Situated on the Horn of Africa at the entrance of the Red Sea on the strait of Bab el Mandeb and overlooking routes linking Europe, Africa, the Middle East and Asia, Djibouti aims to further leverage its unique location among important routes of commerce to become an international trade hub. The country hopes to maintain the stable economic growth it has seen by investing in new transport infrastructure, developing maritime ports and airports, extending road networks and easing cargo traffic with neighbouring Ethiopia through a railway connection inaugurated in January 2018. Success will be determined by how well the ongoing infrastructure plans and the costs of logistics for domestic and international operators are managed.
SECTOR PERFORMANCE: According to the most recent data from the African Development Bank, the services sector accounted for over 77.1% of GDP. Of this, the transport and logistics segment represented 28.4% of GDP in 2016, suggesting that the country’s ability to act as a reliable and efficient trade platform for the region is strongly linked with its economic growth.
The sector has made a number of marked improvements in recent years. According to the World Bank’s Logistics Performance index, released every two years, Djibouti averaged 134th out of 160 countries in its overall ranking in 2016, with the worst performance scores given to logistics quality and competence (152nd), tracking and tracing (139th) and timeliness (132nd). However, in 2018 the country jumped 44 places to the 90th spot overall, with advances made in quality and competence (135th), tracking and tracing (72nd), as well as timeliness (85th). These issues were addressed through a vast transport infrastructure development plan, which has seen the establishment of new seaports, revamped road and railway links and plans laid out for the expansion of airport infrastructure.
The financial commitments that these projects require, however, have come to weigh heavily on budgetary health. Authorities hope that these efforts will allow the country to diversify its economy in the years to come as it positions itself as a logistical hub in the region (see Economy chapter).
FRIENDLY NEIGHBOURS: Economic growth in Djibouti owes much to its close trading relationship with Ethiopia. After the establishment of Eritrean independence in the early 1990s, Ethiopia lost its direct access to the Red Sea and international maritime routes. As the landlocked nation’s economy began to diversify and expand rapidly, driven to a great extent by a series of large-scale construction projects, it came to rely heavily on its much smaller neighbour to access construction materials, equipment and other imported goods. “Ethiopia’s external commerce restrictions were solved through Djibouti, which has invested in its international trade capabilities,” Mamadou Ndione, senior economist at the World Bank, told OBG. “Today, roughly 95% of Ethiopia’s imports come through Djibouti,” he added.
This strict interdependence has been mutually beneficial, leading to the establishment of large-scale infrastructure projects based on the countries’ relationship. For Djibouti it has allowed several years of rapid GDP expansion. However, it has also created a high degree of dependence on Ethiopian trade to feed its own transport and logistics sector. For instance, of the total 11.7m tonnes of merchandise that entered Djiboutian ports in 2016, 8.8m tonnes were destined for Ethiopia, according to figures from the Department of Statistics and Demographic Studies (Direction des Statistiques et Etudes Démographiques, DISED). A similar trend was seen in hydrocarbons imports: of the 3.7m tonnes that came into Djiboutian ports, 3.1m tonnes had Ethiopia as their final destination, which suggests Djibouti has significant scope to expand trade to a greater number of commercial partners. Nonetheless, in the medium-term, Ethiopia is expected to continue to be a key partner and source of business for Djibouti’s logistics sector.
CLOSELY TIED: The relationship with Ethiopia also means Djibouti is affected by regulatory restrictions or monetary problems with its trading partner. One issue that has been having an impact is the limited amount of foreign currency in Ethiopia, which has been mostly used to pay for materials for large-scale projects, such as the Grand Ethiopian Renaissance Dam, expected to become the biggest dam in Africa upon completion. This has created difficulties in handling logistics for some Djiboutian firms, which must pay port fees to move merchandise but may have to wait months to be paid for their services. The lack of currency has been acknowledged by players within the industry as a major challenge. If it is not resolved soon, it could continue to represent a bottleneck for transport operators.
Another difficulty for transporters has been inefficiencies at the Ethiopian Modjo Dry Port, located south-east of Addis Ababa. Lack of adequate stacking equipment at this important logistics point has caused the saturation of available space, leading to reduced performance in the corridor and containers being stored for longer than necessary.
In the past, much of the freight traffic between the trading partners had been used to supply materials and equipment to several large infrastructure projects in the larger nation, but shipping trends have been changing over the last two years. “It seems like the amount of heavy machinery heading into Ethiopia has been reduced now that some of the big projects are winding down,” Araleh Daher, sales executive at APL, subsidiary of French transport and shipping firm CMA CGM, told OBG. “What you see now is some machinery returning to China. The route is mostly serviced by Ethiopian firms, with only a minority of Djiboutian companies operating on the international corridor between the two countries,” he said.
Djiboutian transporters have also been witnessing other changes in the types of commodities moving across the border as Ethiopia expands its manufacturing base. “Ethiopian exports used to be largely made up of agricultural commodities, such as sesame seeds, coffee and beans,” Araleh Daher told OBG. “Now you see exports moving towards other products like finished manufactured goods, clothing, shoes and leather, while you see imports include more textiles and chemicals from Asia to manufacture these goods.”
PORT OPERATIONS: Djibouti’s unique access to maritime trade has elevated the importance of its port facilities, making them a priority for investment. With the aid of foreign concessional financing, authorities have been promoting the expansion of existing ports and the creation of new platforms that cater to different products and types of cargo, while developing staff to run them. “Given Djibouti’s experience in maritime activities, the ports are investing in human resources to professionalise and standardise skills within the sector,” Wahib Daher, CEO of Doraleh Multipurpose Port, told OBG. “In the short term, training centres will be created, and transfers of knowledge will occur, as the country capitalises on its experience and strives to become a global reference in port and maritime training.”
Five different ports and terminals have been under development in recent years. In 2017 three of these facilities were completed and began operations, including the $160m minerals-export port in Tadjourah, the $64m facility at Goubet, which will facilitate the country’s salt exports, and the recently upgraded Doraleh Multipurpose Port. The new additions are expected to raise trade exponentially (see analysis).
Along with the range of upgrades taking place, stakeholders have highlighted the streamlining of logistical operations and investment as another area in need of attention, “Like Singapore a decade ago, Djibouti must make use of ICT to increase the efficiency of its ports and free zones infrastructure,” Warsama Bouh, CEO of Djibouti Port Community Systems, told OBG. “Setting up a single digital entry point, like the port community system, was a very important step as it proves the country’s commitment to excel in the sector.”
STEADY INCREASES: While there are areas for improvement, solid growth in trade volumes has continued to be recorded. Between 2012 and 2016, total cargo including merchandise and hydrocarbons entering Djibouti’s ports rose from 13m tonnes to 15.3m tonnes, according to DISED. Of the 2016 figure, 12m tonnes were bound for Ethiopia, while 1.1m tonnes went to trans-shipment and 2.2m tonnes stayed in country. Comparatively, cargo exiting the country’s ports expanded from 1.8m tonnes to 2.2m tonnes between 2012 and 2016. Of the 2.2m tonnes of exports, 629,000 tonnes were from Ethiopia, while 47,100 tonnes were domestic and 1.6m tonnes were trans-shipped goods.
Total container traffic in Djibouti also rose, with the number of twenty-foot equivalent units increasing from 356,000 in 2008 to 928,000 in 2017, according to the Djibouti Ports and Free Zones Authority (Autorité des Ports et Zones Franches Djibouti, DPFZA).
FREE TRADE ZONE: Besides its growing network of ports, logistics operations in Djibouti will also be supported by a 4800-ha free trade zone. The $3.5bn project is being developed by the DPFZA and Chinese partners, with the Asian country’s largest port operator, Dalian Port Corporation, managing construction. In July 2018 the initial 240-ha phase was launched, which is expected to mobilise up to $7bn in trade in its first two years of operation as part of a 10-year plan expected to generate 350,000 jobs over this period.
In February 2018 the government seized control of Doraleh Container Terminal, which had been under the management by DP World since it was awarded a 30-year concession in 2006. Officials stated at the time that the facility was not running at full capacity or reaching the productivity levels initially agreed upon. DP World took the case to the London Court of International Arbitration, although no new developments had been announced as of August 2018.
UPGRADING CONNECTIONS: Land transport remains a critical component of the country’s logistics operations. Due to consecutive years of underinvestment, many roads in the network are in poor condition, though there have been ongoing efforts to repair them. In the early 2000s a $6m loan was provided by the World Bank to finance rehabilitation of the connection between the Ethiopian capital and the Port of Djibouti. The upgrade helped transform the corridor into an essential trade route, with an estimated 1500 freight trucks crossing the border on average each day.
Although several urban roads are in visible need of repair work, the authorities seem to be prioritising projects with a direct impact on connectivity. Since its inception in 2013 the Djibouti Roads Agency has overseen maintenance of the country’s network, receiving funding from both the national budget and fees charged on a per tonne basis to trucks using ports. In 2016 authorities signed a JPY1.2bn ($10.9m) grant agreement with the Japan International Cooperation Agency to equip several of the authorities in Djibouti City, Tadjourah and Dikhil, with machinery, equipment, training and technical support to adequately maintain urban roads. The construction of the $80m North Tadjourah-Balho corridor highway is also under way. The project is being financed by a loan from the Kuwait Fund for Arab Economic Development and is expected to allow for the export of potash reserves in Ethiopia through the port of Tadjourah.
AIR LINKS: In addition to its land and sea connections, Djibouti also stands to benefit from its location near flight paths between the Middle East, Africa and Asia. While insufficient investment has left the air transport segment inadequately prepared to handle fast growth in traffic, passenger and cargo volumes have been increasing steadily over recent years. The number of yearly passengers passing through the capital’s Djibouti-Ambouli International Airport (DAIA) rose from 243,000 in 2012 to 317,000 in 2016, according to DISED. Over the same period, transport of air cargo expanded from 7660 tonnes to 9890 tonnes. These increases have taken place despite a lack of modernised facilities. “Our Airport was built before independence, and it has only two gates, which makes it quite outdated,” Kamal Daher, flight operations manager at Air Djibouti, told OBG. “A new airport and expansion of existing facilities is necessary, although we understand this is a challenge in terms of mobilising the necessary investment.”
The airport remains the sole air transport facility in the country. Although the 3-km runway makes it adequate to receive big aircraft, traffic and related operations are hampered by the need to share available space with a number of military aircraft from US, Chinese, French and Japanese forces stationed in the country. “At the moment, it is a small and crowded facility,” Kamal Daher told OBG. “However, the government is aware of this and is working to expand the airport.”
FLYING HIGH: Finding adequate operational room will be critical to ensure the success of the recently revamped national carrier, Air Djibouti. After collapsing under a strained financial situation in 2002, the airline was resuscitated in 2015. At the moment the firm is 70% owned by the DPFZA and Ambouli International Airport, with the remaining stake. Since its inaugural flight in 2016, the airline has extended its coverage into regional markets, with regular flights into Addis Ababa and Dire Dawa in Ethiopia; Hargeisa, Bosaso and Mogadishu in Somalia; and Seiyun and Aden in Yemen.
Although passenger numbers remain low and are mostly driven by business travellers, the government’s long-term development strategy, Vision Djibouti 2035, aims to expand tourism and reach 500,000 annual visitors. The flag carrier plans to base its growth on key regional markets like Somalia. “At the moment Djiboutian passengers make up 15-20% of our clients at most and peak in the holiday seasons during the hot weather,” Kamal Daher told OBG. “However, most traffic is made up of the Somali diaspora.” Hargeisa and Mogadishu remain the most profitable routes for the airline.
Overall, 15 regional and international airlines are servicing the country on a regular basis, and it is becoming a growing platform for cargo, as well as a natural passenger transfer point into neighbouring destinations.
Dubai-based Fly Dubai links to the country in partnership with Emirates, while Turkish Airlines has regular flights from Istanbul to Mogadishu through DAIA, and Air France has several flights a week to Paris. The airline with the biggest volume of passengers in 2016 was Ethiopian Airlines, which transported 118,000 passengers to and from Djibouti, followed by Turkish Airlines, Qatar Airways, Kenya Airways, Fly Dubai and Air France with approximately 48,400, 33,500, 30,200, 23,400 and 17,900 passengers, respectively.
Additionally, cargo operations are becoming increasingly attractive for airlines flying into the country, with Emirates Cargo, FedEx, UPS and DHL all developing connections. Growth in cargo volumes is expected over the coming years as the country opens new port facilities, which should serve as an important base for intermodal transport from Djibouti.
Air transport networks are also set to improve with the commissioning of two planned airports, expected to cost a combined $599m. One of these facilities will be in Ali Sabieh, 15 km south of the capital, and have the potential to serve 1.5m passengers annually, while the second will be built near the Seven Brothers islands in the north and focus on tourism. In October 2017 the DPFZA announced that the project would be re-tendered, after being previously awarded. No further developments had been made public as of August 2018.
RAILWAY EXPANSION: Another project set to ease trade with Ethiopia is the new 750-km railway link between Djibouti Port and Ethiopia’s capital city, Addis Ababa. The line, developed at a cost of $4bn, began operations in October 2016, and reportedly cuts travel times from between two and three days to roughly 10 hours. Although the new connection follows the same trajectory as an earlier line built by the French in 1917, the rebuilt railway has the potential capacity to transport over 3500 tonnes of freight per trip, helping to boost both Djibouti’s logistics capacity and Ethiopia’s emerging manufacturing sector.
OUTLOOK: The sector has become the central axis of Djibouti’s economic growth and this pattern is set to continue over the medium term. The relationship with Ethiopia is being further enhanced as a series of infrastructure projects come on-line. At the same time, increasingly modern facilities are removing bottlenecks and improving Djibouti’s positioning as a gateway for other landlocked countries in the region.
However, maintaining momentum and, more broadly speaking, the economy’s positive performance will require the diversification of economic partners, and the correct balance of resources to continue leveraging Djibouti’s position. In order to secure continuous growth, Djibouti would have to overcome a number of challenges. As pointed out by some key players in the local industry, such obstacles include maintaining a positive business climate, increasing the use of the railway connection to Ethiopia, improving the quality of the road network and developing the air transport infrastructure for cargo operations.
Despite these growing concerns, the transport and logistics sector is expected to continue to sustain high levels of foreign direct investment for the foreseeable future, particularly due to its increasing importance for international trade flows and regional relevance.
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