Djibouti’s economy grew by an average of over 6% per year in the decade leading up to the start of the Covid-19 pandemic. Investment in transport and port infrastructure, enabled by the rollout of business-friendly regulations and external financing, has been a key driver of this growth. These efforts reflect long-term objectives to leverage the country’s geostrategic location and deepwater port to serve as a regional trade and logistics centre. This focus has had a considerable impact on construction activity in this coastal country in the Horn of Africa. Construction and public works are expected to remain a primary accelerator of Djibouti’s economic expansion in 2023 and beyond.
Oversight
The main government body responsible for sector oversight is the Ministry of City, Urban Planning and Housing. The ministry’s responsibilities include coordinating and implementing housing and urban planning policy, preparing and implementing housing construction policy, as well as defining and monitoring implementation of construction standards. Meanwhile, the Ministry of Infrastructure and Equipment is tasked with the operation, maintenance and renovation of public facilities, along with the design and implementation of road, port and airport infrastructure policy, among other responsibilities.
Performance & Size
Djibouti has been among Africa’s top-performing economies in terms of growth in recent years, posting a 5.5% increase in 2019. The country grew by 1.2% despite international headwinds in 2020, with the figure rising to 4.8% in 2021 before moderating to 2.5% in 2022, according to the IMF’s “World Economic Outlook” update from April 2023. Looking to the future, GDP growth is projected to rebound to 4% in 2023 and 6% in 2024. Capital investment projects for new infrastructure have been important factors behind this economic performance, with the government focusing on assets that can offer longterm returns and multiplier effects for sustained economic expansion. Employment within industry, including construction, accounted for around 13% of national employment every year from 2004 to 2019, according to the most recent World Bank estimates.
The construction sector has played a pivotal role in Djibouti’s economic development since the early 2000s. The value contribution of Djibouti’s construction industry to GDP increased each year in the 2015-20 period, according to the Central Bank of Djibouti (Banque Centrale de Djibouti, BCD). In 2020 the sector was valued at nearly DJF54.2bn ($305.4m) – marking a 9% increase, and more than double the 2017 figure of DJF21.6bn ($121.7m). Construction accounted for 9.1% and 9.6% of GDP in 2019 and 2020, respectively, underscoring its pivotal role in the country’s long-term economic development framework Djibouti Vision 2035. The plan aims to transform the country into a middle-income economy and aims to increase the contribution of construction and public works to 16% by 2035.
While economic disruptions in 2020 stalled growth, the easing of pandemic-related restrictions at the end of the year enabled a recovery in construction activity and investment. By the end of September 2021 construction output had increased by an estimated 22% year-on-year, according to the World Bank’s “Djibouti Economic Monitor” published in late 2021.
Macro Environment
Leveraging inter-regional logistics and trade remains a priority in efforts to unlock the full potential of Djibouti’s geostrategic positioning between Africa, the Middle East and Asia. Ongoing investment to expand and modernise transport infrastructure includes port, free trade zone and railway renovation projects. Many of these investments have been sourced from overseas, weighing on the country’s balance sheet. Indeed, a report from the IMF released in October 2019 identified reducing debt vulnerability linked to large-scale investment in the development of transport and logistics infrastructure as a key measure in ensuring long-term and sustainable growth. To this end, the international institution suggested limits on borrowing by government-owned enterprises and a focus on concessional financing.
Amid the challenges posed by the pandemic, public and publicly guaranteed debt reached an estimated 74% of GDP in 2021, according to the BCD. Around three-quarters of this was attributed to public enterprises. Bilateral debt accounted for 70% of total external debt that year, while multilateral debt represented the remaining 30%, according to the central bank. This external debt was used to fund key construction-related developments, including an electricity connection project linking Djibouti and neighbouring Ethiopia, strategic port and free zone projects, and a railway from Djibouti to Ethiopia’s capital, Addis-Ababa.
The country’s main bilateral donors are China and the Kuwait Fund for Arab Economic Development (KFAED), which account for 82% and 13% of all external bilateral debt respectively, as of 2021. In light of this concentration, Djibouti has been working to diversify its sources of financing, including via multilateral creditors. Moreover, under the auspices of Djibouti Vision 2035 the country launched the Djibouti Sovereign Fund in September 2020 aimed at facilitating investment in sectors including logistics and infrastructure, as well as other regional projects. Since its launch in September 2020 the sovereign wealth fund’s portfolio has incorporated government-owned enterprises from segments such as logistics and utilities, with the fund’s goal being to reach a valuation of $1.5bn by 2030.
Investment
To further encourage private sector investment and enhance the country’s economic competitiveness, ongoing measures to improve the ease of doing business remain key. Possible actions to help meet this objective include improving the business environment, encouraging competition and raising the efficiency of public enterprises to reduce factor costs. In recent years the country has made significant gains in terms of procedures, time, cost and quality control.
Meanwhile, investment in the real estate construction segment is increasingly encouraged by fiscal advantages and supported by international financing. The development of new housing is among the government’s priorities in order to unlock equitable development and enhance living standards for Djibouti’s population – particularly for projects that focus on housing for the low-income segment of the urban population. In addition to new units to meet growing demand, there has been a renewed focus on the renewal of urban areas and the elimination of informal settlements (see Real Estate overview).
Labour
A potential barrier that investors may face in the construction industry – and that the government might see when trying to achieve its development objectives – is a reported shortage of skilled labour within the sector. The utilisation of local firms and workers has remained limited, even amid the host of construction activity in recent years. This is partially attributed to a shortage of human capital, including project engineering and management, as well as skilled construction workers among the domestic population. It is also partially a consequence of the high rates of foreign investment, with some partners bringing their own personnel and equipment from overseas. Nonetheless, international investment presents an opportunity for the transfer of skills and industry expertise, while also driving competition on price and quality.
These advantages can ultimately help raise industry standards, increase domestic employment and boost productivity, supporting Djibouti’s inclusive socio-economic development goals. Promoting the development of the local building materials industry could also be a boon to growth and is a key priority under Djibouti Vision 2035. Indeed, the sector is continuing to move towards international standards for construction techniques and building materials, supporting the ease of doing business for international investors. The development of domestic capacity may go some way towards reducing the cost of construction in the country, a factor that has previously caused issues for foreign companies investing in the sector.
Electricity
Among the construction-related articles outlined in Djibouti Vision 2035, enhanced electricity generation is pivotal to meeting Djibouti’s socio-economic potential. A number of power plants are under development, primarily concerning renewable energy generation. This is reflective of the country’s target of a 100% reliance on renewable energy sources by 2035, aligned with the global transition towards a lower-carbon future. One ongoing project to help meet these national and international goals is the €360m development of a 300-MW solar complex in the Gran Bara region. Construction activity associated with the initiative includes the installation of a substation and related infrastructure. While the timeline for the project’s completion has not yet been determined, it is expected to be executed over six phases that generate an average of 50 MW each. In a related effort, in July 2022 Emirati renewables developer AMEA Power signed a contract to develop a 30-MW plant for the project as part of a public-private partnership. The project is aligned with the Djibouti Vision 2035 objectives of social progress and job creation, as well as those to rely 100% on renewable energy sources.
In March 2022 the World Bank approved $55m of financing through its International Development Association for the Second Djibouti-Power System Interconnection Project, a programme that has been in operation since 2011. Aligned with Djibouti’s inclusive growth objectives, the project is designed to strengthen regional connectivity and support climate change mitigation efforts through low-cost, environmentally sustainable and reliable electricity transmission between Ethiopia and Djibouti (see Energy & Utilities chapter). The $138m project comprises the development of a second, double-circuit and high-voltage electricity transmission line with a combined capacity of 250 MW between a substation at Galafi, bordering Ethiopia, to the Nagad substation, near Djibouti’s capital.
In March 2022 the African Development Bank committed $12m of financing for the project. There is optimism that the initiative could help reinforce Djibouti’s position as a regional trade centre in the years ahead by enabling the country to produce and export excess renewable energy. Set for completion by the end of 2026, it is expected to attract private sector investment and create new jobs and economic opportunities. Moreover, strengthening the supply of energy and lowering electricity prices for construction players could benefit broader industry development – and possibly encourage the domestic manufacturing of key inputs in the years ahead.
Ports
Leveraging port infrastructure to capitalise on Djibouti’s deepwater port position on key trade routes between East Africa and Asia have been priorities since the launch of the country’s 2035 roadmap in 2013. The government aims to provide maritime access for 13 landlocked countries in Africa – thereby consolidating its position as a gateway to the continent, according to the Djibouti Ports and Free Zones Authority (DPFZA).
June 2017 witnessed the inauguration of two Djibouti Vision 2035 port infrastructure facilities in the Tadjoura region. The $64m Port of Ghoubet, which seeks to boost exports of salt reserves from Lake Assal, was financed by the Export-Import Bank of China and employed 600 people during its construction phase. Meanwhile, a $90m terminal for the export of goods from Ethiopia was built by Chinese contractor Baoye Hubei Construction. The facility has the capacity to transport up to 4m tonnes of potash, a potassium-rich salt that is an important fertiliser input, per year. These efforts have paid off, as by 2018 Djibouti handled 90% of trade for its larger neighbour.
The construction of the $570m Doraleh Multipurpose Port was also finalised in 2017, employing some 300 people over its four-year construction phase. The project was a joint venture between the Port of Djibouti and China Merchants Group. In March 2022 the port operator, Société de Gestion du Terminal à conteneurs de Doraleh, signed a sea-air logistics model agreement with DPFZA, Ethiopian Airlines and Air Djibouti. The agreement aims to enhance supply chain management combining the speed of air transportation with lower-cost maritime transportation. Cargo will be transported via sea from China to the free zone, and sent onwards from Djibouti International Airport.
Historic Regeneration
Meanwhile, a redevelopment project was launched to transform the historic Port of Djibouti into an international business district in October 2020. Phase one development for the East Africa International Special Business Zone is expected to cost around $513m through 2025, including a business district, exhibition centre, conference rooms, a hotel and apartments. The six-phase redevelopment project is expected to generate over 27,000 jobs.
The programme utilises the port-park-city concept, which refers to the integration of ports, industrial parks and services. “The ports are a key node in the transportation of goods. The international free trade zone brings added value to these goods, and this new business district is expected to facilitate the development of services, particularly in the financial sector,” Aboubaker Omar Hadi, chairman of the DPFZA, told international media in December 2020.
Free Zones
The July 2018 launch of the first phase of the Djibouti International Free Trade Zone is another construction project that the authorities are hoping to leverage for long-term, sustainable growth (see Trade & Investment chapter). The 4800-ha site is set to be Africa’s largest free trade zone upon completion in 2028, with total costs expected to reach $3.5bn. The first completed phase spans 240 ha, at a cost of $370m. Construction is being undertaken by China’s largest public port operator, Dalian Port. The zone will promote the development of priority industries including logistics and construction, and is expected to create over 15,000 direct and indirect jobs. It will be jointly operated by DPFZA and China Merchants Port Holdings.
Meanwhile, the Djibouti Damerjog Industries Development free trade zone, scheduled to be built by 2033 at a cost of $3.8bn, will constitute Djibouti’s first heavy industrial and petrochemicals facility. Plans include a factory for the production of construction materials. The zone will be the first industrial complex in East Africa with a road-port-air-railway network. International media reported in November 2022 that sovereign wealth fund Ethiopian Investment Holdings plans to hold a stake in the mega-project’s Damerjog Liquid Bulk Port. This $350m component is being developed by Sociétés Maghrébiennes de Génie Civil, a Moroccan firm specialising in port infrastructure construction, and is expected to offer an annual capacity of 13m tonnes once operational from the first half of 2023.
Cross-Border Connectivity
Ongoing construction works to enhance rail and road connectivity between Djibouti and other East African economies presents another opportunity to consolidate regional economic integration while unlocking the country’s socio-economic development potential.
Key among these is a 752-km rail line linking Djibouti with Ethiopia’s capital, Addis Ababa, East Africa’s first fully electrified cross-border railway. The $3.4bn line, which commenced commercial operations in January 2018, was constructed by China Civil Engineering Construction Corporation and China Railway Group, and financed 70% by the Export-Import Bank of China. The project created around 4000 local job opportunities by the first quarter of 2022, with monthly transport revenue reportedly surpassing $10m in November 2021. The link reduces travel time from two to three days to 10 hours, enhancing logistics efficiency for cargo transport and reducing road congestion. The line offers potential for long-term development, with Ethiopia planning to construct an additional 5000 km of railway linking Sudan, South Sudan and Kenya.
Another development designed to relieve road congestion on the Ethiopia-Djibouti corridor, while lowering transport costs and boosting integration, is the construction of a four-lane expressway. Upon completion, the Kampala-Juba-Addis Ababa-Djibouti Corridor will connect two additional landlocked countries – Uganda and South Sudan – to Djibouti’s ports. After construction began on a 60-km section of the route in Ethiopia in May 2021, Djibouti released a tender for the first phase of its section of the project two months later, with the view to completing the project by the end of 2026. The project is expected to be a boon to the construction sector, and will be undertaken by a joint venture between Indian engineering and construction firm JMC Projects and the Longjian Road & Bridge Company, a large-scale comprehensive construction group in north east of China which is primarily engaged in road and bridge construction.
Another road corridor linking Djibouti with Ethiopia was launched at the end of 2019. The 120-km Tadjoura-Balho-Mekelle road connects Tadjoura’s ports with Balho, a Djibouti border town with the Eritrean port of Assab, and later to Mekelle, the capital of Ethiopia’s northern Tigray region. Construction cost some $156m and was financed by KFAED. The route is intended to expedite the transport of potash and other commodities from Tadjoura’s port facilities.
Outlook
The construction sector looks set to continue to play a pivotal role in Djibouti’s economic expansion, including job creation, wider electrification and enhanced regional connectivity. The country is making considerable progress in reinforcing its position as an international logistics centre, spanning port facilities, railway lines and road infrastructure. Such developments provide wide-ranging investment opportunities, while also improving connectivity for the East Africa region. Meanwhile, Djibouti is making progress towards attracting business through free trade zones and industrial parks. There remains scope to better harness international financing flows for domestic development, including opportunities to enhance human capital. This should raise industry standards and employment prospects, and encourage the local production of industry inputs. This will also be important to help address housing shortfalls, promote inclusive expansion and advance progress towards the broader goals of Djibouti Vision 2035 in the coming years.
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