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The long-running Ethiopian civil war left Eritrea, which was, until 1991, the northernmost province of Ethiopia, with its economy in a parlous condition. Since the split from Ethiopia in 1993, Eritrea has been engaged in a series of military campaigns which have stunted its economic development. The most recent border war with Ethiopia cost Eritrea several hundred million dollars.

Agriculture sustains the bulk of the population with indigenous grains, maize, wheat and sorghum as the main crops. However, reconstruction has been hampered by the legacy of war (damage to land, mines, lack of equipment) and poor rainfall, and the country still needs substantial food aid.

The small industrial economy produces glass, cement and textiles. The government has been developing fishing and mineral industries, particularly as there are thought to be significant oil and gas deposits within Eritrea's territorial waters (which may in part explain its border disputes). Exploration rights have been granted by the government to several major multinational oil companies to conduct surveys of the area.

With an average annual per capita income of just US$150, Eritrea is one of the world's poorest countries. But, albeit from a low base, the economy has been expanding rapidly since the end of the Ethiopian war. However, erratic rainfall and below-average cereal production has stumped growth somewhat. Growth rate was 4.8% per cent in 2005.

Eritrea has been granted admission to the ACP group of Third World countries, which receive preferential access to certain European Union markets, and it is now a member of the International Monetary Fund.