The Government of Eritrea states that it is committed to a market economy and privatization, and it has made development and economic recovery its priorities. Nevertheless, the government and the ruling PFDJ party play pervasive roles in the economy. The government has imposed an arbitrary and complex set of regulatory requirements that discourage investment from both foreign and domestic sources. The economy was devastated by war and the misguided policies of the Derg, which disrupted agriculture and industry. The more recent 1998-2000 war with Ethiopia also has had a major negative impact on the economy and further discouraged investment. Eritrea lost many valuable economic assets in particular during the last round of fighting in May-June 2000, when a significant portion of its territory in the agriculturally important west and south was occupied by Ethiopia. As a result of this last round of fighting, more than one million Eritreans were displaced. According to World Bank estimates, Eritreans also lost livestock worth some $225 million, and 55,000 homes worth $41 million were destroyed. Damage to public buildings, including hospitals, is estimated at $24 million. Much of the transportation and communication infrastructure is outmoded and deteriorating, although a large volume of intercity road-building activity is currently underway. As a result, the government has sought international assistance for various development projects and has mobilized young Eritreans serving in the National Service to repair crumbling roads and dams.

According to the IMF, post-border war recovery has been impaired by four consecutive years of recurrent drought that have reduced the already low domestic food production capacity. There are now some encouraging signs that the drought may be ending. Eritrea currently suffers from large structural fiscal deficits caused by high levels of spending on defense and on emergency reconstruction and humanitarian programs, which have resulted in the stock of debt rising to unsustainable levels. Exports have collapsed, mainly owing to the border conflict with Ethiopia and border tensions with Sudan; however, large and persistent transfers from Eritreans living abroad have cushioned the impact.

In Massawa, the port has been rehabilitated and is being developed. In addition, the government has begun to export fish and sea cucumbers from the Red Sea to markets in Europe and Asia. A newly constructed airport in Massawa capable of handling jets could facilitate the export of high-value perishable seafood.