It is no exaggeration to say that Eritrea is at a cross-roads today. The war with Ethiopia meant that the development plans and programs gradually put into place since independence were disrupted. The signing of the peace agreement in December 2000, and the ruling of the boundary commission on April 13, 2002, are all-important, but it is clear that the conditions facing Eritrea are significantly more difficult than prior to the war. Not only are the direct costs of the war very high, but the break in economic relations with Ethiopia and the loss of investor confidence will continue to exact a price for some years to come. It is in this context that the Government has decided to review its development strategy and has asked for World Bank input into this process. In response, the Bank has prepared this Country Economic Memorandum (CEM). It follows the first CEM on Eritrea (World Bank 1994) that provided a Bank and donor input as independent Eritrea refined its development strategy. The CEM is divided into three chapters. The first is a review of Eritrea's development experience since independence, organized along the lines of the recommendations of the previous CEM. These recommendations covered nine major areas ranging from achieving macroeconomic stability to improving the environment. The second chapter is a review of government expenditure in Eritrea. A notable feature of this first Bank effort to review the public expenditures of Eritrea is an attempt to assess the composition of expenditures in Eritrea by reassigning them from original budget heading to a programmatic classification. The third chapter outlines a learning strategy for Eritrea. This is not meant to replace Eritrea's existing strategy. The learning strategy is meant to supplement the existing strategy based on the experience of actual implementation over the last ten years, but also on Eritrea's post-war reality.