Djibouti has a long relationship with China due to its location at the mouth of the Red Sea, which positions it as an important centre for international maritime trade. This was noted by Xue Bing, China’s special envoy for the Horn of Africa, during the Horn of Africa Peace conference held in Addis Ababa, Ethiopia, in June 2022, during which China reasserted its commitment to working with its regional partners to advance its Initiative of Peaceful Development in the Horn of Africa.
Infrastructure Projects
China’s economic and trade strategy in the region is part of its Belt and Road Initiative, a global infrastructure development plan to boost economic growth and connectivity between Asia, Europe and Africa. Reflecting its growing influence and its strategic interest in maintaining stability and promoting development in the region, China has expanded its presence in the Horn of Africa in recent years. In line with this strategic direction, China established its first overseas military base in Djibouti in 2017 to serve as a logistics support centre for Chinese peacekeeping and humanitarian missions in Africa and the Middle East, as well as its efforts to combat piracy in the region.
Djibouti has attracted significant investment from China, which has provided funding for various infrastructure projects in the country, including the Doraleh Multipurpose Port and the Djibouti International Free Trade Zone (DIFTZ), which is expected to become Africa’s largest (see Industry & Retail chapter). These have boosted the Djiboutian economy and further leveraged its location by creating the infrastructure to support greater international trade. In addition to the spending commitments under the aforementioned Belt and Road initiative, the relationship between the two countries established a strategic partnership in 2017.
However, Djibouti’s high level of sovereign debt – which the US Congressional Research Service estimated rose from 50% of GDP in 2016 to 104% of GDP by 2018 – is noteworthy. As of the first quarter of 2022 the nation’s external public debt stood at $2.4bn. In order to address this effectively, the government is pursuing a strategy to combine structural reform and fiscal consolidation with public and private sector investment to diversify the country’s economy and secure a greater proportion of international trade.
Debt Financing
Pressure on public finances has raised concerns about Djibouti’s ability to meet its debt obligations. At the end of November 2022 it was reported that Djibouti had suspended bilateral debt repayments to China and Kuwait after its debt-servicing obligations more than tripled from $54m to $184m, and the World Bank sees this figure reaching $266m in 2023. These challenges have been compounded by global inflation dynamics and associated price increases.
Debt financing was initially provided by stateowned banks China Merchants Port Holdings and the Export-Import Bank of China to finance the construction of several key infrastructure projects, including the Addis Ababa-Djibouti railway, a water pipeline from Ethiopia to Djibouti, Doraleh Multipurpose Port and the DIFTZ. It has funded projects that are not only pivotal to Djibouti’s economy and others in the region, but are also significant for China’s international footprint.
While the country’s small size and limited economic base mean that economic diversification and the generation of new sources of revenue will take time, meaningful progress is being made towards its diversification goals, with China signalling its readiness to work with Djibouti. Despite Djibouti’s suspension of loan repayments, the two countries have continued to maintain a strong relationship, and the likelihood of renegotiating debt obligations with China is considered to be high.
The country’s economic outlook nonetheless remains positive, especially in comparison to other countries that have been beneficiaries of the Belt and Road initiative. With the support of its overseas partners, Djibouti is continuing to work to stabilise its economy and position itself as a strategic centre for multi-modal logistics and international trade in the Horn of Africa.
Read More from OBG
