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Cablegate: Investment Climate Statement 2008

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

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