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Betting on Investment in Djibouti

Djibouti is the natural gateway to Africa, a market of over 400 million inhabitants and also provides critical sea, air, rail and road linkages for the East Africa’s subregion. 

This city-state US$2 billion economy is driven by public investment in rail and a state-of-the-art port complex, among the most sophisticated in the world. The country’s real GDP growth has remained strong, estimated at 6% in 2019. Inflation is estimated at 2.2% in 2019.

The country possesses a free-enterprise economy with an economic freedom score of 47.1, making its economy the 169th freest in the 2019 Index. Revolving around its liberal business environment, regional free trade access. Three-fourths of Djibouti’s inhabitants live in the capital city; the remainder are mostly nomadic herders, according to the World Bank.

Investment

The East Africa country’s economy is based on service activities connected with the country’s strategic location as a deepwater port on the Red Sea, which is the second shipping route of the world, where transit 60℅ of world traffic. Bordering the Gulf of Aden and the Red Sea and situated between Eritrea and Somalia, Djibouti is the route to the sea for African countries such as South Sudan and Ethiopia.

Many investments have been made in the port facilities, railways and highways to connect the whole region. Djibouti, has attracted several giant international investors in logistics operation grown to seven port facilities within a few years and has become the major port for east Africa.

In 2019, Djibouti and Oman signed an agreement to allow the gulf state to invest in Djibouti’s logistics sector.
The deal between Oman and Djibouti has the objective of undertaking a joint investment in the port. The total investment is tagged at USD 660 million. The container terminal will have a capacity 2.5 million TEU containers per annum in the first phase.

Problems

The country’s main challenges are vulnerable to climate change, reflected in average precipitation barely exceeding 150 millimetres a year across a large part of the country (drought and floods), the size of its economy limits its ability to diversify production and increases its reliance on foreign markets, making it more vulnerable to market downturns and hampering its access to external capital.

Djibouti’s electricity demand is also expected to considerably increase due to trade expected to growth through the port, parallel with the expanding economy of its largest neighbour and main trading partner, Ethiopia. Ethiopia, which accounts for 80% of Djibouti’s port activities.

Government Policies

The government has implemented three major policies that should boost economic momentum: The National Employment Policy 2014–24, which aims to develop the small and medium enterprises subsector, the Education Action Plan 2017–19, and the National Agricultural and Food Security Investment Plan 2016-2020.

Ethiopia, which largely depends on its deep-water harbour. The country is expanding its transportation and utilities infrastructure to leverage its strategic location as a transshipment hub and host to military bases.

However, the country has abundant natural resources and renewable energy sector employs more people on a megawatt-hour basis than the conventional energy sector. Off-grid renewable power can meet the demand in unserved rural areas and replace existing diesel systems, thereby reducing carbon emissions and improving air quality.

For Better Djibouti

Although, the advantages of the strategic location have not been fully exploited. Growth in the past has been uneven and insufficient to lift the population from poverty and provide sufficient jobs.

Therefore, to reap the benefits from these massive investments and ensure that they are shared by all, the authorities will need to focus on several key reforms such as structural reforms, debt strategy, reforming the tax system, reviewing the monetary and financial policies and improve statistics, in especially GDP calculations and financial statements of the public sector to improve decision-making. These will translate Djibouti’s investment boom into strong, inclusive growth to reduce poverty, create jobs, and return debt to a sustainable path.

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