ASMARA, April 14 (Reuters) - Eritrea's government, facing a shortage of foreign exchange, will enforce tough new rules to crack down on black market currency dealing on Friday, according to documents publicising the new rules.

Offenders caught using foreign currency in Eritrea without permission could face two years in prison and a fine of two million Nakfa, more than $130,000 at official rates, a hefty fine in the Red Sea state where average income is about $130.

The government faces serious shortages of hard currency due partly to a collapse of trade with neighbouring Ethiopia and Sudan, its fixed exchange rate and the fact that most foreign exchange transactions take place outside official channels, according to the International Monetary Fund (IMF).

The IMF has also said Eritrea's defence spending is high. Tensions with Ethiopia have lingered in the wake of the two neighbours' 1998-2000 border war.

Government officials say the shortages are due to generous fuel subsidies needed to protect the rural poor in the country of less than four million people.

The government announced fuel price rises of up to 25 percent on Saturday due to high world oil prices.

The new currency regulations, dated 28 March and due to take effect from April 15, target people involved in exchanging foreign currency exchange without permission, illegal remittances of Nakfa for dollars received abroad, and the "deceitful" import or export of foreign currency, as well as any transactions involving foreign currency done without permission.

In 2003, remittances from Eritreans abroad, many of whom are living in Europe and the United States, were worth an estimated 70 percent of Eritrea's gross domestic product, according to estimates made by economists.

In the same year, foreign reserves were equal to just two weeks worth of imports, according to the IMF.

On January 1, the Nakfa exchange rate was increased to 15 Nakfa to the U.S. dollar at the official rate, from 13.5 Nakfa against the U.S. dollar. The U.S. dollar currently fetches more than 20 Nakfa on the black market.