Having successfully leveraged its geographic position economically, Djibouti has recently weathered a combination of regional and global instability. Despite these headwinds, the country’s resilience remains anchored in the comparative advantage of its location. Djibouti has continued to attract investors across multiple sectors, serving as a transit point between African, Middle Eastern and Asian markets. Indeed, as a natural gateway to the trade routes that cross the Red Sea and the Gulf, the country has positioned itself as a strategic partner for transport operations and energy trade. Transport links to neighbouring landlocked Ethiopia, in particular, have made Djibouti an integral part of international trade and commerce with the largest country and most dynamic market in the Horn of Africa.
These favourable conditions have been compounded by a steady programme of infrastructure development. Public and private investment has given rise to new ports, roads and railway links, as well as critical energy and water assets to serve the country’s growing population. The result has been a fast and sustained expansion of GDP.
Policy Goals
As the country seeks to achieve its economic ambitions, several structural factors are in focus. Arid and dry climate conditions, coupled with a lack of natural resources, have historically limited domestic food production, exposing Djibouti to commodity price volatility. Addressing the twin challenges of food insecurity and poverty, both of which are aggravated by climate change, will be key to raising living standards across the population. At the same time, improving education and professional training mechanisms will be important tools to address unemployment and unlock growth in household incomes over the coming years.
Policymakers expect that investment in infrastructure, coupled with leveraging Djibouti’s competitive advantages in logistics and transport, will drive growth across other sectors of the economy. To achieve this, the authorities are expected to look to small and medium-sized enterprises (SMEs) to spur growth, and enact broad and sustained human resource development programmes.
Performance Indicators
Djibouti’s annual economic growth has been notable. GDP in current prices grew from $1.9bn in 2012 to $3.7bn in 2022, according to figures from the IMF. The equivalent figures for GDP per capita increased by close to 65% over the same period, from $2190 to $3590.
Accelerating GDP growth – a key government policy objective – has been partly secured through a mix of investment in key transport infrastructure and improvements in the country’s broader business environment. Over the 2014-16 period GDP grew at an annual rate of more than 7%, before easing to 5.5% in 2017, 4.8% in 2018 and 5.5% in 2019, according to the IMF. Recently, as has been the case in many markets, economic expansion has slowed as a result of the Covid-19 pandemic, war in neighbouring Ethiopia and Russia’s ongoing invasion of Ukraine. GDP growth eased to 1.2% in 2020 but rebounded to 4.8% in 2021, before moderating to 2.5% in 2022. Expansion is projected to accelerate to 4% in 2023 and 6% in 2024, according to the IMF.
Despite the notable economic rebound following the pandemic, trade volumes were still below their normal levels as of the end of 2022, limited by ongoing disruptions to global supply chains, and a reduction in commerce between China and Ethiopia points to more subdued growth prospects.
As was the case around the world, the pandemic led to a slowdown in domestic and external economic activity. The government acted quickly, however, adopting support mechanisms for households, SMEs and vulnerable populations. Djibouti also received significant support from the international donor community. After a roughly two-month lockdown, business operations slowly resumed, which allowed for a rebound in key sectors such as trade, construction and energy in the second half of 2020. Overall investment held steady at 26.4% of GDP in 2020, before decreasing to 21.7% of GDP in 2021. Covid-19-related government assistance to households and businesses lasted from the first quarter of 2020 into the first half of 2022, supporting a degree of domestic consumption.
Port Traffic
With more than 75% of GDP connected to transport services to Ethiopia, Djibouti remains dependent on the economic fortunes of its landlocked neighbour. The start of war in the Tigray region of Ethiopia in late 2020 – alongside pandemic-related disruptions to trade – affected the logistics services sector and the country’s economy.
Traffic through Djiboutian ports fell from 16.3m tonnes in 2019 to 14.3m tonnes in 2020. Although a post-Covid-19 economic rebound pushed traffic upwards to 15.2m tonnes by 2021, it remains below pandemic levels. As of June 2022 the global volume of goods transiting Djibouti’s ports was down 8% year-on-year, according to the World Bank. The downturn stemmed in large part from a reduction in Ethiopian demand, and underlined Djibouti’s strong dependence on trade with its neighbour, which accounts for 80% of goods handled.
After two years of civil war, the announcement of a peace agreement between the Ethiopian government and the Tigray’s People Liberation Front in November 2022 has renewed hopes for a more prosperous and stable future in the Horn of Africa. Despite the tentative good news, regional instability is set to have an impact in the short term.
“Every country would want to service Ethiopia because it is a huge market of more than 110m people,” Guled Ahmed, a specialist in hydropower, water resource management and highway infrastructure projects, as well as a non-resident scholar at the Middle East Institute, told OBG. “However, Djibouti is dependent on commerce with Ethiopia, and even for part of its energy and water. This can amount to a vulnerability, especially if the conflict reignites in Ethiopia, or if the country decides to diversify its trade routes,” Ahmed added.
Strategy Implementation
Despite the additional challenges that have arisen from the external environment in 2022, the authorities have moved ahead with economic and development plans. The bulk of these policies are part of Djibouti Vision 2035, the country’s long-term economic and diversification development strategy. Since it was launched in 2014, the plan has aimed to turn Djibouti into a middle-income country supported by its unique role as a competitive regional logistics centre located on key merchandise and energy trade routes. More specifically, the strategy envisions the creation of 200,000 new jobs and the tripling of national per capita income by 2035 (see analysis).
Djibouti Vision 2035 is divided into five-year plans. The first of these, the Strategy for Accelerated Growth of Employment, implemented during the 2015-19 period, established the country as a reliable transport point in the Horn of Africa. It allowed Djibouti to build modern maritime transport and railway infrastructure, and expand electricity access and supply. Annual nominal GDP expanded from $2.4bn to $3.1bn over that period, and the country’s business environment improved through a reduction in red tape and other incentives for new business creation. In recent years the authorities have established a one-stop shop for business creation, strengthened protections for minority investors and eased procedures for property transfers.
The second five-year plan, called the National Development Plan 2020-24, or Djibouti ICI, because it is built on three strategic axes – inclusion, connectivity and institutions – was launched in February 2022, and has been allocated a budget of DJF2.5trn ($14bn). Among other things, the authorities hope the current five-year plan will more equitably distribute the economic benefits Djibouti has accrued, improve the state’s institutional capacities, and cement the country’s economic positioning as a trade and transport centre. The implementation of the plan is being tested by the successive macroeconomic shocks the global economy has endured in recent years. This will likely affect some of its economic aims, such as the government’s goal for GDP to grow at an average rate of 8.5% over the period. Even without this level of economic expansion, a focus on and acceleration of economic reforms and investment in port activities and a growing services sector should drive continued development and modernisation of the economy.
GDP Structure
While the implementation of development plans has secured the country’s standing in the region as a trade centre, leveraging this to diversify the economy will require investment in other sectors as well as skills development. Dependence on commerce with Ethiopia has given the services sector an outsized role in the Djiboutian economy. By end-2022 services were projected to account for 76.8% of GDP, according to the World Bank, while industry and agriculture were expected to contribute 15.7% and 1.6% of GDP, respectively. Transport services, meanwhile, strengthened by large-scale investment in infrastructure, have been a driving force of the country’s economic development, with Ethiopia alone paying more than $1bn in port fees to Djibouti annually.
Raising the contribution of industry to GDP is a key goal of government policy. Development of local manufacturing has historically lagged due to uncompetitive energy prices and the lack of a sufficiently large pool of trained human resources. However, much is expected from the development of the Djibouti Damerjog Industrial Development, located in the region of Arta, which will focus on heavy industry and is expected to include fuel stocking areas, a refinery, as well as cement and other building materials production capacity (see Industry & Retail chapter). The World Bank projects that the industrial sector’s contribution to GDP will grow from 14.1% in 2018 to 16.6% by 2024.
Food & Agriculture
In terms of agriculture, however, the lack of activity, unlike most other African countries, has translated into very specific challenges. Djibouti has an estimated 10,000 ha of arable land, and although the sector grew by 11.4% in 2021, it still amounts to a small portion of national GDP. The majority of the sector is made up of cattle raising, which contributed DJF5.7bn ($31.2m) in value added over 2021, compared to DJF1.6bn ($9m) from standard agricultural activity. Indeed, the conditions for food production have left Djibouti’s population at risk to shortages and dependent on food imports. Vulnerability to swings in food and commodity prices was again underscored by Russia’s invasion of Ukraine in early 2022.
Budget
In addition to ongoing macroeconomic instability, a combination of lower trade revenue and mounting debt servicing have had an impact on Djibouti’s budget structuring in recent years. A key focus is the management of rising debt, as well as mobilising additional tax revenue.
The 2021 budget totalled DJF140.7bn ($792.7m), a 2.4% decrease on expenditure in 2020. Government revenue and grants, meanwhile, registered a 2.6% decrease, amounting to DJF127.6bn ($718.9m). However, according to figures from the Central Bank of Djibouti, the fiscal deficit eased from 2.1% of GDP in 2020 to 1.9% of GDP in 2021. For 2022, the national budget was expected to rise slightly to DJF143.9bn ($810.7m), although spending will likely be influenced by the high energy and food costs that affected global markets over the course of the year.
In a report published after a visit to the country in June 2022, the IMF commented on the need to create fiscal space in free up adequate room for social expenditure. In recent years expenditure on infrastructure has consumed roughly 30% of Djibouti’s annual budget, while 5% has gone to the health sector and 3% to social spending, according to figures from the World Bank. Striking the right equilibrium between infrastructure development and the improvement of living standards for citizens should help to maintain social stability amid a challenging global environment.
The 2022 budget reportedly adopted measures to increase revenue, including a revision of income tax brackets by increasing rates on progressive income taxes, and lowering the value-added tax threshold in order to enlarge the number of taxpayers. Other measures in the budget have aimed to make spending more efficient. For example, new hiring in the public sector was frozen, subsidies to state companies were reduced, and government tenders for goods and services were centralised.
Debt Servicing
Over the coming years, Djibouti is expected to work to balance its attractiveness as an economic and geopolitical centre with the need to raise tax revenue. Average tax collection remains at about 10.8% of GDP, according to the World Bank, leaving room for Djibouti to capture additional fiscal resources and create greater fiscal room to invest in its development plans and service its debt.
Infrastructure development projects undertaken to date have been mostly supported through debt financing. Although the commissioning of new transport, energy and other major infrastructure projects have been key tenets of Djibouti’s growth model, debt servicing is increasingly weighing on the fiscal situation and perceived risk. The bulk of loans have been channelled towards the construction of railway links, water pipelines and electricity connections – all with neighbouring Ethiopia – as well as the development of the country’s port infrastructure to facilitate regional and global trade flows.
According to the Central Bank of Djibouti, the public debt-to-GDP ratio reached 74% in 2021, a four-percentage-point increase relative to 2020. Most of this debt, at 70%, is bilateral debt, owed primarily to China, and to a smaller extent, the Arab Fund for Economic and Social Development. Although the building of these infrastructure projects has been essential for Djibouti to pursue its development goals, a slowdown in trade driven by the pandemic and the war in Ethiopia has strained the country’s ability to make payments.
Djibouti’s section of the 752-km railway to Ethiopia, for instance, cost roughly $550m, while the pipeline that allows the country to receive freshwater from its neighbour required an investment of $329m. In November 2022 mounting pressure led the government to suspend payments to some creditors. As of 2022 Djibouti was also in discussion with the Export-Import Bank of China, its creditor for loans used to build the water pipeline and the railway link with Ethiopia, to restructure its debt, likely by extending the maturity to 40 years and reducing the weight of interest payments. Given Djibouti’s importance to Chinese interests in the Horn of Africa as a key node in its global Belt and Road Initiative, a deal that allows Djibouti to fulfil its commitments without compromising its growth objectives is expected to be reached soon.
Inflation
Similarly to other economies, inflation in Djibouti began to rise as the country recovered from the worse effects of the pandemic. Annual inflation rose from 0.3% in 2020 to 2.5% in 2021. However, by mid-2022 macroeconomic volatility as well as domestic and regional conditions had pushed inflation upwards. Furthermore, high global food prices driven by Russia’s invasion of in Ukraine had affected commodity imports. As a result, inflation peaked at 11.6% in June 2022. Food prices, in particular, will continue to be an important variable for Djiboutian households. Prices for flour and cooking oil rose by 12% and 47%, respectively, between February and July of 2022, according to figures by the World Bank. By September of that year annual inflation had fallen to 6.1%. Although most projections expected inflation to ease over the course of 2023, energy and food prices are likely to remain a source of pressure for global prices.
Revenue Streams
The country’s strategic position with access to the Red Sea and the Gulf of Aden has made Djibouti an attractive military centre. China, France, Italy, Japan and the US all rent space for military installations, which accounts for a combined $125m in government revenue per year.
More broadly, the country’s long-term economic strategy to focus most of its economic growth on Ethiopia may change. In March 2018 the Ethiopian government bought a 19% stake in the Port of Berbera in Somaliland. The port is owned by UAEbased DP World, which holds a 51% stake, and the Somaliland government. The deal was expected to give Ethiopia an additional avenue for conducting international trade. With rising signs that its landlocked neighbour is diversifying its transport and logistics routes, Djibouti will benefit from increasing its economic cooperation efforts across the broader region. “One huge opportunity for Djibouti is to integrate with Somaliland economically and in terms of infrastructure” Ahmed told OBG.
The pandemic, as well as global macroeconomic instability in 2022, are likely to have tempered the short-term appetite for emerging market investment. However, Djibouti is expected to remain an attractive destination for foreign direct investment (FDI) flows due to its importance for maritime trade. According to figures by the UN Conference on Trade and Development (UNCTAD), FDI in Djibouti has increased steadily in recent years, nearly doubling from $124m in 2015 to around $240m in 2020. More broadly, FDI stock increased from $40m in 2000 to an estimated $1.9bn by 2020, according to UNCTAD. In addition to expanding port and transport infrastructure, FDI has focused on industry, services, and the real estate and construction sectors.
Ongoing improvements in the energy sector are expected to boost Djibouti’s attractiveness as an investment destination by gradually reducing electricity costs. At the moment, more than 65% of the country’s electricity supply is generated by dams in neighbouring Ethiopia and imported. While the remaining supply comes from domestic, fossil fuel-generated thermal power, the government aims to deploy solar, wind and geothermal infrastructure to generate 100% of power from renewables by 2035 (see Energy & Utilities chapter).
Poverty Reduction
Although Djibouti’s transport activities have accelerated economic growth and gradually diversified the economy, improving living standards remains a priority. As much as 16% of the population was below the international poverty line in 2022, according to the UN World Food Programme (WFP). The consequences of Russia’s invasion of Ukraine on global food prices have affected Djibouti and compounded existing food insecurity. Structural problems, such as the lack of arable land and the ongoing dry spell in the region at large, have required urgent measures. As of June 2022 roughly 132,000 people in Djibouti, or 11% of the population, were facing acute food insecurity, according to the World Bank, with an additional 127,000 at risk of shortages. The WFP estimates that the population’s poorest segments spend 77% of their household budget on food. In October 2022 the World Bank approved a $20m grant to combat food insecurity in Djibouti through the establishment of an emergency food stock.
The current global environment of high commodity prices has been challenging. With around 90% of Djibouti’s food requirements covered through imports, the population is especially vulnerable to swings in prices. Given the ongoing volatility of commodity prices globally, Djibouti will likely look to secure additional support mechanisms to ensure food supplies and affordable prices for the population into 2023 and 2024.
Employment
Generating new employment opportunities is an important plank in the government’s plan to reduce poverty rates. With more than 70% of the country’s 1m-strong population under the age of 35, Djibouti’s young workforce represents both an opportunity and a challenge. While the country was able to reduce unemployment from 29% in the mid-1990s to 26.1% by 2017, rates have risen slightly in the wake of the pandemic, reaching 28.4% in 2021. Unemployment disproportionately affects young people. Fiscal consolidation will likely limit public sector employment over the coming years, making it increasingly important to accelerate growth in the private sector and promote entrepreneurial opportunities that lead to job creation.
Improvements in training and education will also be beneficial (see Health & Education chapter). In March 2022 the World Bank approved a $15m financing mechanism to fund a project to expand enrolment in technical and vocational training programmes for citizens. The programme’s goal is to improve qualifications in order to promote employment, and is expected to increase enrolment in technical and vocational education and training programmes from 4700 to approximately 8000 students, of which 40% are women.
Outlook
Djibouti has showcased a significant degree of resilience to a multitude of global and regional crises. Although its role as a critical transport centre in the Horn of Africa has been strengthened over recent years, the impact of external shocks has brought new challenges. The combination of declining tax collection and rising debt servicing is prompting the authorities to pursue budgetary restructuring and will likely lead to further revisions to existing tax exemptions.
A sustainable peace in neighbouring Ethiopia will be critical for Djibouti to return to its high GDP growth rates. However, the country will continue to be vulnerable to global shock waves arising out of the war in Ukraine. Going forwards, the continued focus on infrastructure expansion and improvement in social protections will likely allow Djibouti to maintain domestic consumption levels over the medium term. Nonetheless, the exposure of many households to food insecurity remains an important development prerogative, and future employment creation will depend on efforts to diversify the economy, free-up private sector activity and increase domestic manufacturing industries.
While some of the growth objectives laid out in the 2020-24 development plan may be ambitious, the economy is set to benefit significantly from government strategy and continues to display resilience in the face of global macroeconomic headwinds.
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