In July of this year, one of the weekly radio call-in programs broadcast by Dimtsi Hafash, the government-owned and operated radio station in Eritrea, featured the Secretary General of Eritrea’s Chamber of Commerce as its studio guest.  The broadcast was intended to educate the people on the role of the Chamber.  As listeners started to call the program, however, the discussion took an unexpected turn: the topic shifted to the difficulties that businessmen were facing as a result of the mass cancellation of business licenses.   Almost all those who called in were complaining that their shipments are stranded either en route or in Massawa, simply because they were prevented from proceeding with the formalities of not having a valid license.   The besieged Secretary General had no answers other than to promise to take up the issue with the Ministry of Trade.  

If the SG took up the issue with the Ministry of Trade, there is no evidence that he has anything to show for it: four months later, the situation is far worse.  The government has all but declared war on Eritrea’s merchant class, a group of citizens it has always eyed suspiciously.  Consequently, the Eritrean market is still being run like a war economy with the attendant runaway hyperinflation, pervasive corruption, and stifling beaurocracy.  Within the government, Eritrean merchants point to many villains including mismanagement, power centralization, excessive need to control, as well as plain ignorance of the dynamics of a free market.   But none gets as much blame as the Red Sea Trading Corporation, the ruling party’s economic arm.  

The Red Sea Trading Corporation

Then dubbed “09”, the Red Sea Trading Corporation (RSTC) traces its foundation to the mid 1980s.  One of its founders, Mr. Dessu Tesfazion  ⁽¹⁾, was fond of telling the story of how he, and other fighters, started up the company with a capital of 40,000 Ethiopian birr.  “09” had modest goals: it would raise enough money to buy essentials for the combatants of the Eritrean People’s Liberation Front (EPLF), who were then pushed to Nakfa (Northern Eritrea) by repeated Ethiopian offensives.  After the EPLF withstood Ethiopian assaults and was victorious in turning the tide, “09” also began to provide food staples to the citizens of the liberated territories.   In time and with more capital, which was raised from Diaspora Eritreans, the trade—which began with camel caravans and little boats—would mushroom into various other industries including transportation and arms trade.  But “09” was still managed as a co-op: for accounting, the closely-knit group of managers used the honor system and co-mingling of funds was the norm. 

After independence, when the Front became the government, the issue of how to divide the property between the Front and the government, was handled arbitrarily and without any transparency.  Military equipment would belong to the government; everything else, including the revenues generated from selling scrap metal of destroyed Ethiopian tanks, would go to the Red Sea Trading Corporation’s coffers. Government officials were often sensitive to the issue of delineating party and government property and, if pressed, they have been heard to say that the government owes the party a great deal of money. 

In 1994, at its congress, the EPLF renamed itself the People’s Front for Democracy & Justice (PFDJ) and declared “Eritrea’s economy must be a market economy.”  Simultaneously, it also provided an intellectual and emotional underpinning to rationalize a dominant role for the government in this market economy: the new nation had to be protected from speculative retailers and profiteers and, equally importantly, the party owes the veterans and orphans of the 30 year armed struggle a source of income.  The Red Sea Trading Corporation would be restructured as a trust or an endowment for such purpose and would compete in all areas of the economy.

General Oqbe Abraha ⁽²⁾ served the Red Sea Trading Corporation as its General Manager until his replacement by Mr. Hagos “Kissha” Ghebrehiwet ⁽³⁾ in 1994.  With an estimated net worth of about 500 million dollars, the Red Sea Trading Corporation now dominates the construction industry with companies like Segen, Rodaab, Asbesco, Gedem and Geddec; the banking and currency exchange industry with companies like HCBE, Himbol and Eri Commercial; the insurance industry, with companies like National Insurance Co; the transportation industry with companies like Amberber, Royal, Fenkel and Lilo; publishing and publication with companies like Sabur, Aughet and Hidri; the manufacturing and IT industry with companies like Erisoc, EWAN and multitudes of internet cafes; as well as the hospitality & tourism industry with companies like the Intercontinental Hotel.

The Commanders Step In

The biggest competitors to the Red Sea Trading Corporation are companies set up by other PFDJ agencies, the so-called “mass organizations” of youth, women and workers.  By far, the biggest of these companies are those set up by the National Union of Eritrean Youth and Students (NUEYS), which manages the national Raymok lottery, private shipping lines and its own publishing arm. 

New entrants into this competition are another group of government employees: the commanders.  The involvement of the military in economic activities, which started a few years ago with small canteens and bars in army units, has now expanded to encompass more sectors of the economy.  Every army division has vast agricultural activities with Sawa and Af-Hmbol plantations being the largest.  The harvest goes directly to the market; when sold, the proceeds go directly to the commanders (in the name of their divisions.) The rank and file do not receive any rations from the agricultural products they help produce.  In the area of construction, the military divisions are taking up whatever is not being used by the Red Sea Trading Corporation, crowding out the few individuals from the private sector.  In fisheries, the Navy is now fully in charge of both the commercial and investment activities of the marine sector, replacing the ministry of fisheries and the few individuals in the private sector.  All the fishing vessels and marine trading companies that were under the supervision of the Ministry of Fisheries are now part of the Eritrean Navy.  The Ministry of Fisheries is now reduced to the sole task of protecting the marine environment.   Private investors (whether local or foreign) who want to do business must pay royalties to the Navy.  

All of these enterprises are possible only due to the free labor of the conscripts of “Warsay-Yekaalo.”

The businesses run by the commanders are even less transparent (and, therefore, more likely to be corrupt) than those run by the RSTC.   A conscript who was assigned as a counterperson in one of his division’s bars tells a story of what happened to the revenues at the end of each day: the commander of the battalion checks in, pockets all the money (no counting) and goes home.    Many of the commanders are barely literate and the businesses are considered “hush money” to retain their loyalty to the president.

The only business competition and rivalry is not between the public and private sector but between and among the different sectors of the public sector: the Red Sea Trading Corporation, the Commanders and NUEYS.  In this battle, NUEYS seems to be losing out.  As of October, NUEYS was directed to surrender its very lucrative Raimoc Lottery to the Ministry of Finance.   According to our sources, this measure was taken at the request of the commanders, particularly General Wuchu, who were disaffected by what they considered a growing NUEYS conglomerate. 

Scope of Investigation

There is no question that the PFDJ, with all its divisions, dominates the Eritrean market and has achieved a monopoly status.  The questions we will attempt to answer here are: has it achieved its monopoly status by competing fairly?  What is the modus operandi it uses in cornering a market?  Is it managed like a trust fund?  And, finally, what are the results to the Eritrean economy, as measured by third parties like the IMF? As with all our previous investigative reports, our sources are highly reliable but, for obvious reasons, are unwilling to be quoted on the record. 

1. Hard Currency:  Sooner or later, all business who rely on imports to conduct business (and almost all do) have to run up against the issue of hard currency.   The Nakfa has been losing its value (from 1USD = 8 Nak to 1USD=24 Nak).  In comparison, the Ethiopian Birr has retained its value at 1 USD = 8Birr.

Due to many reasons (including failing exports), hard currency is a very scare commodity in Eritrea. Several months ago, the PFDJ closed down all currency exchange offices in Asmara, including the one next to the general post office, which used to provide “black market” rates to businessmen, tourists and Diaspora Eritreans.  (The “black market” was actually controlled by the PFDJ.) At present, currency exchange services are offered only at the PFDJ or government run banks.     The problem is that the dollar is not auctioned at a currency market; priority is given to the government (which is expected).  A beneficiary of government association are the party-owned businesses which get first crack at the dollar, often at very favorable rates.  Often, private businesspersons are unable to get access to hard currency and unable to compete with the PFDJ businesses.  

When businessmen manage to buy a currency at black market rates (controlled by the PFDJ), they are compensated at “official” rates if the business deal goes sour.   For example, [DELETED, NAME OF FIRM], imported cement.  When it went to the Massawa port to pick up its cement, it was told that the shipment was diverted to the “Warsay-Yekaalo Project.”   The government “compensated” them by paying them in Nakfa (at the “swindler rate” of 14 Nkfa exchange, according to a source); the firm had paid 24 Nkfas to buy the dollars necessary for the import.  This measure was taken  under the direct orders of President Isaias Afwerki who, according to our source, admonished the Port of Massawa authorities for “slackness” and threatened to send them “wholesale” to Assab and replace them by the staffers there, unless they improve their performance.

2.           Mafia Style Business Practices

Asked to explain the PFDJ business plan, a frustrated businessman compared it to the “Cosa Nostra”, or the Mafia, where a gangster approaches a businessman and provides protection in exchange for partnership. The classical “compulsory partnership” plan of the Red Sea Trading Corporation is to approach a businessman brimming with nationalism and then to lure or coerce him into a partnership with the PFDJ mammoth and then, at the appropriate time, to swallow up the whole venture, leaving the poor victim either completely subdued or forced into exile.   There is a long list of Red Sea victims, the most prominent being ASBESCO’s Engineer Mel’ake,  Tewelde Weddi Vacarro and Mustapha Abdulaziz.    

Engineer Melake worked hard to establish the road (tarmac) paved company, ASBECO, in the mid 1990s and implemented a number of projects.  His success attracted the attention of Red Sea Corp, which soon pressed him into a partnership.  In the year 2000, he was bullied into the status of a junior and insignificant partner—a position he found difficult to accept, resulting in his withdrawal from the enterprise.  ASBECO is now wholly owned by PFDJ.

Another example is that of Dr. Woldezion Mesghinna, of USA-based NRCE: Natural Resources Consulting Engineers who founded GEDECC, a drilling and earth-moving operations company in “partnership” with the Red Sea.   GEDECC is now fully owned by PFDJ.

The Red Sea Trading Corporation’s uncompetitive practice is not limited to this. Public contracts are awarded to the Red Sea corporation without announcing the winning bids. The Massawa Airport construction is one such a contract.  Thanks to its relationship with the government, all government agencies are now mandated to procure needed supplies exclusively through the Red Sea Trading Corp.   Government agencies cannot even use private auditors.  In the past, government agencies used private auditors because the government’s Audit Services Corporation (ASC) did not have the required resources to conduct audits.   Now all government agencies have been directed to use ASC.  ASC still doesn’t have the resources: but it takes all the government contracts and then subcontracts them out to the same private auditors the government agencies have been prevented from using.

Another feature that the PFDJ-affiliated businesses share with the Mafia is their aversion to taxes.  None of these businesses pays for licensing fees or taxes which places them at a huge competitive advantage over the private sector.   Individuals who challenged this double standard, like Brigadier General Seyoum Estifanos^,(4) have been silenced.   

3.           “Hdri” (Trust) As An Emotional Tool

Many Eritreans believe that the presence of the Red Sea Trading Corporation, even with some of its excesses, is justified because “it is for a good cause.”  They believe that something should be done to help those who paid the most to liberate the country.  While this may be a noble goal, there is no evidence at all that the combatants and the orphans have directly or indirectly benefited from the Red Sea Trading Corporation.

In the area of price stabilization, RSTC provides cheaper commodities long enough to drive the competition out of business and then increases the prices to their equilibrium rates.  At the retail level, the RSTC has failed at its supposedly core objective: to stabilize prices for essential goods.  For example: meat sells 65 Nkf/kg; a kilogram of tomatoes sells for Nkf 10; oil, Nkf 60; potatoes, Nkf 20/kg; butter Nkf 185/kg; legumes and lentils like Ater: Nkf 15/kg; Bersen, 13/kg and the ultimate staple, Taff, sells for Nkf 1,200/quintal.  In the cities, those who are fortunate enough to own phones have just had a rental fee of Nkf 45 added to their bill.  Electricity is up Nkf 20 per room per month.   And so on.

There is also the issue of governance.  If the RSTC were truly a trust, would it not have a Board of Trustees which included combatants and orphans who are not a part of the PFDJ hierarchy?  Even the much publicized partial donation of Asmara Brewery Factory to the families of those killed in action in the Eritrea-Ethiopia war, follows the same formula: the PFDJ retains governance without any oversight or input from the shareholders.  

4.   Bureaucracy & Control

In April, all business owners in Eritrea were asked to fill a five-page application form to renew they business licenses.  Without any advance notice, the government had arbitrarily nullified 6,500 business licenses.   Licensees are now expected to use an application form that “looks like an immigration application”, according to our source who added: “I filled out a similar form to get a passport.”    A sample of the questions includes queries such as how the applicant achieved citizenship: by birth, by residence or adoption (“breast fed by an Eritrean”) or by marriage.  Applicants are also required to give the same details for their spouses, mothers, fathers and children.  In addition, they have to fill out a one-page form itemizing how they intend to “fulfill your national obligations.”  

These requirements are always explained as “nothing new”; that the government is merely following up on a proclamation it had long passed and ignored.  A similar onerous requirement was placed on all citizens—which mostly affects businesspersons—to get an exit visa.  The government does not appear to have any discernible method of organizing the data: applicants are referred to multiple agents who keep manual registers where they spend prolonged periods in non-productive and wasteful time.

5.   RESULTS

According to the International Monetary Fund (IMF), “Eritrea’s public sector domestic debt is expected to increase 131% of GDP in 2008 while external debt will rise to 90% and decline to 85% by 2008.”  What is worse, the IMF forecasts are based on rosy and unrealistic expectations including the following:

·      The demobilization of 130,000 combatants by the end of 2003 and the residual 70,000 by 2004;

·       Improved economic policy and significant increase in donor financing;

·        Resumption of normal trade with neighboring countries;

·       Return of normalcy to the country, which would include freedom of movement to travel and conduct commerce;

·       Demarcation of border with Ethiopia and cessation of hostility with neighboring countries.

On a per capita basis, Eritrea’s indebtedness is now one of the highest in the world.  Eritreans who take pride in self-reliance now owe over half a billion US dollars.  In plain English, every Eritrean—man, woman, child—including the conscripts in the trenches now owe $600 each.    At 19.8% of GDP, Eritrea has the third highest military expenditure per capita in the world. (The first and second being North Korea and Angola.)  Out of 129 countries, Eritrea ranks 122 (near the absolute bottom) for its expenditure on education, which is a shocking 1.4% of GDP. 

CONCLUSIONS

Virtually every sector of the Eritrean economy is in deep malaise.  Instead of taking measures to liberalize the economy, the government has chosen “feel-good” political solutions reminiscent of command economies—national parades and white elephant projects.   It is long past due for the government to admit that its policies are not working and ask itself some questions:

·    Why did Yemen manage to receive $600 million in aid from the US last year?

·     How was Ethiopia successful in finessing the international community into subsidizing its economy with close to the $900 million dollars from donor nations, making up 40% of its annual budget DESPITE the tumbling price of coffee for the last five years? 

·    What is the impact to Eritrean tourism when the government persists on trying to paint the country as threatened by Eritrean jihad movements?

·      Is there any nation in the world that has managed to alienate its three largest trading partners? 

Eritrea needs a civilian authority competent enough to formulate macro economic and investment policies and execute them.  In today’s global economy, even well educated technocrats struggle to grasp the ever-changing economy that is driven by technology and fickle markets.   It is a disservice to the nation to hand the economic wheels of the nation to commanders and party apparatchiks solely because the president’s priority is preventing a coup.  Morevoer, as is evident now for 12 years, the PFDJ commercial sector’s chokehold on the Eritrean economy does not and will not allow small, start-up businesses to compete or flourish.    Restoring relationships with our neighboring countries, who happen to be our biggest trading partners, is of great national interest, even if it is not in the best interest of the ruling party.   Finally, economic liberalization can only be realized in an environment where property rights and individual rights are respected. 

FOOTNOTES

1.                        Dessu Tesfatsion:  after being arrested for three years, he was tried retroactively by the “Special Court,” a military tribunal hand-picked by Isaias Afwerki, and found guilty of embezzlement.  

2.                        General Oqbe Abraha:  the same “Special Court” that sentenced Dessu Tesfatsion, incriminated General Oqbe Abraha because the alleged crime occurred with his co-operation.  The general wrote his response to Keste Debena newspaper (June 11, 2001) where he categorically denied the allegation: “… the information mentioning my name and provided on behalf of the Special Court is deficient of truth and incomplete and defames my name…”  General Oqbe Abraha was arrested two months later for unspecified crimes and remains in jail without charges.  He is one of the “G-15.” "Keste Debena is now closed and its editors and reporters arrested."

3.                        Hagos “Kisha” Ghebrehiwet:  Prior to his designation as General Manager of Red Sea Trading Corporation, he was the ruling party’s representative in Washington, DC, where he raised the ire of many people for his alleged failure to be account for donations.  He was hand-picked to his current post by the President.

4.                        Brigadier General Seyoum Estifanos:  Was in charge of Eritrea’s “Inland Revenue Service” until August 2001, when he demanded that the PFDJ conglomerates pay taxes, like everyone else.  He was immediately fired.  A month later, he was arrested for unspecified crimes against the state.  He is one of the “G-15”  

Addendums:

1-    Business License request application form (Tigrigna)

2-    Business License request application form (English Transalation)

3-    Table of main indicators
Sources: http://www.nationmaster.com/  and CIA Factbook 2002

1

Price: 500 Nackfa

Information needed to apply for external trade license Pursuant to
Proclamation No 124/2002

1-  General Information

·                           Name of applicant:____________

Nationality_____  ID Number____________ Responsibility

·                           Residential address:

Town_________ Zone__________ Street__________ House #_________Tel #_______

·                           Address of Establishment:

Town_________ Zone__________ Street__________ House #_________Tel #_______

·                           Warehouse Address:

Town_________ Zone__________ Street__________ House #_________Tel #_______

·                           Legal status of Establishment:  Private       Partnership       HzZeGeMa

                                                     Share Co.              Governmental

·                           Activity Field of Establishment

Agriculture              Industry          Transportation       Professional

Fish resources              Commerce              Tourism           General

Mining                     Construction              Finance   

2-  Funding of Capital        2000              2001

Equity                            -----              -----

In Nackfa                       -----               -----

In U$                             -----              -----

Working Capital                -----              -----

In Nackfa                        -----              -----

In U$                             -----              -----

Is there bank loan?            Yes                No

Additional clarification________________________________

3-   Employees

Number of Employees              2000               2001

·                           Permanent                     -------              ------

·                           Part timers                    -------              ------

Annual Wages of Employees     -------              ------

4- Gross Annual Turnover          -----              -----

Output/Services of Establishment -------        ------

Note:

external trade license in practice requires additional permit

It is legally required that The movement of foreign trade be entered in accounting books

external trade license include wholesale but retail …..[illegible]

5-  Production/output of the Establishment :         As Per Capacity
                                                 Under Capacity

If The Establishment is producing under capacity, as per details in Number 7, Hindrances/problems, should be explained briefly.

6-           Annual payments to Internal revenues

Taxes   

Excise

Note: As per proclamation No. 124/2002 article (5)

All information from Number 1 to No. 6 should be current and correct and must be presented supported by official documents. Any deficiency of information could lead to legal questioning.

·                                       A renewed 2002 establishment license that was used for operations.

·                                       Legal title of premise or pertinent copy of ownership Libreto or a legal lease agreement.

·                                       Validity of premises or warehouses as per the validation by the ministry in charge.

·                                       If the premises of the establishment is located in the environs of a city, an assurance that is it is in accordance with zoning policy, must be presented to the city administration.

·                                       Proof of payment of taxes and fees from the internal Revenue must be presented.

·                                       Those using the services of a bank must bring a support letter from the bank.

7-             Problems/hindrances facing the establishment in business.

A-            Investment-wise:
B-              Concerning employees:
C-              Raw materials/energy/water/communication and transportation and other services:
D-              Technology and tools:
E-               Securing markets for products and services:
F-                Banking services:
G-               Governmental entities that have direct relations with business:

8- If there is corrective plans for hindrances/shortages by the applicant:

9-  National Responsibility

It is important to note that although the license holder’s motive of achieving his business or individual goal is recognized, his activities should be within the bounds of the law and that he shoulders a responsibility.

Therefore, any individual asking for a business license, his activities must consider national interest in the field of growth of the national economy; creating new job opportunities; increasing productivity; balancing the supply of products and services in all Eritrean markets; saving hard currency; stabilizing prices; preserving national traditions and cultures. In short, it should not be forgotten that they are expected to contribute in the construction of the country as well as the Eritrean identity.

The applicant for a license should explain, briefly on the bottom empty space, how he thinks his establishment would contribute towards these national responsibilities.

Full name of applicant:

Name______________    Sig.______________  Date_____________

11-          To be filled by the regulatory body of the department of trade.

A brief explanation detailing whether the request for the trade license is in line with the policies of the ministry and its requirements/conditions.

Is the renewal of the trading license supported?   Yes____  No _____

If supported, let them have a permit.

Signature of authorized officer ____________

10-        To be filled by the office of ownership permit only

a- registration number_________  Date received ________

b- The request is acceptable     Acceptable ___   Not Acceptable ___

c- Reason for its rejection _______________________

d- Name and signature of investigating person            Name ______________

           Signature _______________ Date _____

e- Name and signature of approving body:                  Name ______________        

                                       Signature _______________ Date ______

Sources: * http://www.nationmaster.com/
              * CIA Factbook 2002

Comments: awateteam@awate.com