Current Development Projects and Future Opportunities in Djibouti

Djibouti’s biggest business and economic strength comes from its strategic geographical location as it boasts 314 km of Red Sea coastline. The major portion of the country’s revenues (almost 75%) is generated from international and transit port activities through various transit and harbor taxes. Djibouti also supports various landlocked African countries, such as Ethiopia, by providing a route for exporting and trading goods and supplies.
Further, its close strategic ties with France and the United States and its status as a free trade zone in North East Africa have seen Djibouti emerge as a strategically important economy in the African region. Djibouti serves as a single military base in Africa for France and the United States. This contributes to Djibouti’s national revenues, as well as strengthening its relations with its strategic partners.

In common with other poor African countries, Djibouti faces issues such as high unemployment rates (about 60%), a scarcity of natural resources, and reliance on oil imports for electricity generation. These factors, coupled with a civil war which only ended in 2006, have weakened key pillars of the nation’s economy and made it highly reliant on foreign assistance to fund its high external debt and support development projects.

Opportunities
Efforts have been made by a number of non-profit organizations, together with government, to develop industry and improve infrastructure for self-sustained growth and the generation of employment opportunities. These organizations have managed to cultivate the interest of funding bodies – and thus encourage direct foreign investment – by making them understand the potential of Djibouti. Here are some of the projects currently underway, as well as some key opportunities for further development:

1. Private Sector Development-Policies: Electricity shortages, high interest rates and high inflation booming at around 4%, have formed significant barriers to investment. Local authorities have taken steps in order to ease processes and encourage investment in the private sector. They have brought in policies to ease tax implications for businesses, and are beginning to grant exemptions on consumption tax.

2. Addressing electricity shortages: Djibouti lacks food security and is a completely dependent on imports for food because of a dearth of energy and recurring droughts in the region. To address the problem of electricity shortages, the Global Environmental Facility, World Bank and Organization of Petroleum Exporting Countries have collaborated to set up a 56 megawatt geothermal power plant to be completed by 2018. This will reduce the country’s dependence on Ethiopia for power. Oil imports currently account for 20% of Djibouti’s total imports; in this context, the construction of the new power plant is expected to reduce debt and support GDP.

3. Optimization of mineral resources: Salt Investment (SIS) has taken advantage of the country’s natural salt resources and low freight costs. It has started salt mining from Lake Assal, and is operating at a capacity of 4 million tonne per annum. This has generated employment opportunities and increased export revenues for the country.

4. Doraleh Container Terminal: This large greenfield project for Djibouti will broaden the scale of port operations. A $396 million project financed through the first PPP between Djibouti government and DP World, the terminal has a capacity of 1.5 million twenty foot equivalent container units per year.

5. Banking system reinforcement: There are 10 credit and deposit institutions in the country along with Central Bank of Djibouti; steps have been taken to ensure robustness in the banking system. The minimum capital that a commercial bank needs to keep is 30% of shares in the credit institution, and branches of international financial institutions need to have a minimum paid up capital of 300 million francs.

6. Encouraging bank lending: There are some major challenges in the financial system such as high interest rates, high security or collateral requirements for borrowers, low maturity periods and often a degree of unreliability in the financial statements of companies applying for debt. To combat these challenges, Djibouti authorities have set up a guarantee fund to provide comfort to banks and enable them to extend credit without asking for any collateral to SMEs with a feasible economic plan. Commercial bank prime lending rate is around 11.5%. Investment as a percentage of GDP has also significantly shot up to 41% in 2009 from just 8% in 2001 due to FDIs in several sectors, especially port development.

7. Stable Currency: The Djiboutian Franc is a stable currency. The exchange rate policy in the country is designed around maintaining a fixed parity with the dollar. This supports regional investors and assures them some financial security.

8. Diversification of revenue streams: Presently, over 70% of revenues in Djibouti are generated from port activities. However, there is a steady flow of much-needed investment in projects in other sectors, such as constructing telecommunication infrastructure and building domestic enterprises to drive higher domestic incomes. This is important from the point of view of addressing high unemployment rates, which remain at around 60% of the urban population, and the percentage of  the population below the poverty line – currently 42%.

9. Agriculture and fishing: Primary sector agriculture is highly underdeveloped with little investment and the high dependence of the country on imports for its food requirements. Agriculture contributes around 7% of total GDP. Investment is required to educate people about modern agricultural techniques for irrigation, storage etc. More investment in this sector will not only bring the bills of the country down but also increase food security, which remains a social challenge in the economy.

Further, fishing and agroprocessing, which contributes about 15% of GDP, has been identified as a sector with considerable potential – and investment in this area has started to flow through, especially in the last five years. If the development of the sector continues, it could see a new agroprocessing industry being developed in Djibouti. This sector has tremendous potential for generating high employment and helping to create a self sustaining economy.

10. Education: In September 2011, a total of USD $4 million in education assistance and USD $645,000 towards improving democracy and governance was contributed by the United States.

The country has a significant balance of payment deficit which can be bridged through concessional foreign direct investment. However, the current global recession fears looming over developed nations could impact the flow of such funds into Djibouti. Therefore, it is of utmost importance that constant and regular steps are taken to bring internal stability in the economy through development in various sectors in order to generate employment opportunities, encourage business development and alleviate poverty in the country.

Djibouti is a country with high potential. If further steps towards the development of the nation can be taken through investment and carefully planned initiatives, it will be a win-win situation for investors as well as Djibouti itself.

By Ridhima Bansal
References:
  1. http://news.bbc.co.uk/2/hi/africa/country_profiles/1070579.stm
  2. http://www.state.gov/r/pa/ei/bgn/5482.htm
  3. https://www.cia.gov/library/publications/the-world-factbook/geos/dj.html
  4. http://www.bloomberg.com/news/2011-10-13/djibouti-will-spend-19-6-million-to-develop-geothermal-power.html
  5. http://djiboutisalt.com/index2.html
  6. http://www.africaneconomicoutlook.org/en/countries/east-africa/djibouti/
  7. http://www.djiboutinvest.dj/index.php?option=com_content&view=article&id=27&Itemid=90&lang=en
  8. http://www.horntrade.com/news/djibouti-shoura-bank-inaugurated/
  9. http://www.indexmundi.com/djibouti/commercial_bank_prime_lending_rate.html
  10. http://eastafrica.usaid.gov/en/USAID/Article/2870/United_States_and_Djibouti_Agree_to_Strengthen_Achievements_in_Basic_Education_and_to_Promote_Democr
  11. http://www.indexmundi.com/djibouti/economy_profile.html

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