While the Covid-19 pandemic and conflict in Ethiopia have impacted the regional economic environment in the short term, the government is moving ahead with longer-term development ambitions. Indeed, most of the ongoing economic reforms and infrastructure construction under way are part of the country’s economic and diversification development strategy, Djibouti Vision 2035.
The government began to implement Djibouti Vision 2035 in 2014, aiming to focus development efforts and financial resources on a long-term strategy with specific policy steps. Djibouti Vision 2035 has several ambitions. Its primary aim is to transform the country into a middle-income economy and become a leading centre for regional and global transport and logistics trade. It also aims to create an additional 200,000 jobs and triple per capita GDP by 2035. As of 2022 this figure stood at $3666, up from $2180 a decade earlier, according to the latest available figures from the IMF. Djibouti Vision 2035 also foresees a full transition of national electricity generation capacity to 100% renewable sources by 2035 (see Energy & Utilities chapter).
Any one of these objectives would be ambitious under normal conditions, but current global macroeconomic volatility and inflation will add new obstacles to the pursuit of these plans. Investment in emerging markets is likely to sustain a decrease in 2023 and 2024, and inflation is continuing to have an impact across the Middle East and North Africa.
Five-Year Plans
Djibouti’s geographic competitive advantage and its long-term planning are expected to help policymakers navigate the current challenges. To divide Djibouti Vision 2035 into actionable policy blueprints, the authorities divided the development roadmap into five-year plans. The starting point, the Strategy for Accelerated Growth and Employment (Stratégie de Croissance Accélérée et de la Promotion de l’Emploi, SCAPE), was implemented over the 2015-19 period, with a budget of DJF2.4trn ($1.4bn).
According to the government, SCAPE made some valuable changes to the structure of the economy. The development of critical infrastructure has put the country in a better position to unlock economic growth. With four new seaports; a new railway line operating between Djibouti City and the Ethiopian capital, Addis Ababa; as well as the creation of new industrial special economic zones, Djibouti has established the enabling infrastructure to leverage its strategic geographic position. Projects have also facilitated growth closer to home. Road expansion work has improved connections within the country, and eased regional integration by improving land transport to neighbouring Ethiopia and Somalia.
Highs & Lows
SCAPE helped to improve the livelihoods of many Djiboutians. According to government figures, school enrolment reached 96% during the lifecycle of the programme, the poverty rate was reduced to 17%, access to energy rose to 60%, and infant mortality decreased from 44.3 per 1000 live births in 2015 to 31.3 per 1000 live births by 2019.
Despite this, and by the government’s own account, SCAPE has faced several limitations due to its nature as an essentially infrastructure-first development plan. First, economic growth in recent years has been driven mainly by capital-intensive sectors, which has had a limited impact on new job creation. Second, while the government has remained a major growth driver, the informal sector has continued to account for a significant proportion of both economic activity and employment. As such, while SCAPE expanded much-needed economic infrastructure, it did not go as far towards reducing social and economic inequality as the overarching Djibouti Vision 2035 goals called for.
The government is focused on bridging these remaining gaps. One key priority will be to deal with what the authorities have deemed the “dual economy”. As a result of heavy investment in transport infrastructure over the past decade, different sectors of the economy are now growing at markedly different rates. Activities linked to port operations, multinational companies and formal businesses have benefitted greatly from new infrastructure, which has led to a palpable improvement in business operations. However, another side of the economy, linked to domestic and often informal businesses not related to transport or logistics operations, have had fewer knock-on effects from recent infrastructure development plans. Increasing the economic competitiveness and value of local industries will be important for the government to reach its development goals and diversify the economy.
Next Steps
The second five-year plan, called the National Development Plan 2020-24, or Djibouti ICI because it is built on three pillars – inclusion, connectivity and institutions – was launched in February 2022 with a budget of DJF2.5bn ($14bn). Broadly, Djibouti ICI aims to redistribute the economic gains of recent years across a larger swatch of the population, reinforce the role the country plays as a centre for trade in the region, and strengthen governance by improving how both the government and public institutions operate. The plan also includes ambitions to cut poverty by 28% and decrease the country’s Gini coefficient – a measure of equality ranging from 0 to 1, with 0 being the most equal – from 0.42 to 0.35 by 2025.
Diversification Efforts
Djibouti ICI seeks to accelerate the diversification of the economy and support Djibouti Vision 2035’s overarching ambitions. While Djibouti has been able to position itself as a regional commercial centre, the primary challenge will be to translate those benefits into growth drivers across other sectors of the economy.
Transport services related to Ethiopia, which now account for more than 75% of GDP, will remain a sizeable component of the economy. However, government plans aim to foster other economic activities’ contribution to GDP. Under Djibouti Vision 2035, the agriculture and fisheries sector, for example, which represented 1.3% of GDP in 2018, is expected to account for 1.7% of GDP by 2024 and 5% by 2035 if the government’s plans are fully realised, according to World Bank projections. Tourism, meanwhile, could contribute up to 10% to GDP by 2035, an increase from 3% in 2022 (see Tourism chapter).
The authorities are seeking to leverage existing travel to Djibouti – which is currently dominated by business activities and military-related travel – to strengthen the economic weight of the sector and increase the number of formal jobs. Indeed, the tourism sector is expected to provide around 30,000 additional direct jobs by 2030, compared to 4500 jobs in 2015, with further indirect jobs in construction and transport, among other sectors.
Diversifying the economy will require significantly more private sector involvement. While public administration accounted for 19.1% of GDP in 2012, Djibouti Vision 2035 expects this to ease to 12%.
Challenges
The unexpected increase in inflation that has stemmed in large part from Russia’s invasion of Ukraine and global supply disruptions will likely make implementation of the current five-year plan more challenging. Although the plan was expected to accelerate GDP growth from a projected 7% in 2021 to 8.5% by 2025, external economic challenges have forced the government to review its growth prospects for the near term. GDP growth stood at 4.8% in 2021 and eased to 2.5% in 2022. However, this is expected to recover to 4% in 2023 and 6% in 2024, according to the IMF.
Inflation, meanwhile, was projected to settle at around 2% to 2.5% over the 2022-25 period, according to government figures. It peaked at 11% in mid-2022 before easing late in the year. Nonetheless, Djibouti’s exposure to macroeconomic shocks has left the country vulnerable to higher inflation over the coming years. This is likely to make the current plan’s implementation more expensive, and will also require extended government support for the most economically vulnerable segments of the population over the short to medium term.
Another challenge will be maintaining foreign direct investment (FDI) flows. Djibouti has been successful in this regard so far, with inflows expanding from $124m in 2015 to around $240m by 2020, according to the UN Conference on Trade and Development. Attracting FDI over the next decade will depend on many variables. Under the current fiveyear plan, the authorities expect Djibouti to attract $338m in FDI per year by 2025. However, the uptick in volatility that began in 2020 might force the government to extend its projected investment timescale. Keeping healthy levels of FDI will be essential for several sectors. More importantly, it will be key to sustain the transition to 100% renewable energy.
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