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.

 Table 2: GDP by sector (in percentage)

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

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.

 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)

 Table 5: Current account (percentage of GDP)

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)

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.

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.