Estudos Económicos
Djibouti

Djibouti

Population 1.1 million
GDP 3,103 US$
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Country risk assessment
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 8.4 7.5 -2.0 3.0
Inflation (yearly average, %) 0.1 3.3 1.5 2.6
Budget balance (% GDP) -2.8 -1.6 -4.4 -2.5
Current account balance (% GDP) 18.0 14.9 -2.9 1.8
Public debt (% GDP) 69.9 66.5 73.1 67.1

(e): Estimate (f): Forecast

STRENGTHS

  • Geostrategic position at the entrance to the Red Sea and support from the international community
  • Emergence as a regional trade, logistics and military hub
  • Substantial FDI inflows
  • Ongoing efforts to modernise port and railway infrastructure, free zones
  • At the heart of China’s Silk Road Project
  • Ethiopia’s only access to the sea, with 90% of Ethiopian trade passing through Djibouti

WEAKNESSES

  • High risk of over-indebtedness
  • Increasingly dependent on Ethiopia and China
  • Large informal economy: high poverty and endemic unemployment
  • Dry climate
  • Difficult business environment

Risk assessment

Dependence on re-export activities makes recovery uncertain

The economy contracted in 2020 due to the health crisis. In response to the epidemic, the government introduced border restrictions and suspended travel to and from Djibouti City. Non-essential workers were placed under lockdown and physical distancing measures were encouraged. The economy, which is mainly based on transport and logistics services (85% of GDP) and which had been benefiting from the economic upturn of its neighbour, Ethiopia, with a large share of Ethiopian trade passing through Djibouti, was hurt as Ethiopia’s economy weakened. With the easing of some restrictions since May 2020 and the opening of borders in July 2020, the economy has picked up. Whether the recovery continues in 2021 will depend on the vigour of port and free zone activities, and hence on the economic performance of Djibouti’s trading partners. In order to meet the country's hydrocarbon needs, a new jetty is under construction in the port of Damerjog as part of a USD 3.8 billion (approximately 100% of GDP) project underway since 2018 to develop an industrial free zone, the cost of which is to be repaid to China over 15 years. Djibouti's ambition is to become a regional trade hub. However, it faces regional competition, which could benefit from the court decision ruling in favour of the Emirati group DP World against Djibouti regarding the management of the Doraleh container port since 2018. Nevertheless, the population, which is heavily dependent on the informal economy (70% of jobs), should benefit from the job creation resulting from foreign investment. The unemployment rate, which stands at almost 50%, is expected to fall, which could stimulate private consumption (almost 60% of GDP). However, consumption is likely to be adversely affected by higher food and oil prices in 2021 linked to an increase in demand.

 

Delayed fiscal consolidation and a deterioration in the current account balance

Expenditure to tackle the Covid-19 crisis, equivalent to 2.4% of GDP, has widened the budget deficit. While capital expenditure has decreased, health and social security spending has increased. The crisis has temporarily halted the fiscal consolidation process, which is expected to resume in 2021. Infrastructure financing has been a severe drag on public accounts in recent years, leading to a high risk of over-indebtedness. Public debt, which is almost entirely external, is mainly owed to China (55% in 2018). Despite the restructuring of the Chinese loan for the railway linking Djibouti and Ethiopia in September 2018, which extended the repayment period and lowered the rate, debt service is expected to increase. In May 2020, the IMF approved a USD 43.4 million loan to help the authorities address the Covid-19 crisis, as well as debt relief under the Catastrophe Containment and Relief Trust to provide additional resources.
The current account surplus vanished in 2020 because of the contraction of world trade and its negative impact on the sale of services related to re-export activity with Ethiopia, on which the country depends (80% of exports). Moreover, excluding re-exports, the decline in imports, linked to lockdown measures and the economic recession, did not offset the decline in exports (livestock). In 2021, the current account should turn slightly positive again. Imports of capital goods are expected to continue to fall in line with infrastructure investment. However, the global trade recovery may not do enough to revive trade with Ethiopia and exports of services. Increased repatriation of profits from foreign investments will mitigate the income surplus generated by the presence of foreign military bases and international aid, which has been on the rise since the onset of the Covid-19 crisis. Moreover, foreign exchange reserves held by the central bank are extremely low, at 1.4 months of imports.

 

Continuation of the Vision 2035 development plan in a climate of uncertainty

Ismail Omar Guelleh, who has been in power since 1999, is expected to win the presidential elections in April 2021, helped by the boycott policy of his opponents. In the short-term, the country is expected to focus on food security for the poorest sections of the population, after agriculture was hit by a locust outbreak. Furthermore, the government will continue to implement the Vision 2035 development plan, which has the dual objective of tripling per capita income and improving social and human development indicators. Despite the desire to transform the country, the business environment remains poor, owing in particular to weak governance and corruption (ranked 126th out of 190 by Transparency International). The country's heavy debt burden could harm trade relations with China, the main creditor. Closer bilateral relations, symbolised by the establishment of a Chinese military base in 2017, could cause the Djiboutian authorities to be drawn into the diplomatic game played by the countries with interests and military bases in the region. Moreover, the resumption of diplomatic relations between Eritrea and Ethiopia could affect Djibouti’s prospects if Ethiopia were to negotiate agreements to free itself from its trade dependence on Djibouti.

 

Last updated: February 2021

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