Creating connections: New infrastructure and better regulation to improve trade conditions

With its strategic position on the Gulf of Aden, along a primary Europe-Asia shipping route, and its status as an entry-point to the hundreds of millions of consumers in East Africa, Djibouti’s economic strategy is predicated on leveraging its potential as a trade platform. This stance is supported by ambitious plans to build new ports, airports and railways, and to significantly raise transport capacity for a multitude of commercial products and materials.

The economy already depends heavily on trade and has been benefitting greatly from its role as a link between Ethiopia, which has been experiencing double-digit growth in GDP for the past decade, and international markets. According to a 2014 report by the World Trade Organisation (WTO), 90% of Ethiopian traded goods passed through the port of Djibouti. The close link with its 95m-strong neighbour to the west has allowed Djibouti a solid base for its own growth in GDP, which is expected to reach 6.5% in 2016, according to figures by the IMF, and 7% in 2017. Trade in goods and services accounts for 94% of Djibouti’s GDP, according to the WTO.

Unsurprisingly, this fact has increased the volume of traffic going though Djibouti’s port facilities. The number of twenty-foot equivalent units handled by the country rose from 176,453 in 2002 to 854,851 by 2014, according to information from Djibouti Ports and Free Zone Authority (DPFZ). Similarly, total cargo tonnage rose from 4.1m metric tonnes to 8.1m metric tonnes of the same period of time.

Next Step

The country’s present focus is to scale this performance up, without increasing its vulnerability to fluctuations in global trade flows. To help limit the impact on the state balance sheet of the high capital costs required by its plan, Djibouti has been working to source foreign investment and financing for a number of its major infrastructure projects, ranging from US backing for a pipeline to significant Chinese funding for a modern railway project. “Djibouti has been diversifying its investment sources and the number of countries it does business with. This is a reflection of the fact that the world has changed, and there are now new emerging economic powers and a diversity of potential economic ties that can be established,” Samir Aden Cheikh, advisor to the Minister of Economy and Finance, told OBG.

Close to $14bn of planned investments are expected to add new infrastructure to the country and improve its ability to compete internationally. Investment as a percentage of GDP is expected to have reached a record 60% of GDP in 2015, although this will ease to 53% of GDP in 2016, according to recent statistics from the IMF.

The infrastructure projects – from new port facilities to two new airports – are by their very nature ambitious. “Djibouti is a very small country. This means that all projects need to be thought of with Ethiopia and the larger East African market in mind. That is the only way to make them sustainable,” Cheikh told OBG.

The new developments highlight the efforts by the government to diversify the country’s capacity as well. Currently under construction in the maritime sector alone is a $200m ship repair dock; $160m mineral export port facility in the northern city of Tadjourah; an expansion of the Doraleh Multipurpose Terminal, set to cost $590m; a salt export terminal in Goubet; and a $3bn liquefied natural gas terminal and a $200m crude oil export terminal, which combined will have an annual capacity of 20m tonnes.

Trade Partners

Ensuring a wide range of trading partners, both for transiting goods and for direct imports and exports, is also central to the country’s objectives and as a result, the small country’s trade volumes with countries in the Middle East and Asia have been rising significantly.

Imports from the UAE into Djibouti reached DJF29.2bn ($163.5m) in 2014, while Saudi Arabia, another important trade partner, exported DJF22.1 ($123.8m) worth of goods into the country. China is becoming an increasingly relevant commercial partner, while Turkey has recently begun to strengthen links as well, through direct flights and a new industrial zone that will cater to Turkish companies wanting to increase commerce with East African countries “The Djiboutian economy has seen a lot of foreign investment that has driven recent growth. An important issue is to ensure that these investors transfer the knowledge and involve the local community and companies in their activities,”Omar Omar Tani, general manager of Tani told OBG.

Regional Exchanges

Additionally, trade possibilities with countries in East Africa are also improving. Djibouti is an active member of the COMESA; a 19-member regional body tasked with strengthening economic integration between East African countries. Currently under implementation is COMESA’s virtual trade facilitation system, which allows its member countries to track goods in transit in real time. Initial testing began in 2012 on the trade corridor linking Djibouti to Addis Ababa and South Sudan. It is expected that the system will help promote trade security and transparency, as well as allow COMESA countries to combat tax evasion.

Regulatory Changes

To ensure that soft infrastructure keeps pace with the hard infrastructure upgrades, Djibouti has worked on improving the rules and regulations to reduce delays and costs for transport activity. In 2010 authorities published the country’s National Trade Development Strategy (Stratégie Nationale de Dévelopemment du Commerce, SNDC), which led to the implementation of several measures that have set the base for a better environment for international commerce activities. These have included the upgrading of software systems used by Customs to process merchandise going through the port, the introduction of a commercial code, as well as the enhancement of sector statistics, according to information by the WTO. To support growing international business interaction, the Djibouti Chamber of Commerce (Chambre de Commerce de Djibouti, CCD) is setting up an International Centre for Arbitration.

The centre will be based in Djibouti, and work will be done jointly between the CCD and the Inter-Governmental Authority on Development, a regional grouping on security and economic development. Overall, trade policy is also expected to benefit from the establishment of the National High Council for Public-Private Dialogue (Haut Conseil National du Dialogue Public-Privé, HCNDPP), which was officially launched in March 2014. A development and expansion of free trade zones (FTZs) with valuable tax exemptions has served to attract a number of foreign companies to settle down in Djibouti, and the government is expanding the use of FTZs, with a planned new 3500-ha area set to be built in the next decade.