Djibouti

Overview

 

Djibouti

In 2010 Djibouti saw steady economic growth, at an estimated 4.4%, albeit slightly below the 2009 level of 5%. The less vigorous performance of the economy in 2010 was due to a reduction in port operations, upon which the country’s economy is heavily dependent, and the postponement of planned foreign direct investment (FDI). Nevertheless, domestic private investment accelerated.

In 2011 and 2012 the economy is forecast to grow by 4.6% and 5.1% respectively, boosted by a recovery in port operations and FDI.

Following the fiscal slippage in 2009, the authorities tackled the issue of restoring balance to the public finances in 2010 in line with the requirements of the International Monetary Fund (IMF). A three-year IMF programme is in place through an Extended Fund Facility (EFF) agreed upon in 2008. The public deficit of 5.1% of gross domestic product (GDP) in 2009 was cut to 2.7% in 2010.

Inflation, meanwhile, surged from 1.7% in 2009 to 4.2% in 2010. This was mainly caused by dearer food products from the second quarter on and, to a lesser extent, more expensive transport and price rises in the housing, water, electricity, gas and other fuels sub-sector. It should be recalled that the annualised rise in prices reached 12% in 2008.

With the aim of strengthening Djibouti’s position as a hub for trade, logistics and related services, as well as a provider of financial services, several road corridors were opened or renovated in 2010.

Furthermore, the authorities have continued to develop the financial sector, passing new laws governing banking, such as stronger legislation regulating banks, and relating to financial co­operatives and Islamic finance. Two new banks came into being, bringing the total number of financial institutions in Djibouti to 11. Other structural reforms have been carried out, including an overhaul of the investment code, legislation on companies and bankruptcies, and the overhaul of the labour code.

Nevertheless, the economy remains little diversified and highly dependent on port operations in the tertiary sector. This accounts for 76% of GDP, while the primary sector contributes a mere 3.9%. The country depends almost entirely on imports for its food supply. Domestic agricultural production covers only 10% of the country’s food needs. The country still faces the problem of structural food insecurity, which has been made worse by recurring droughts. Its energy supply is limited and expensive, putting a brake on the country’s development. To solve this problem in 2010 the authorities began to construct an electricity interconnection with Ethiopia so they can import power.

Finally, although economic growth is steady it does not yet benefit everyone. Unemployment remains high and poverty affects 70% of the population.

 

Figure 1: Real GDP growth (E)

Source:IMF and local authorities’ data; estimates and projections based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

Table 1: Macroeconomic indicators

  2009 2010 2011 2012
Real GDP growth 5 4.4 4.6 5.1
CPI inflation 1.7 4.2 4 3
Budget balance % GDP -5.1 -2.7 -2.5 -1.3
Current account % GDP -17.5 -9.1 -14.3 -13.6

Source:National authorities’ data; estimates and projections based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.


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Recent Economic Developments and Prospects

 Table 2: GDP by sector (in percentage)

  2005 2009
Agriculture, forestry, fishing & hunting 3.7 3.9
Agriculture, livestock, fishery, forestry and logging - -
of which agriculture - -
of which food crops - -
Mining and quarrying 0.2 0.2
Mining, manufacturing and utilities - -
of which oil - -
Manufacturing 2.7 2.4
of which hydrocarbon - -
Electricity, gas and water 5.9 5.2
Electricity, water and sewerage - -
Construction 7.8 12.3
Wholesale and retail trade, hotels and restaurants 21.1 19
of which hotels and restaurants - -
Transport, storage and communication 27.3 28.8
Transport and storage, information and communication - -
Finance, real estate and business services 13.5 14
Financial intermediation, real estate services, business and other service activities - -
General government services 17.9 14.2
Public administration & defence; social security, education, health & social work - -
Public administration, education, health - -
Public administration, education, health & other social & personal services - -
Public administration, education, health & social work, community, social & personal services - -
Public administration, education, health & social work, community, social services - -
Other community, social & personal service activities - -
Other services 1.9 1.7
Gross domestic product at basic prices / factor cost 100 100

Source:AfDB Statistics Department based on data from national authorities.

Figures for 2010 are estimates; for 2011 and later are projections.

At 4.4%, real GDP growth slowed slightly in 2010, but remains steady. Concentrated in the tertiary sector, the drivers of growth are still port operations, including transit trade with Ethiopia, and FDI. Nevertheless these two sectors were less dynamic than in 2009 and 2008.

Private sector investment accelerated in 2010, while FDI, which has been the driving force of economic growth for several years, fell to USD 74 million, down from USD 93.5 million in 2009 and USD 234 million in 2008.

Port operations, the other engine of economic growth, were affected in 2010. These include the trade in oil and gas and dry freight transported in bulk or in containers to Ethiopia or for trans-shipment. During the first three quarters of 2010, the number of containers entering Djibouti fell by around 30% compared with the same period in 2009. There was a particularly marked fall in trans-shipment activity (down 75%). Trans-shipment used to account for between 50% and 60% of containers entering Djibouti. In the third quarter of 2010, that figure had slumped to just 25%. The number of incoming containers bound for Ethiopia, however, remained stable.

Dry bulk freight was less affected, falling by 17% during the first three quarters of 2010, mainly in that bound for Ethiopia. Trade in oil and gas slowed slightly, shrinking by 10% during the first three quarters of 2010 compared with the previous period.

Nevertheless, thanks to the recovery in Ethiopia, Djibouti’s main trade partner in the region, and in FDI, economic growth is forecast to accelerate to 4.6% and 5.1% in 2011 and 2012. The FDI is mainly linked to the enlargement of the container terminal at Doraleh port, the construction of the trans-shipment port in the town of Tadjourah, the project to exploit the geothermal energy potential of Lake Assal and the construction of 1 600 housing units. There are also plans to extend the free-trade zone to accommodate processing activities, and possibly industrial activities. This will only be possible, however, once the energy constraints that weigh so heavily upon the country have been eased. FDI is forecast to reach USD 161 million in 2011 and USD 149 million in 2012.

The Djiboutian economy is not diversified. It is dominated by the tertiary sector, which accounts for 76.5% of GDP. This sector includes transport and communication activities, which contribute 28.4% to GDP, trade and tourism (18.7%), non-market services (13.9%), and the banking and insurance sector (13.8%).

The contribution of the secondary sector is more modest, accounting for 19.6% of GDP. Nevertheless, the secondary sector is on the rise thanks to the establishment of several companies producing construction materials (brick, tiles and cement) and mineral water.

The primary sector, on the other hand, contributes very little to GDP (3.9%). This is the result of limited agricultural production and poor production caused by the weather. The sector provides only 10% of the country’s fruit and vegetable consumption. Djibouti has to import 90% of its food products, resulting in structural food insecurity, which is made worse by chronic drought. In November 2010, the United Nations (UN) launched an appeal for USD 39 million to provide humanitarian aid to 120 000 people affected by the prolonged drought in Djibouti. Low rainfall over the past four years has destroyed the harvests of small farmers, wiped out more than 70% of livestock and caused widespread malnutrition. Furthermore, although Dijibouti has 372 km of coastline, with an estimated exploitable potential of 47 000 tonnes of fish resources, the fisheries sector remains underdeveloped. Only around 4.2% of the potential resources are exploited (approximately 2 000 tonnes a year). This under-exploitation is caused by the limited number of boats, the poor training of fishermen, and unsuitable fishing techniques.

Although the economy stood up fairly well to the financial crisis, it remains particularly vulnerable because of the country’s strong dependence on foreign trade. However, for several years new sectors of activity, such as telecommunications, the finance and insurance sector, and tourism and construction have emerged.

On the demand side, investment – which accounts for a significant 39.5% of GDP – continues to drive economic growth. The strong growth in investment is forecast to continue at the same level in 2011, propped up by an increase in private-sector investment, which increased by 22% in 2010, thereby contributing to growth. However, the structure of the Djiboutian economy means that the value of imports remains higher than that of exports.

Despite sustained growth averaging 3.7% between 2004 and 2006 and 5.3% between 2007 and 2009, it is narrowly based. Depending mainly on the port operations sector, it does not benefit the population at large. Unemployment affects 54% of the population, 70% of whom live below the poverty threshold and 42% of whom live in extreme poverty.


 Table 3: Demand composition

  Percentage of GDP (current price) Percentage changes, volume Contribution to real GDP growth
2002 2009 2010 2011 2012 2010 2011 2012
Gross capital formation 10 39.5 5.3 25.7 9.4 2.1 10.2 4.5
Public 4.4 15.4 -10 7.2 1.6 -1.5 1 0.2
Private 5.6 24.1 15 35 12.5 3.6 9.2 4.2
Consumption 95.1 82.1 2.9 3.3 6.7 2.4 2.7 5.4
Public 28.1 19.3 1.5 -2.1 9.1 0.3 -0.4 1.5
Private 67.1 62.8 3.3 4.8 6.1 2.1 3 3.9
External sector -5.1 -21.6 - - - -0.1 -8.2 -4.7
Exports 38.2 52.2 2.8 0 0.9 1.4 0 0.4
Imports -43.4 -73.7 2.1 11.5 6.7 -1.5 -8.2 -5.1
Real GDP growth rate - - - - - 4.4 4.6 5.1

Source: AfDB Statistics Department based on data from national authorities; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.


Macroeconomic Policy

 Fiscal Policy

A stringent fiscal policy in 2010 aimed to reduce the budget deficit, which amounted to 5.1% of GDP in 2009. The budget deficit was caused by increased military spending because of the conflict with Eritrea, and increased social spending to ensure food security. In 2010, the government managed to reduce the deficit to 2.7% of GDP. It did so thanks to increased tax revenue through improved collection of value added tax (VAT), introduced a year earlier,  to the global economic recovery and to reduced public spending, especially military spending after the end of the conflict with Eritrea. Overall, government spending focuses on capacity building as part of the INDS national social development initiative (Initiative nationale pour le développement social), with the aim of reducing poverty. Government spending also supports basic social sectors, maintenance costs and strengthening the public investment policy.

The policy defined in the framework of the INDS covers the 2008­-12 period. It provides the social sectors with a significant proportion of the national budget.

However, the government’s efforts in this area did not have a crowding-out effect on private investment, which remained steady during the 2007-­10 period (29% of GDP on average). Having contracted in 2009, private investment accelerated in 2010.

International aid to Djibouti amounted to 6.8% of GDP in 2010. This is consistent with the historic levels of aid received, except in 2008, when there were massive levels of aid to prevent an acute food crisis. The authorities hope to increase the amount of development aid following a round-table meeting with donors in 2010.

Although 2011 is an election year, the government intends to maintain its stringent fiscal policy to limit the deficit. The 2011 budget forecasts a 10.2% increase in domestic revenue arising from greater tax revenues resulting from higher direct and indirect taxes. The government hopes to establish tax revenue as a ratio of GDP at 20.3% for 2010 and 20.7% for 2011. It plans to do so by strengthening the tax and customs authorities, especially by hiring additional staff for the unit responsible for collecting VAT and by opening a new tax office in Balbala.

Budget forecasts are currently carried out for a one-year period, but preparations are being made for three-year budgeting, a system that should be implemented in 2012.


 Table 4: Public finances (percentage of GDP)

  2002 2007 2008 2009 2010 2011 2012
Total revenue and grants 29.2 35.2 44.6 38.7 38.8 39.1 37.7
Tax revenue 20.9 20.5 21.4 21 21 21 20.7
Oil revenue - - - - - - -
Grants 5.9 5 13.9 6.7 6.8 7.2 6.1
Other revenues - - - - - - -
Total expenditure and net lending (a) 32.9 37.7 43.3 43.8 41.5 41.6 39.1
Current expenditure 28.4 26.6 28.5 25.7 26.1 25.6 23.8
Excluding interest 28.1 26.2 28.2 25.3 25.7 25.1 23.3
Wages and salaries 15 13.8 13.5 13.5 13.4 13.1 12.2
Goods and services 6.2 7 10.1 7.4 7.6 7.6 7
Interest 0.4 0.4 0.3 0.5 0.5 0.5 0.5
Capital expenditure 4.4 11.2 14.8 18 15.4 15.9 15.3
Primary balance -3.3 -2.2 1.7 -4.6 -2.3 -2 -0.8
Overall balance -3.7 -2.6 1.3 -5.1 -2.7 -2.5 -1.3

a. Only major items are reported.

Source:AfDB Statistics Department based on data from national authorities; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

Monetary Policy

Inflation accelerated in 2010 to an annual rate of 4.2%, up from 1.7% in 2009. Inflationary pressures appeared during the second quarter of 2010 following the rise in the price of food products, especially those imported from Ethiopia, because road transport was used instead of rail and  international commodity prices were higher. The higher costs for transport and for items that fall into the categories of housing, water, electricity, gas and other fuels also contributed to the rise in the general price index, and although their impact looks set to diminish over the next two years, food prices are likely to continue to keep inflation higher. Inflation is expected to reach 4% in 2011, before falling slightly to 3% in 2012. Since 2008, the government has tried to limit the rise in food prices by reducing taxes on food. Through an awareness campaign, the government has also encouraged traders to reduce their profit margins.

The economy benefits from a favourable exchange-rate system. The Djiboutian franc (DJF) can be freely and fully exchanged into any currency. Capital flows freely and no exchange controls are applied. The Djiboutian franc is governed by the currency board system: the country’s central bank, the BCD, must hold the equivalent of its currency in circulation in dollars with the American Federal Reserve Bank (FED). Since 1973, the Djiboutian franc has been pegged to the dollar at a rate of USD 1 = DJF 177.7. The BCD’s main intervention tool is control of the money supply. To acquire an additional liquidity management tool, the BCD  worked over the year towards the introduction of compulsory reserves, but the ratio has not yet been set. This is one of a series of reforms made to the financial sector since 2008 in conjunction with the IMF.

External Position

Djibouti’s trade balance is structurally in deficit as a consequence of its imports of oil which represent 20% of total imports. The reduction in FDI was accompanied by a fall in imports of capital goods. While they  accounted for 34% of imports in 2009, they amounted to only 18% in 2010.

Exports of goods are relatively low, much lower than exports of services, in particular to military bases and maritime transport, which respectively accounted for 56% and 21% of exports of services in 2010.

The current account deficit was reduced to 9.1% of GDP in 2010, down from 17.5% in 2009. This was made possible by a reduction in capital goods imports and an increase in exports of goods and services.

Large FDI inflows from Gulf states over the preceding years significantly contributed to reducing the external imbalances. In 2010, the capital account remained positive, with a balance of USD 74 million, but this was much lower than in previous years. The return of FDI in 2011 and 2012 should pull the capital account balance up to its previous levels. A positive balance of USD 224 million is expected in 2011.

The authorities are determined to participate actively in regional integration. The introduction of VAT in 2009 was a preparatory step for the common external tariff to be introduced by the Common Market for Eastern and Southern Africa (COMESA). Djibouti is negotiating trade agreements with Kuwait, Kenya, Turkey, Saudi Arabia, Tunisia and Ethiopia.

The ratio of external public debt to GDP was reduced slightly in 2010 to 58%, down from 60% in 2009. This remains a critical level, however, preventing the government from borrowing and forcing it to fund its investment programme using domestic resources and to keep its public finances in balance. Djibouti has not been declared eligible for the Highly Indebted Poor Country (HIPC) Initiative. Nevertheless, the government has held negotiations with Paris Club creditors for its external debt to be rescheduled with a view to easing its debt burden. Bilateral agreements have been reached with France and Germany, while discussions are continuing with Spain. Agreements have already been signed with Saudi Arabia. Negotiations have begun with the United Arab Emirates and Kuwait.

Furthermore, between 2010 and 2012 the state intends to pay back all arrears owed to the public water and electricity boards (ONEAD and EDD). These arrears accrued as a result of the budgetary problems encountered in 2009. The authorities also intend to continue consolidating the cross-debts with public enterprises.

 Table 5: Current account (percentage of GDP)

  2002 2007 2008 2009 2010 2011 2012
Trade balance -27.1 -50.1 -66.9 -50.6 -51.4 -55.9 -56.2
Exports of goods (f.o.b.) 6 6.8 8.2 9.4 9.1 8.7 8.1
Imports of goods (f.o.b.) 33.1 57 75.2 60 60.5 64.6 64.3
Services 21.9 17.2 18.6 29 33.4 31 37.4
Factor income 2.6 10.5 9.8 7.1 10.2 13.6 7.8
Current transfers 1 -3.3 -3.1 -3 -1.4 -2.9 -2.6
Current account balance -1.6 -25.7 -41.8 -17.5 -9.1 -14.3 -13.6

Source:AfDB Statistics Department based on data from national authorities; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.


Figure 2: Stock of total external debt (percentage of GDP) and debt service (percentage of exports of goods and services)


Source:IMF and local authorities’ data; estimates and projections based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.


Structural Issues

Private Sector Development

The World Bank’s 2011 Doing Business report ranks Djibouti 158th out of 183 countries, one place below its 2010 ranking. Although Djibouti still has a respectable rating of 60th for paying taxes, it has fallen 22 places since 2010, when it was ranked 38th. The country also scores well for trading across borders (38th), but doing business is hindered in particular by the poor protection of investors (179th), the difficulty in getting credit (176th), and the problems in starting a business (175th). Entrepreneurs are also confronted with the high costs of input such as energy and telecommunications, in addition to the limited availability of electricity and the lack of qualified manpower. Financial intermediation plays a modest role because of the high cost of credit, in a context of low inflation and monetary stability.

Nevertheless, the authorities have taken measures that over time will allow Djibouti to improve its ranking. In 2010 there was an overhaul of the investment code with the revised text passed by the National Assembly. It provides tax and non-tax incentives to investors, such as tax exemptions, exemptions from domestic consumption tax and registration fees, and preferential tariffs for energy and land acquisition. Legislation governing companies and forms of bankruptcy was also passed. Finally, the labour code was revised. The most notable changes  related to the abolition of the minimum wage, which was compensated for by the introduction of industry-specific labour agreements.

In response to the difficulties small and medium-sized enterprises and industries (SMEs/SMIs) have in obtaining financing, the authorities are working on setting up a guarantee fund for loans requested by such companies.

Furthermore, the ANPI national investment promotion agency (Agence nationale pour la promotion des investissements) was created to encourage investment and promote private-sector development. The ANPI provides companies with a one-stop shop to facilitate business start-up formalities, assist them with administrative procedures and promote their activities. Economic operators can thus quickly complete the necessary formalities and declarations at a single place and at little cost. The ANPI is testimony to the dynamism of the private sector, having recorded a massive rise in the number of investment programmes submitted for approval in 2010. Under Scheme A, for investments of less than DJF 50 million  (USD 281 400), the investment programme increased to DJF 2.8 billion (almost US 16 million) in 2010, up from DJF 272 million (USD 1.53 million). Under Scheme B, for investments of more than DJF 50 million, the amount rose from DJF 19 billion (USD 110 million) to DJF 68 billion (USD 380 million), covering both domestic and foreign investment. The construction and industry sectors have both seen major investment.

The financial system is not greatly developed. Almost all of the country’s financial assets are concentrated in the banking system. Credit institutions are essentially retail banks which collect their resources from the local market. There are two insurance companies and one state pension fund. The sector is highly liquid and the level of bad debt is low. Nevertheless, only a small proportion of the resources collected (20­%-25%) are reinjected into the national economy in the form of credit. SMEs/SMIs receive only 5%. The remaining resources are transferred abroad.

Two new banks in 2010 brought the total number to 11, compared with just two in 2004. Reform of the banking system continued in 2010. The government revised old codes and strengthened banking regulations and supervision by passing new legislation relating to banks,  financial co-­operatives, to complete the legislation relating to microfinance, and Islamic finance. It also improved licence-awarding procedures, updated the charter of the central bank and modernised payment systems. During the year the government also passed legislation to combat money-laundering and funding for terrorism.

To increase the penetration of banking services, in 2009 the government made it compulsory for employers to pay salaries greater than USD 225 (DJF 40 000) by bank transfer. This policy led to an increase in deposits, a trend that continued in 2010 thanks to the new banks. The niche positions of these banks, following the introduction of Islamic banking and the opening of accounts for small savers, have enabled them to tap into hitherto neglected savings. During the first nine months of 2010, deposits increased by 15% compared with the same period in 2009.

Enlargement of the banking sector has made possible more competitive financial operations, giving rise to better interest rate terms, swifter processing of credit histories and more flexible guarantees. This resulted in a 27% increase in credit between September 2009 and 2010. Most credits (76.2%) are concentrated in the private sector. Public enterprises receive only 2.6% of credits distributed. However, these credits grew by 81.5% between September 2009 and 2010. Approximately 13% of credits were allocated to private individuals. Most were medium-term credits (two to five years). Long-term operations cannot be financed on the domestic market.

Innovations are expected related to mobile banking, the creation of the guarantee fund for SMEs/SMIs and improved access to microfinance for individuals and companies, both of which are poorly served by traditional banking.

Other Recent Developments

Djibouti benefits from a geographically strategic position by the Red Sea, allowing the country to position itself as a trade hub. The country is located at the crossroads of Africa, Asia and Europe and next to a very busy shipping route.

The country has thus endeavoured to build modern, competitive port infrastructure, with a bulk port, a petroleum port, a container terminal, a free-trade zone and modern information and communication technologies.

In recent years, the amount of freight carried by road has increased at the expense of the Djibouti-Addis Ababa railway, making transport more expensive. Djibouti’s road network covers approximately 2 900 km. Most of the traffic travels on the road between the port and Ethiopia. Investment in basic infrastructure has been substantial, with the construction of  the Djibouti-Tadjourah, Tadjourah-Obock and Tadjourah-Dorra-Balho routes. There is now also a ferry service that vastly improves access to the north of the country, reducing freight transport costs. The numerous initiatives to upgrade and privatise the 781 km railway line between Djibouti and Addis Ababa have failed. Unless sufficient funding is received to upgrade the railway infrastructure, roads will remain the main form of transport in Djibouti.

But to strengthen its position as a trade hub, Djibouti must overcome its energy, water and food constraints.

It is faced with a major energy deficit. Its total energy production capacity is estimated at 98.8 megawatts (MW), produced by oil-powered generators. But the obsolescence of the generators and significant losses of power in the network have reduced the effective production to 57 MW. This is below the demand, which sometimes reached 75 MW during peak times in 2010. Demand could rise to 138 MW by 2015 and 219 MW by 2035. The electricity network covers only 50% of the country, concentrated mainly in Djibouti city. During the third quarter of 2010, the capital city produced 85% of national production and consumes 88%.

The energy deficit is hindering the development of the economy and is an obstacle to the introduction of new industries and manufacturing activities. The need for oil makes electricity production expensive. This weighs on the competitiveness of the Djiboutian economy, making it dependent on other countries for its supply and adversely affecting the trade balance. Various projects are under way to make up for the sector’s deficiencies. The completion of the line between Djibouti and Ethiopia will enable between 180 and 700 gigawatt hours (GWh) per year to be supplied by Ethiopia. The low cost of imported electricity will accordingly reduce the amount of imported oil and reduce the cost of electricity production. Djibouti also has substantial geothermal-energy potential, the exploitation of which would ease the energy constraints. An Icelandic company has already begun work to make use of this energy. Financing is required for a 50 MW geothermal power station, which is still in the first phase of planning. The investment needs in the sector have been estimated at approximately USD 30 million a year between 2010 and 2020 to finance the replacement of electricity generation equipment, the expansion of existing capacities and the improvement of the transport and distribution network.

The lack of water is also major constraint on the country’s development. Annual water production stands at only 15 million m3, whereas demand is estimated at approximately 30 million. There has been a marked improvement in access to safe drinking water over the past few years, but a significant proportion of the population remains without access and is exposed to the risk of drought. Another important challenge for Djibouti is sanitation, which is currently available to only 69% of the urban population and 17% of the rural population.

National agricultural production provides only 10% of the country’s needs. The sector is based on a rural subsistence economy, consisting mainly of pastoral activities. The main difficulties hindering the development of agriculture are the lack of easily harnessed water resources, the lack of training in irrigation and cropping techniques because of the lack of a farming tradition, and the small area being farmed. In reaction to the soaring food and oil prices in 2008, the Djiboutian government revived price control mechanisms to protect the purchasing power of poorer people. The reduction in the rate of domestic consumption tax has made it possible to contain the price of staple food products such as rice, sugar, flour, oil and milk. Other mechanisms used to keep prices down include the reduction in the profit margins of traders and the suppression of taxes on all inputs used in agriculture and fisheries. To reduce the country’s vulnerability, a food security body, the Société nationale de sécurité alimentaire, was set up to oversee the farming of arable land in other countries.  Djibouti reached agreements with Sudan and Ethiopia for the concession of 5 000 hectares in each country for growing food products for the national supply.

Djibouti has natural resources that have not yet been exploited, particularly perlite and salt. Perlite reserves are estimated at 23 million tonnes. The potential salt resources in Lake Assal are estimated at 1.2 million tonnes per year. Despite the investment of an American company in the sector, the resources have not yet been exploited. Prospecting for gold and oil is in progress. The country also has tourism potential, which is not sufficiently exploited. A strategic plan to develop the tourism sector has been prepared. The main tourist sites are Lake Assal, Lake Abbé, Day Forest, Le Goubet, the Seven Brothers islands, Moucha Island and Maskali Island. Initiatives have been undertaken by the Djibouti tourism agency, which now has around a dozen local promoters.

Various initiatives are under way to deal with the critical lack of statistical data. At the start of 2010, the legal framework was bolstered by the passing of legislation regarding the organisation of the collection of statistics and the statistics system. Surveys have also been carried out relating, for instance,  to the poverty profile, consumption, and governance to improve the quality, coverage and frequency of economic data. These data will improve national accounting and the calculation of GDP, the balance of payments, public finance, etc.

Emerging Economic Partnerships

Since the turn of the century, the economy has seen a massive influx of capital in the form of FDI, almost exclusively from Gulf states. The investment, which was mainly in transport (especially port operations), real estate, hotels and banking, has boosted the authorities’ ambition to strengthen Djibouti’s position as a regional and international trade platform. FDI took off in 2003, when work began on the container port in Doraleh. Between 2002 in 2003, FDI increased from USD 3.43 million to USD 14.22 million. It peaked at USD 253 million in 2008.

Investment has been concentrated in capital-intensive activities, essentially in the tertiary sector, the chief driving force of economic growth in Djibouti. These activities have included the construction of the container terminal in Doraleh and the Kempinski luxury hotel by the Emirate of Dubai. Through the state company DP World, the emirate also obtained the concessions to manage the container terminal, the bulk port, the free-trade zone, the airport and the petroleum port.

The investment in the sectors that sustain the Djiboutian economy should further spur economic growth. This investment has already enabled a huge increase in the potential of the port.

Djibouti has few partnerships outside the Gulf states, but has signed co­-operation agreements with China. These agreements are related to the construction of hospitals, schools, and study and research centres financed by grants. China is aiming to place its companies on the local market to build infrastructure linked to projects financed by grants, with the aim that these companies subsequently respond to calls for tenders on other markets. Before the massive influx of FDI, Djibouti’s foreign partnerships were military, with French contingents present since 1977 and American forces since 2002. Djibouti is now home to other units, too, as well as to anti-piracy forces.

Because the investors are highly specialised, the arrival of new, competing partners is limited. Competition could, however, come from the development of similar activities in neighbouring countries, such as the port of Aden in Yemen for trans-shipment, which is also financed by DP World. Among the investment opportunities that have been studied are geothermal energy and salt extraction in Lake Assal.

Nevertheless, the financial crisis has seen a withdrawal of FDI, which has particularly affected investors from the Gulf, with some projects under construction being postponed. Other projects are continuing: the construction of the deep-water port in Tadjourah, the construction of 1 600 housing units financed by Kuwait and of offices as part of a business district, the second phase of the port in Doraleh, and the enlargement of the free-trade zone.

Although investment is directed towards the sectors driving economic growth, the effects on employment are not so significant as the economic effects, since these sectors are capital-intensive activities. In spite of sustained economic growth since 2004, unemployment has fallen very little, and remains at 54%. The port, for instance, provides 1 300 jobs, including 300 at the container terminal. The free-trade zone, meanwhile, provides 1 400 jobs, while tourism provides around 1 600.

These large-scale projects being financed are an integral part of the development strategy undertaken by the country’s authorities. The results are tangible. DP World’s investment has improved the port of Djibouti’s profitability and development prospects. Its management by the private operator has improved the quality of its services, thanks in particular to the creation of a high-performance computerised system and more straightforward procedures for processing declarations. The investment has served to highlight Djibouti’s strategic attributes.

The investment code provides tax and non-tax incentives to domestic and foreign investors. Incentives are also available to companies setting up in the free-trade zone. These include incentives such as exemptions on profits tax and other taxes, with the exception of VAT, which was reintroduced in January 2009. The free-trade zone has no restrictions on the employment of foreign workers. The repatriation of all capital and benefits is authorised, with no exchange restrictions. A one-stop shop is available for completing administrative formalities in three days and provides access to markets in the sub-region, especially the Ethiopian market. The free-trade zone provides seven licences related to imports, exports and re-exports: general trade, trade, logistics, industry, service, bunkering and international transport. Nevertheless, despite the potential for the introduction of processing industry in the free-trade zone, the energy constraints hinder its development.


Political Context

Presidential elections will take place in April 2011. The incumbent president, Ismaïl Omar Guelleh, who has been in power since 1999, can stand for a third term of office thanks to an amendment to the constitution passed by the National Assembly in April 2010 increasing the maximum number of presidential terms of office from two to three. But an age limit of 75 for the office was imposed. Although the number of political parties is not limited by the constitution, political opposition remains fragmented. In the absence of major opposition, the incumbent should get re-elected. Since 2005, the opposition has boycotted elections, which it considers fraudulent, and condemned political repression. The main potential rival, Abdourahman Boreh, a businessman and former chairman of the ports and the free-trade zone authority, is in exile to avoid a prison sentence imposed in June 2010 for tax fraud and terrorism. During the events that shook the Arab world at the start of 2011, an unprecedented challenge to the Djiboutian government was launched during February. Opponents of the regime took to the streets demanding the departure of the president, a kind of event extremely rare in Djibouti.

Normal relations between Eritrea and Djibouti resumed in 2010, with the signing of the Doha Agreement, with Qatar acting as the mediator. This agreement ended a border dispute that broke out between the two countries in 2008. In accordance with the agreement, Eritrea has withdrawn its troops from the Ras Doumeira region and Doumeira island. A private company chosen by a three-party commission that will include Qatar will define the border. A Qatari peacekeeping force will be deployed to oversee the border before and during the demarcation process. Conflicts with Eritrea had already erupted in 1996 and 1999 and Djibouti suspects Eritrea of supporting the Afar rebels in the north of the country.

Ethiopia and Djibouti have an interest in maintaining good relations with each other, as the two countries are interdependent. Ethiopia depends on the port of Djibouti for the transit of its imports and exports. Djibouti, for its part, imports its food through Ethiopia. Eventually, Ethiopia hopes to reduce its dependence on the port of Djibouti by developing other trade routes, particularly via Port Sudan and the ports of Berbera in Somaliland and Mombasa in Kenya. Nevertheless, Djibouti remains the best in terms of security and distance.

The country is home to major foreign military bases thanks to its strategic geographical location in the Gulf of Aden. In 2002, an American military base was added to the already existing French base. German and Japanese military contingents are also present, as is the European anti-piracy Operation Atalanta.

The country faces governance problems. According to the 2010 Ibrahim Index, Djibouti obtained a score of 48.5 out of 100, and was ranked 30th out of 53 African countries in terms of quality of governance. (Mauritius is at the top of the ranking with a score of 83.0) Djibouti is below the African average for the categories “participation and human rights” and “sustainable economic opportunity”. Its score is close to the African average for the categories “safety and rule of law” and “human development”.According to the ranking produced by Transparency International, corruption problems are still prevalent in Djibouti. Nevertheless, its score on the corruption perception index improved from 2.8 in 2009 to 3.2 in 2010, a score of 10 meaning there is no corruption.


Social Context and Human Resource Development

The INDS social development initiative was established in 2007. This is a roadmap charting the government’s  efforts to respond to the main development issues in Djibouti. The policy established for 2008-12 centres on strengthening the country’s competitiveness, promoting access to social services and improving the quality of governance and public services. Nevertheless, the financing of the initiative is not fully guaranteed. As part of this strategy focused on human development, the government has allocated significant budgetary funds to health and education, almost a third of the total expenditure going to these two sectors.

Djibouti was ranked 147th out of the 169 countries included in the UN Human Development Index (HDI). This places Djibouti among the low human development countries. It has improved its rank from its 2009 position of 155th but the position shows the weakness of the country’s social indicators compared with its per capita revenue.

Despite Djibouti’s sustained growth, its effect on poverty reduction is relatively small. The poverty survey carried out in 2006 confirmed that it was widespread and structural: 74% of the population are living in relative poverty and 42.1% in extreme poverty. Despite the lack of recent data,  living conditions in some neighbourhoods of Djibouti city and rural areas are testimony to the difficulties experienced by large sectors of the population. High unemployment remains a priority issue for government action. The survey carried out in 2010 revealed that it had been reduced from 59% to 54%, but remains at a very high level.

Such poverty makes the population particularly vulnerable to shocks, especially variations in food prices. This is exacerbated by the country’s structural food insecurity and recurring droughts. Most affected are children, among whom there is one of the highest levels of malnutrition in the world, particularly among children aged under 5 years in rural areas. The drought over the past four years has affected the production of small farmers and wiped out 70% of livestock. The livestock farming areas in the north-west and south-east are those most affected by the extreme food insecurity and malnutrition. According to available surveys, a third of children in Djibouti suffer from emaciation or growth retardation, which irreversibly affects the development of their brains, leading to learning difficulties at school. Malnutrition also increases the risk of mortality, delays the development of intellectual faculties and eventually reduces productivity in the workplace.

In education, data from the 2006 EDIM (Enquête djiboutienne à indicateurs multiples) survey show that the net primary school enrolment rate was 66.2%, a rate that varied between urban (67.1%) and rural (49.0%) areas and between boys (66.7%) and girls (65.7%). In secondary school, the net enrolment rate was 41.0%.

In 2000, the Djibouti university centre was created. Its main objective was to provide access to post-secondary education. In January 2006, the centre became the University of Djibouti, which offers courses in the arts, languages, humanities, law, economics, management, computing, accounting, sciences and traditional technology subjects. In 2005/06, there were 1 928 students, including 771 women. Numbers were growing by an average of 25% per year.

Health care is structured on three levels. At the first level there are 23 clinics in rural areas and 12 community health-care centres in urban areas. At the second level there are five hospital medical centres. The third level consists of national hospitals: Peltier General Hospital, Balbala Hospital, a maternity hospital, and two centres specialising in tuberculosis and AIDS. The parastatal and private sectors only exist in the city of Djibouti. The six parastatal bodies consist of four centres provided by the military and two provided by the social protection organisation. Private services consist of three polyclinics, five pharmacies and ten doctors’ surgeries.

Progress has been made in public health indicators. Between 1990 and 2006, the fertility rate declined from 6 to 4.2 children per woman, while the infant mortality rate declined from 121 to 67 deaths per 1 000 live births, and the death rate of children under five declined from 129.1 to 94 per 1 000 live births. The high maternal mortality rate, which was 546 per 100 000 live births in 2002, can largely be attributed to the high level of fertility, the anaemia caused by malnutrition and the practice of female genital mutilation.

The incidence of tuberculosis is very alarming: at 1 132 cases per 100 000, Djibouti has the highest prevalence in the world. The mortality rate from this illness is estimated at 121 deaths per 100 000. With regard to malaria, there is an improvement as indicated by intra-hospital data. The number of malaria cases decreased between 2008 and 2009 respectively from 3 450 to 2 686. This decrease reflects the combined effects of the following factors: awareness campaigns and distribution of mosquito nets carried out under the national anti-malaria campaign, and prolonged droughts in recent years.

Djibouti imports khat daily from Ethiopia. The leaves of this plant contain a psychotropic substance that is a stimulant and gives a feeling of well-being. Between 50% and 60% of the male population are believed to use this substance, the daily consumption of which can cost up to 30% of the average salary. There are estimated to be around 2 000 sales points. Khat generates an estimated annual revenue of almost USD 30 million.

According to the 2009 census, Djibouti has a total population of 818 159, of whom 70.6% live in urban areas, with 58.1% of the population resident in the city of Djibouti, especially in the Balbala and Boulaos neighbourhoods. The rest of the population is spread across the different regions: Dikhil (10.9%), Ali Sabieh (10.6%), Tadjourah (10.6%), Arta (5.2%) and Obock (4.6%). There are 161 132 nomadic people, accounting for 19.7%, while the sedentary rural population accounts for 9.7% of the total. Of the total poulation 53.8% are male and 46.2% female and 60.7% of the population are aged between 15 and 59 years old.