A surge in Ethiopia-bound trade from Djibouti increases traffic and prompts reforms

Serving as Ethiopia’s connection to maritime shipping, Djibouti’s cargo sector has seen an increase in traffic related to the neighbouring country’s expanding economy. This critical transport connection has been maintained through a highway link that connects Djibouti and its port all the way into Ethiopia and its capital Addis Ababa. Although the development of alternative infrastructure such as airports and new railway lines will diversify transport options, road traffic will remain a key part of the logistics sector. According to the World Bank, 85% of cargo traffic in Djibouti is either going to or coming from Ethiopia, with the small country handling more than 90% of its neighbour’s larger trade.

“We have instigated a large number of infrastructure projects, such as the new railway to Ethiopia, which was started in September 2013 and is nearing completion,” Moussa Ahmed Hassan, minister of equipment and transport, told OBG. “Projects like these are transformative, with trade volumes between our two countries increasing considerably. The new railway will reinforce the economic corridor from our ports to the hinterland.”

Busy Corridor

The fast-growing Ethiopian economy has accelerated traffic through the Port of Djibouti, with the volume of containers handled rising from 176,453 in 2002 to 854,851 in 2014, according to figures by Djibouti Ports and Free Zones Authority (Autorité des Ports et Zones Franches Djibouti, APZFD). Figures also show an average of 1500 transport trucks crossing the border daily between Ethiopia and Djibouti, with this expected to climb to as many as 8000 trucks by 2020.

“Djibouti’s investment in new road infrastructure will not only improve its connectivity with major East African markets, like Ethiopia, but it will also help facilitate the development of Djibouti’s remote regions,” Mahamoud Moussa Ahmed, director-general of the Djibouti Roads Agency, told OBG.

Despite the importance of the road corridor, the economic benefits of the crucial logistics business has traditionally accrued to operators from Ethiopia. According to figures in a 2014 report by the World Trade Organisation, the number of Ethiopian trucks servicing the transport corridor between the two countries ranges between 6000 to 8000. This number being far greater than the fleets of Djiboutian operators, with a total of 200 to 250 trucks.

Cost Watch

In recent months the Djibouti government has sought to ensure players that amidst the steady increase in activity related to Ethiopia, delays and costs do not erode the competitiveness of Djibouti – particularly in light of efforts of nearby countries, such as Kenya, to roll out new infrastructure developments and transport networks and tap into the Ethiopian market.

Currently, the shipping cost of bringing a twenty-foot equivalent unit from Shanghai into the Port of Djibouti is around $600 and takes 14 days, with an additional $750 and two days needed to take the container all the way into Addis Ababa in Ethiopia, according to figures by the APZFD. However, freedom in determining the price for freight forwarding in Djibouti led to a discrepancy in prices, with prices charged for Customs and port procedures varying from between DJF18,000 ($100) to DJF40,000 ($225), according to figures by the APZFD. To prevent price variability from impacting the competitiveness of the Djibouti-Ethiopia corridor, the government established fixed prices for these operations in 2015, with the new regulations enforced from January 2016.

Better Oversight

Authorities have also made an effort to formalise logistics operators and companies working within the transport sector by enforcing stricter rules for operating licences. “The restructuring of the licence for transport providers has aimed at bringing back transparency and fair competition to the sector,” Luc Marill, managing director of Marill Group, a logistics company based in Djibouti, told OBG. “Now only companies that possess the sufficient documentation and have a physical presence in the country are granted licences to operate on the important Djibouti-Ethiopia route.”

After the new regulations for freight forwarders were reinforced in March 2015, the number of freight forwarders in Djibouti went down considerably from 301 to 77, according to local media.

Freeing Up Space

Road congestion has been a major problem when linking cargo transport between Djibouti and Ethiopia but work is afoot to shift traffic off the road, and onto a recently rebuilt railway line. The 753-km Chinese-financed railway link will be able to transport up to 3500 tonnes per voyage between the countries – seven times the maximum capacity of the previous line – and cut travelling times to around ten hours, from the current average of two days it takes trucks. Speaking to media in 2015, Getachew Betru, chief executive of state-owned Ethiopian Railways, described the project as a “game changer,” adding, “It will be one of the most vibrant economic corridors in the world.”

Djiboutian officials hope the railway will eventually be extended to South Sudan, the Central African Republic and Cameroon, connecting the Red Sea and the Atlantic Ocean. Longer term, officials hope to build on the country’s geographical position, abutting markets in the Middle East, North Africa and East Africa, along with its transport links by developing special economic zones, where foreign companies will be able to assemble goods.

New Pipeline

Another project set to ease overall cargo transport will be the construction of a 550-km pipeline between Djibouti and central Ethiopia. The $1.55bn project will be used to ship refined petroleum products, which have been typically transported using tanker trucks. The new infrastructure will have the capacity to move 240,000 fuel barrels per day. “The energy pipeline is likely to improve road congestion and will create more room for logistics companies,” Reuben Ahronee, director-general at Massida Group, a local logistics operator, told OBG.

Currency Issues

Multiple large-scale projects and associated costs in Ethiopia have made it difficult for transport operators to get paid for logistics services between the two countries. “With most logistics services being oriented towards Ethiopia, a complication lies with the processing of payments of services, as the Ethiopian market has less financial liquidity,” Ahronee told OBG. “Also, the Ethiopian Customs services could be improved in terms of efficiency and integration with Djibouti.”

Djiboutian transporters have complained that the lack of foreign currency in Ethiopia – a result of a strict monetary regime – has led to accumulated unpaid debts. In a recent interview, Aboubaker Omar Hadi, president of the APZFD, said that as of December 2015, declared arrears to Djiboutian freight forwarders on the Djibouti-Ethiopia axis had reached DJF3bn ($16.8m); the APZFD has estimated the real figure could be double that. “The large arrears result from a lack of dollars, even the Ethiopian companies have trouble accessing foreign currency, because all of it is going to pay for large-scale projects, such as the dam,” Helen Hussien, general manager of logistics operator Afro Leon, told OBG. Understandably, this has put considerable financial pressure on logistics operators. Djiboutian authorities have been in contact with their Ethiopian counterparts to resolve the issue and recover the costs.

The transport of cargo will continue to remain a critical element of Djibouti’s logistics system going forward. Improved regulation has reduced the presence of informal providers in the market. Ensuring that logistics providers are paid on time would go a long way towards strengthening the sector further.

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The Report: Djibouti 2016

Transport & Logistics chapter from The Report: Djibouti 2016