements.

There have been no new major laws, regulations, or judicial decisions announced in the past year.

**Competition and Anti-Trust Laws**

There are no indications that the GSE makes any effort to promote market competition. All large-scale economic activity is controlled directly by the GSE or by jointly controlled international companies operating under agreements negotiated directly with the GSE/PFDJ.

**Expropriation and Compensation**

There is no transparent process that would allow an individual or company to appeal any GSE expropriation of property.

The most recent public case of expropriation was in 2019, when the government expropriated 22 health clinics from the Catholic Church, citing a law prohibiting religious organizations from providing social services.  The Catholic Church said there was no due process or ability to appeal the decision.

**Dispute Settlement**

*ICSID Convention and New York Convention*

Eritrea is not a member of the International Centre for Settlement of Investment Disputes (ICSID) Convention or the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

*Investor-State Dispute Settlement*

Eritrea is not a signatory to a treaty or investment agreement in which binding international arbitration is recognized. Eritrea has no BIT with an investment chapter with the United States.

Due to a lack of government transparency it is impossible to determine the number of investment disputes involving U.S. persons or foreign investors. Because of the minimal level of foreign investment, the number of disputes is presumably also very small.

Local Eritrean courts do not recognize or enforce foreign arbitral awards issued against the GSE.  There is no known history of extrajudicial action against foreign investors.

*International Commercial Arbitration and Foreign Courts*

Some disputes between private parties are settled in traditional village courts. There is no independent, domestic arbitration body in Eritrea.

The local courts do not recognize or enforce foreign arbitral awards, nor do they recognize or enforce judgements of foreign courts.

There are no known investment disputes involving SOEs.

**Bankruptcy Regulations**

Bankruptcy is addressed in the Eritrean Civil Law and the proclamations amending it; however due to lack of transparency in the court system, it is impossible to determine what rights, if any, creditors, shareholders and holders of other financial contracts have in practice.  No information is available on how bankruptcy is handled in practice.

							4. Industrial Policies					

**Investment Incentives**

Any investment incentives offered to foreign investors, if they exist, are negotiated directly between a small group of GSE and PFDJ officials and foreign governments or companies. There is no published investment incentive framework available for review by all potential foreign investors.

For mining projects, the government requires the ability to buy up to 30% of the equity in the project, in addition to the 10% equity they get by right.

**Foreign Trade Zones/Free Ports/Trade Facilitation**

There are two designated Free Trade Zones in Eritrea: 1) The Free Trade Zone in the port city of Massawa, and 2) the Free Trade Zone along the common border between Eritrea and Sudan. However, neither FTZ is operational.

**Performance and Data Localization Requirements**

The GSE mandates the use of local labor for all positions it can fill but allows foreigners for technical positions it cannot fill.  The GRE tightly controls individual entry visas and work permits for most foreigners and requires individual permits for foreigners to travel within Eritrea, outside of a 25km radius of the capital city, Asmara.

All large investments in Eritrea have been permitted only with the approval of a small group of GSE/PFDJ officials.

The few large foreign enterprises allowed to operate in Eritrea are believed to employ large amounts of non-domestically-produced or acquired goods and technology. However, due to a lack of transparency, it is impossible to determine if their agreements encourage or require them to use some minimal amounts of local goods or technology.

There are no public or transparent procedures for establishing performance requirements for domestic or foreign enterprises.

In Eritrea, there are no requirements for foreign IT providers to turn over source code and/or provide access to encryption. The lack of internet and cellphone data infrastructure (internet penetration in the country is believed to approximate 1.5%) impede data transfer from Eritrea, but there are no publicly stated policies that impede data transmission.  There are no publicly stated rules on local data storage.

							5. Protection of Property Rights					

**Real Property**

All real property in Eritrea is technically owned by the GSE and leased out for use to individuals.  People and businesses can be summarily ejected from their property at any time.

As all real property belongs to the state and private Eritrean citizens acquire only the right to use the land, there are no concerns over titles.  Squatters obtain no legal rights to land.

**Intellectual Property Rights**

Under Eritrean law, the Copyright section of the Civil Code addresses intellectual property (IP) rights. Due to a lack of transparency, it is difficult to determine if and how IP rights are protected in practice.  Legal structures are weak, and IPR protection and enforcement are rare to non-existent.  The government does not maintain publicly available statistics on law enforcement or judicial actions.  Eritrea is not included in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

							6. Financial Sector					

**Capital Markets and Portfolio Investment**

There is no functioning public market for capital in Eritrea, nor is there an established stock market.

The GSE fully controls the banking and financial sectors; there are no transparent mechanisms to facilitate the free flow of financial resources into portfolio investments.  There is no transparency in decisions regarding credit allocation.  Transfers of foreign currency are heavily restricted due, in part, to government concerns about foreign terrorist financing.

The GSE does not respect the International Monetary Fund’s (IMP) Article VIII, regarding restrictions on payments and transfers for international transactions.

**Money and Banking System**

Due to restrictions on the use and hoarding of cash, most Eritreans now have bank accounts and use banking services.  However, there are excessive regulation on banking accounts (including low monthly limits on withdrawals and restrictions on sending foreign currency abroad) and obsolete technology at the banks.  There are no automated teller machines in Eritrea and there is no infrastructure to allow the use of credit or debit cards.

It is unclear what the estimated total assets of the country’s largest banks are.  The Bank of Eritrea is the country’s central bank.  Foreign banks are not allowed to open branches or establish operations in Eritrea.  Foreigners are able to establish bank accounts, but are subject to the same monthly Nakfa withdrawal limits as Eritreans.

Eritrea does not currently have any correspondent banking relationships.  Per a 1994 regulation, locally-based entities are forbidden from maintaining foreign bank accounts.

**Foreign Exchange and Remittances**

*Foreign Exchange*

Organizations in Eritrea have often found it difficult to move foreign currency into or out of Eritrea, even to pay essential bills abroad.  All fund transfers into and out of Eritrea must go through the National Bank of Eritrea.  Some international organizations have resorted to bringing money by courier.  Local funds are not freely convertible to any world currency.  The exchange rate is determined by the government, and the rate does not fluctuate.

*Remittance Policies*

As the major large investments in Eritrea are non-transparent collaborations with the GSE, the companies running them may be able to remit investment income in ways not available to the general public.  Small- and medium-sized enterprises often have difficulties moving investment income abroad due to strict withdrawal limitations (for cash) and the requirement that all electronic fund transfers be executed through the National Bank of Eritrea, which can arbitrarily deny fund transfers.

**Sovereign Wealth Funds**

Eritrea has no sovereign wealth fund.

							7.  State-Owned Enterprises					

The few large enterprises that operate in the economy are owned and operated by the GSE, the PFDJ, or are jointly operated with the GSE under an agreement with a foreign country or company.  There is no official list of state-owned enterprises (SOEs), but they dominate all sectors, especially agribusiness, construction, import/export, and financing.  The mining sector is dominated by joint ventures between foreign companies and the state-owned ENAMCO.

SOEs operating in the domestic market receive non-market-based advantages from the GSE, such as the right to import and export through the PFDJ-controlled import/export entity, and preferential access to goods imported by other SOEs and government offices.

**Privatization Program**

The government has often expressed its interest in privatizing the economy but has made no efforts yet to do so and is generally believed to be suspicious of private enterprise.

							8. Responsible Business Conduct					

Most large enterprises in Eritrea are operated directly or jointly by the GSE, and there is no general awareness of the concept of “responsible business conduct” (RBC).  However, on some issues, especially environmental protection, many businesses take great care to act responsibly.  Due to a lack of transparency, it is unknown if the GSE has taken any measures to encourage RBC; if it has, these efforts are not well publicized.

Eritrean former employees of a Canadian mining company that previously operated in Eritrea have filed a lawsuit in Canadian court against the company for alleged violations of their human rights, including claims of forced labor. According to numerous reports from international NGOs (operating outside of Eritrea), the United Nations, and the U.S. Government, the GSE does not fairly and effectively enforce its domestic laws in relation to human rights, including labor rights.  However, it has rather stringent safeguards for environmental and consumer protections.

There are no public capital markets inside of Eritrea and only a small number of publicly traded companies operate inside of Eritrea. Due to lack of transparency, it is impossible to determine if the GSE has established any standard of corporate governance, accounting and executive compensation to protect shareholders.

There are no independent NGOs, investment funds, worker organizations, unions or business associations in Eritrea.

Due to lack of transparency, it is impossible to determine if the GSE encourages adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. Individual mining companies participate in programs such as the Voluntary Principles on Security and Human Rights, but this participation is not mandated by the GSE.

*Additional Resources*

Department of State

- Country Reports on Human Rights Practices ;
- Trafficking in Persons Report ;
- Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities  and;
- North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

- Findings on the Worst Forms of Child Labor Report ;
- List of Goods Produced by Child Labor or Forced Labor .
- Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World  and;
- Comply Chain .

							9. Corruption					

Eritrean laws criminalize corruption by public officials and by any who claim influence over public officials, which would include family members and political parties.  The 2015 penal code also includes provisions requiring government officials to explain any unexplained wealth or income.  Due to limited transparency within the government, it is unclear the extent to which the GSE applies these laws, though evidence suggests little corruption among government officials.

There are no specific provisions concerning conflicts of interest.

There is no available information to suggest that the GSE requires private companies to establish internal codes that prohibit bribery of public officials, and it is unlikely that the government does so.  It is likely that some, but not all, of the large foreign private companies use internal controls, ethics or compliance programs to detect and prevent bribery.

Eritrea is not a signatory to the United Nations Convention Against Corruption or any other international anti-corruption initiatives.  There are no independent NGOs in Eritrea, including those that investigate corruption.  There are no U.S. firms in Eritrea to provide an opinion on corruption as an impediment to FDI, but it is unlikely to be a serious impediment.

*Resources to Report Corruption*

There are no government agencies that operate independently of the Office of the President and the PFDJ to whom one can report corruption. There are also no independent “watchdog” organizations working within Eritrea.

							10. Political and Security Environment					

There is no history of politically motivated violence or civil disturbance.

In 2015, there were public reports that a Canadian-operated mine in Eritrea was damaged by explosions caused by either bombs or mortars. The mine continued to operate and there were conflicting accounts of who was responsible for the explosion(s).  This one incident does not seem to have had a continuing impact on the investment environment.

Due to Eritrea’s single-party political system, it is difficult to know how politicized or secure the country is, as information on public opinion and security matters does not flow freely.  However, the level of politicization and security does not seem to have changed in recent years.

							11. Labor Policies and Practices					

The most important factor influencing the labor market in Eritrea is the GSE’s National Service program, which, in practice, due (the GSE claims) to a long-standing state of emergency, subjects a large portion of the labor force to indefinite government service, working at very low wages across a large swath of the employment spectrum and unable to pursue alternative employment. All university graduates require a release from National Service before they can legally pursue other employment opportunities.

While there are shortages of specialized labor in many sectors of the economy, particularly in the areas of administration, the international mining facilities are largely able to find enough sufficiently skilled workers; in some cases these are National Service employees seconded from a relevant ministry.  Many small Eritrean companies blame National Service for the paucity of skilled employees available in the market.  Leaving a National Service position without authorized release can result in imprisonment.  Due to National Service, Eritrea is a Tier 3 country for Trafficking in Persons, which results in sanctions against the government.

According to the GSE’s stated policy, the large international mining facilities currently operating in Eritrea are required to hire Eritrean workers wherever possible and to offer training programs for Eritrean workers.

All workers have the right under Eritrean law to severance if removed from a job, regardless of the reason for removal (termination for cause, layoff, or resignation.)  The amount of severance depends on the salary and the length of accrued service.  Moreover, notice must be given any time an employment agreement ends, with some exception for malfeasance on either side, again determined by how long the employee has worked.  There are no known official safety nets for those laid off for economic reasons.  Officially, no labor laws have been waived in order to attract or retain investment, but as most large investments are completed through private negotiations between the government and the outside entity, it is impossible to know the exact nature of provisions of these agreements.

There is one legal labor union in Eritrea, the National Confederation of Eritrean Workers (NCEW).  The NCEW engages in collective bargaining for those workers who qualify, but as most workers are in National Service, very few benefit.  The NCEW also represents workers in labor dispute management.  Eritrea has a Labor Relations Board which hears disputes, made up of seven members of the NCEW, seven members of the employers’ association, and one government official.

There have been no labor protests or strikes during the past year.

The use of those serving in National Service for civilian jobs, and the indefinite nature of that service, continues to pose reputational risks for organizations doing work in Eritrea.  A Canadian company that used to run a mine in Eritrea was sued in Canadian court over accusations of using National Service workers; the case was settled confidentially out of court in 2020.  An EU development project has come under fire after accusations of forced labor.  There are a number of other areas (informal sector, child labor, minimum wage) where Eritrean law does not meet international standards.  No new laws have been introduced in the last year, nor are any new laws expected.

							12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs					

As a least-developed country, DFC is authorized to operate programs in Eritrea, but does not do so at this time.  There is an existing 1994 Overseas Private Investment Corporation agreement between Eritrea and the United States.

							13. Foreign Direct Investment and Foreign Portfolio Investment Statistics