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Viewing cable 08ASMARA38, INVESTMENT CLIMATE STATEMENT 2008

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Reference ID Created Released Classification Origin
08ASMARA38 2008-01-28 11:23 2011-08-25 00:00 UNCLASSIFIED Embassy Asmara
VZCZCXRO2601
RR RUEHROV
DE RUEHAE #0038/01 0281123
ZNR UUUUU ZZH
R 281123Z JAN 08
FM AMEMBASSY ASMARA
TO RUEHC/SECSTATE WASHDC 9404
INFO RUCNIAD/IGAD COLLECTIVE
RUEHLO/AMEMBASSY LONDON 1584
RUEHFR/AMEMBASSY PARIS 1762
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEPADJ/CJTF-HOA J2X CAMP LEMONIER DJ
RUEKDIA/DIA WASHDC
RUMICEA/JICCENT MACDILL AFB FL
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 04 ASMARA 000038 
 
SIPDIS 
 
LONDON AND PARIS FOR AFRICA WATCHERS 
DEPT FOR AF/E 
DEPT FOR EB/IFD/OIA 
 
SIPDIS 
 
REF:  07 STATE 158802 
 
E.O. 12958:  N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC ER
SUBJECT:  INVESTMENT CLIMATE STATEMENT 2008 
 
1.  The following responses are keyed to reftel paragraph 15.  Post 
submitted the 2006 Investment Climate Statement by email only, thus 
no reftel. 
 
------------------------------ 
Openness to Foreign Investment 
------------------------------ 
 
2.  Eritrea remains a strict command economy, pushing out most 
private investment.  The International Monetary Fund's (IMF) October 
2007 Regional Economic Outlook for Sub-Saharan Africa lists Eritrea 
as a fragile country, the lowest economic rating offered.  Risks of 
investing in Eritrea are high and include:  lack of transparency in 
the regulatory process, severe limits on the possession and exchange 
of foreign currency, lack of objective dispute settlement 
mechanisms, difficulty in obtaining licenses, large-scale use of 
conscripted labor, and expropriation of private assets.  The 
judicial system is also used as a coercive tool of the GSE to 
promote its own interests and has not shown itself to be a neutral 
arbiter in legal disputes.  These risks have all acted to discourage 
domestic private investment not conducted under the Government of 
the State of Eritrea's (GSE) auspices. 
 
3.  A number of commercial laws are on the books that purport to 
allow for private enterprise, but these laws are not consistently 
implemented.  The Foreign Financed Special Investments (FFSI) 
Proclamation issued in April 2007 establishes a framework for 
investments of greater than $20 million.  The proclamation's stated 
objectives are to achieve self-sustaining growth, facilitate the 
rapid expansion of exports, expand employment, and promote and 
protect foreign investment.  The Eritrean Investment Proclamation 
issued in 1994 establishes a more general framework for investment. 
This proclamation's stated objectives are to encourage investment, 
expand exports, expand employment, and encourage the use of new 
technology.  It also provides tax incentives for investors, as well 
as a framework for dispute resolution. 
 
4.  Proclamation 114 issued in August 2001 gives the Ministry of 
Trade and Industry the authority to negotiate the sale of public 
enterprises, but details of the process are unspecified.  In 
practice, investors currently seem to require approval from the 
Ministry whose portfolio covers the specific project before 
investing, but there may also be other unpublished approval 
requirements.  Large-scale projects must be approved by the 
appropriate Minister or by the Office of the President.  The GSE has 
selectively and narrowly courted foreign investors to explore 
under-utilized resources primarily in mineral extraction, but also 
in energy, fisheries, and tourism.  Despite the investment 
proclamation's assurance against expropriation there have been cases 
of de facto nationalization. 
 
-------------------------------- 
Conversion and Transfer policies 
-------------------------------- 
 
5.  Proclamation 115 issued in August 2001 allows for unrestricted 
investment and repatriation of foreign currency.  In addition, Legal 
Notice 44 issued in July 2000 states that the Bank of Eritrea is 
responsible for all foreign exchange, and no other entity can 
transfer funds into or out of Eritrea.  The Bank of Eritrea has 
maintained an artificial nafka/dollar exchange rate at 15:1, but the 
black market exchange rate may be as high as 22:1.  The GSE has 
extremely low foreign currency reserves and requires all exchange be 
handled officially.  Foreign business owners have extreme 
difficulties converting profits to hard currency, and the GSE's 
decision making process for each case appears to be arbitrary.  For 
example, the GSE notified Lufthansa in July 2001 that it would no 
longer be allowed to convert profits from nakfa to euros. 
 
------------------------------ 
Expropriation and Compensation 
------------------------------ 
 
6.  The GSE has shown a pattern over many years of expropriating 
businesses without notice, explanation, compensation, or recourse. 
 
ASMARA 00000038  002 OF 004 
 
 
There are no legal provisions for such expropriations other than 
eminent domain for public purposes, but due process of law is not 
followed and the idea of public purpose has been liberally 
interpreted by the GSE. 
 
------------------ 
Dispute Settlement 
------------------ 
 
7.  No effective dispute mechanism exists, and there are no known 
cases in which the GSE has accepted international arbitration for 
business disputes.  There are several unimplemented laws on the 
books regarding dispute settlement.  Article 15 of Investment 
Proclamation No. 59/1994 provides a framework for investment dispute 
settlement and pledges the GSE to enter into bilateral and 
multilateral protection treaties.  Foreign investors also have the 
option to resolve disputes through mechanisms specifically 
stipulated in investment agreements with the GSE, or through 
mechanisms created by multilateral treaties such as International 
Center for Settlement of Investment Disputes (ICSID).  (Note: 
Eritrea has neither ratified nor signed the ISCID Convention.  End 
Note.) 
 
--------------------------------------- 
Performance Requirements and Incentives 
--------------------------------------- 
 
8.  Although laws and regulations provide for incentives, in reality 
there are none.  The Customs Proclamation of 2000, Part X, provides 
for relief from duties and taxes for imports receiving value-added 
processing prior to export, but due to the lack of businesses 
operating in Eritrea, Post is unaware of any businesses receiving 
such relief.  The GSE restricts travel within Eritrea, requiring 
explicit written permission for foreigners with a minimum ten-day 
advance notice when applying.  Permissions for travel are frequently 
denied or simply not issued to foreign elements with no explanation. 
 Eritrea also has an opaque visa regime, and foreigners of many 
nationalities have reported difficulties in obtaining visas to enter 
the country, or experienced lengthy delays in receiving them, again 
with no explanation.  Eritrea is not a member of the WTO. 
 
-------------------------------------------- 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
9.  The FFSI specifically limits foreign investment in financial 
services, domestic wholesale trade, domestic retail trade, and 
commission agencies, but permits investment in other sectors.  The 
FFSI makes allowances for the remittance of net profits and has 
guarantees against nationalization or confiscation, except for 
public purposes and with due process of law.  Investors should be 
aware, however, that most medium-to-large businesses in Eritrea are 
either directly or indirectly controlled by either the GSE or the 
ruling party, the People's Front for Democracy and Justice (PFDJ). 
In 2005, the GSE suspended all private construction activity leaving 
only those owned by the GSE or PFDJ in operation. 
 
 
----------------------------- 
Protection of Property Rights 
----------------------------- 
 
10.  Eritrea's civil law lays out protection for private property, 
but the GSE has a history of expropriating houses, businesses, and 
other private property without notice, explanation, or compensation. 
 Trademarks, patents, and copyrights are available through a 
procedure involving a public advertisement in the local press, but 
Eritrea is not a party to any international conventions on 
intellectual property rights. 
 
------------------------------------- 
Transparency of the Regulatory System 
------------------------------------- 
 
11.  Eritrea has not had a parliament for over a decade and all laws 
 
ASMARA 00000038  003 OF 004 
 
 
are issued by proclamation from the executive branch.  Eritrea also 
has no clearly organized regulatory system; what procedures are in 
place appear to be of haphazard creation and irregularly enforced. 
New regulations are often not announced prior to implementation, and 
they are often unequal in application and subject to sudden change. 
In addition, the GSE neither publishes accounts of its decision 
making process nor offers a public comment period for proposed laws 
or regulations.  Local business owners report extensive difficulties 
with import and export licenses and customs clearances, as well as 
obtaining telephone and mobile phone lines, land leases, and work 
permits.  There also seems to be little coordination between the 
central and regional governments adding to the opacity of conducting 
business outside of Asmara.  The International Monetary Fund (IMF) 
reported investor confidence is undermined by the state's growing 
role in commercial activities and the lack of transparent regulatory 
environment. 
 
--------------------------------------------- ----- 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
12.  Eritrea has neither a stock exchange nor a stock market.  All 
financial institutions are state owned.  Although the IMF states 
that the banks have a high proportion of non-performing loans, they 
appear to be profitable due to income from foreign currency 
transactions.  There is also a lack of convertibility from nakfa to 
hard currency, making repatriation of profits difficult or 
impossible. 
 
------------------ 
Political Violence 
------------------ 
 
13.  The threat of domestic insurrection, civil disturbances, and 
political violence is low, although there are reports of separatist 
movements operating in remote areas.  Tensions along the 
undemarcated border with Ethiopia remain high.  An increase in 
troops in the last year on both side of the border has raised the 
potential for renewed clashes between the countries.  This unsettled 
border dispute is cited by the GSE as its justification for the 
unlimited draft terms of a large number of its youth in the national 
and military service, as well as the extensive restrictions on 
country's economy and political freedom of its citizens on the basis 
of national security. 
 
---------- 
Corruption 
---------- 
 
14.  Eritrea has historically been known as a country with low 
corruption, but there are indications that it does exist.  Civil 
court cases are often directly influenced by the Office of the 
President, or by former fighters obtaining decisions in their favor. 
 (Note:  Fighters, soldiers from the struggle for independence, have 
high social standing and considerable influence within the GSE.  End 
Note.)  The GSE controls all foreign exchange, making it virtually 
the only legal source of imports and creating illicit profit 
opportunities.  The GSE has also not allowed individuals with 
pending civil disputes permission to leave Eritrea, at the request 
of the Eritrean party, until the matter is resolved.  Eritrea is not 
known to be a party to any international anti-corruption 
agreements. 
 
------------------------------- 
Bilateral Investment Agreements 
------------------------------- 
 
15.  Eritrea's only known bilateral investment agreement is with 
Italy, although it is possible that unpublished investment 
agreements also exist with Qatar, the U.A.E, and/or China. 
 
-------------------------------------------- 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
 
ASMARA 00000038  004 OF 004 
 
 
16.  (U) OPIC programs do not currently operate in Eritrea.  Due to 
the poor state of bilateral relations and the lack of bilateral 
trade there is little potential or interest from the GSE in such an 
arrangement. 
 
----- 
Labor 
----- 
 
17.  There is large supply of semi-skilled laborers due to high 
levels of unemployment. Technical experts, highly skilled 
professionals, and managers are in short supply.  Many of the 
highest skilled workers have recently left Eritrea due to 
deteriorating economic conditions.  Eritrea is not a signatory of 
the ILO although purporting to uphold many of its provisions.  As 
much as one-third of Eritrea's workforce is conscripted into the 
national service, in which there is no defined end date.  Employees 
are forced to work in specific jobs, have no job mobility, and are 
paid well below the national minimum wage. 
 
---------------------------------------- 
Foreign Trade Zones and Free Trade Zones 
---------------------------------------- 
 
18.  The GSE is constructing a free trade zone in Eritrea's port 
city of Massawa, and the first companies are expected to begin 
operations in 2008.  Proclamation 115, dated August 2001, about the 
zone declares there will be:  1) no taxes on income, profits, or 
dividends; 2) no customs duties on imports; 3) no currency 
convertibility restrictions; 4) no minimum investment; 5) 100 
percent foreign ownership; and 6) 100 percent repatriation on 
profits and capital.  Since there are no companies currently 
operating in the zone, whether the GSE will honor these commitments 
or revert to interventionist practices when it becomes operational 
is unknown.  Tellingly, however, the zone is slated to be 
administered by an independent board, with the Minister of Finance 
serving as its chair. 
 
------------------------------------ 
Foreign Direct Investment Statistics 
------------------------------------ 
 
19.  Data on foreign direct investment (FDI) is not available from 
the Bank of Eritrea.  Although the Investment Proclamation of 1994 
governs all foreign investment, it contains no specific definition 
of FDI.  The UN Conference on Trade and Development (UNCTD) 2006 
report states Eritrea had $4 million in FDI inward flows and $384 
million in FDI stock (accumulated inflows) in 2006, the most recent 
year for which data is available.  No data is available on 
outflows. 
 
MCMULLEN