How is Djibouti positioning itself as a key entry hub into Africa?
25 Sep 2018
Like many of its African peers, Djibouti’s economy has performed positively in recent years, with GDP growing by 6.7% in 2017.
The country owes this performance primarily to government efforts since 2014 to overhaul the economy, championed by its national development blueprint, Djibouti Vision 2035. The plan aims at transforming the country into a middle-income economy, as well as a regional transport and logistics hub. And the strategy seems to be a welcome one by the country’s business community.
In our inaugural Oxford Business Group Business Barometer: Djibouti CEO Survey, 68% of the 40 C-Suite executives surveyed believe Djibouti Vision 2035 will be successful or very successful in achieving its goals.
Transport to boost commerce
A good share of investment in Djibouti in recent years has been channelled into upgrading and expanding infrastructure and transport networks.
Since the launch of our first-ever Report on Djibouti in 2016, the country has inaugurated three new ports: the Doraleh Multipurpose Port, the port of Tadjourah and the port of Ghoubet; a railway between Djibouti City and Addis Ababa, Ethiopia has been established; and the first phase of the Djibouti International Free Trade Zone – one of Africa’s largest free-trade zones – was opened.
The transport sector, in particular, has traditionally accounted for a significant portion of GDP, at 28.4% in 2016, and Djibouti is capitalising on this asset to push through its agenda to serve as a logistics hub and gateway to Africa.
Boasting one of the most strategic locations on the continent, the 900,000-person Horn of Africa nation sits at the crossroads of the one of the world’s busiest trade routes, opening onto the Red Sea and the Gulf of Aden, and it borders one of the region’s most dynamic, landlocked markets: Ethiopia.
A direct neighbour and long-time ally, Ethiopia is one of Djibouti’s most-important commercial partners, with more than 90% of its trade transiting through Djiboutian ports.
The newly established railway line between both capitals offers the promise of easing cargo traffic even further, but what’s even more promising are Ethiopia’s growth prospects. With a population of 100m, Ethiopia is Africa’s second-most populous country after Nigeria, and, according to the IMF, it is set to be sub-Saharan Africa’s fastest-growing economy in 2018.
This perhaps explains why Djibouti has brought a number of major infrastructure projects on-line to meet such potential.
Efforts to diversify and create economic opportunities
However, Ethiopia’s prospects are not Djibouti’s sole motivation in rolling out these developments: national and local ambitions are also at the heart of the strategy. With a median age of 20, Djibouti has a large pool of young people to provide employment and economic opportunities for.
Djibouti is also betting on economic prosperity to bring down its poverty rate, which, according to the IMF, stood at 41% in 2016.
Furthermore, the need to strengthen trade ties beyond Ethiopia is evident in the same way that oil-rich countries, for instance, must diversify away from their dependence on a single commodity. Leveraging assets is important, but diversification is key for any country looking to establish sound macroeconomic foundations.
While Ethiopia is likely to remain the country’s main trade partner for the near to medium term, efforts to foster new relations in the region and beyond could see this share somewhat level out in the long run.
Djibouti currently has access to a variety of markets in the region through its membership in COMESA and the Intergovernmental Authority on Development. The more recent Africa Continental Free Trade Agreement (AfCFTA), which aims to deepen regional integration and trade, should also help build on the country’s existing trade portfolio.
Opinion on this agreement is largely favourable, with 75% of respondents saying AfCFTA will have a positive or very positive effect on intra-regional trade.
Inter-continental agreements drive positive sentiment
Beyond Africa, Djibouti has developed strong relations over the past decade with Asia, and especially China. Through its Belt and Road Initiative, China has been an active developer of some of the country’s biggest infrastructure projects, such as the $3.4bn Port of Djibouti-Addis Ababa railway.
During the most recent Africa-China forum, which took place in the first week of September, President Ismaïl Omar Guellah met with his Chinese counterpart Xi Jinping and signed a memorandum of understanding to strengthen bilateral relations.
In what has traditionally been regarded as a troubled region, Djibouti has been considered a safe haven for many looking to invest in the Horn of Africa. That said, the business community remains wary of the implications potential cross-border instability could have on the country, with 65% identifying this as the top external event that could affect the economy in the short to medium term.
Nevertheless, executives appear confident in Djibouti’s near-term prospects, with 71% forecasting GDP growth of 6-8% and 90% saying they have positive or very positive expectations of local business conditions in the coming 12 months.