The Eritrean economy is largely based on agriculture, which employs 80% of the population but currently may contribute as little as 12% to GDP. Agricultural export include cotton, fruit and vegetables, hides, and meat, but farmers are largely dependent on rain-fed agriculture, and growth in this and other sectors is hampered by lack of a dependable water supply. Worker remittances and other private transfers from abroad currently contribute about 32% of GDP.

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 remains outmoded and deteriorating, although a large volume of intercity road-building activity is under way and the introduction of mobile telephony is expected in early 2004. 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.

Small businesses, such as restaurants, bars, Internet cafes, stores, auto repair shops, and crafts thrive in the Asmara area. A brewery, cigarette factory, small glass and plastics producers, several companies involved in making leather goods, and textile and sweater factories operate in the Asmara area. The textile and leather industries have made a partial recovery since independence. Most local industries rely on outmoded technology and suffer from a lack of capital investment.

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.