Djibouti Economy 2014: Recent Developments and Prospects

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The huge infrastructural investment program is a big turning-point for the country that aims to take advantage of its geo-strategic position in the Horn of Africa and reduce the structural obstacles to adequate energy and water supplies. Djibouti is at the crossroads of major sea routes for trading oil and other goods, so the government wants to increase its trade profile relative to neighboring countries and also make itself a regional hub for trade, handling and financial services. Some of the investment program’s projects aim to greatly expand poor electricity and water supplies to enable economic diversification to begin.

GDP continued the recovery that began in 2012, driven by the economy’s two main pillars, FDI and port activity, and grew an estimated 5.5% in 2013 (up from 4.5% in 2012). The influx of FDI during the year surpassed the figures for 2006-08 when the Doraleh container port was being built, and accounted for 18.6% of GDP. The main components were the acquisition by China Merchants Holdings International of a 23.5% stake in the port of Djibouti (PAID) as a result of its privatization (and name change to PDSA), as well as continuing infrastructure investment.

According to the government, almost 30% of the USD 6 billion program begun in 2012 was raised between 2012 and 2013, mainly from Chinese investors and the international aid community. Between 2013 and 2014, the program aims to build a port in Tadjourah to handle potash exports and another in Goubet for salt exports, along with the Djibouti to Addis Ababa railway line, an aqueduct to import water from Ethiopia, a desalination plant, a thermal power station and a second electricity line between Djibouti and Ethiopia, as well as housing. Drilling to find geothermal power sources is also expected. Further specialized ports, an airport and a new railway line have also been announced, but a lack of funding details makes it unlikely they will be built in 2014.

Economic spillover from the construction and implementation of these projects will support growth over the next few years, which should reach new record rates of 6% in 2014 and 6.5% in 2015.

The service sector remained the driver of the economy in 2013, mainly through transport, especially port activity, and still employs most of the workforce. Other sub-sectors – commerce, hotels, communications and banking – continued to expand. Quicker production of accounts in 2013 helped to define more precisely the components of GDP, estimated until now in the absence of national accounting standards. The sector made up 79% of GDP; 60% from trade and market services and 19% from non-traded services.

The secondary sector was 19% of GDP, mainly non-manufacturing industries (15% of GDP), essentially construction (12%), electricity (2%) and water (1%). Manufacturing remains underdeveloped because of the high cost of factors of production (water, electricity and labor), accounting for only 3% of GDP. The dry climate and lack of arable land means the primary sector is very small (only 4.1% of GDP), including agriculture (3.5%), fisheries (0.3%) and mining (also 0.3%).

The success of the current investment program depends on close monitoring of public finances and national debt. The infrastructure projects will increase the government’s recurrent spending and may lead to fiscal indiscipline. The government’s heavy borrowing to fund the new Djibouti-Addis Ababa railway and the aqueduct exceeds the entire official public debt in 2012. The government continued negotiations in 2013 for a new agreement with the International Monetary Fund (IMF), to be signed in 2014, that should help management of public finances and debt.

The authorities have also been finalizing their long-term development strategy, Djibouti Vision 2013, to provide formal planning tools for economic and social development, based on peace and national unity, good governance, economic diversification, building human capacity and regional integration. It will serve as the basis for five-year development strategies and aims to triple per capita income by 2035.

Excerpt from Djibouti Country Note, African Economic Outlook 2014

Source: Afribiz, Saturday, August 2, 2014

 

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