Djibouti, a small East African country of about 900,000 people that has few natural resources, relies heavily on international trade for both basic needs and industry inputs. Economic activity in the country is dominated by the tertiary sector – representing roughly 80% of GDP – while the primary sector remains underdeveloped due to an unfavourable natural climate and geography. However, while industry accounts for less than one-fifth of GDP, investment in free trade zones and port facilities is expected to lead to more robust growth in the sector in the coming years.
SECTOR SIZE: Industry, including construction, accounted for 15.5% of GDP in 2017, compared to 17.4% in 2013, according to the World Bank. The manufacturing industry alone comprised 2.7% of GDP in 2012, but is forecast to rise to 5.8% in 2022 and to 7% in 2035, as the government aims to expand activity within free trade zones. Building and public works, meanwhile, is expected to grow from 14.4% of GDP in 2012 to 15% in 2022 and 16% in 2035, according to the national development strategy, Djibouti Vision 2035.
Indeed, most industrial companies operate in construction, engineering and the fabrication of building materials, such as cement and aluminium. The majority of them cater principally to the local market, with little focus on exports. However, with a surge of foreign investment in recent years, notably from Asia, Djibouti has seen the number of internationally focused projects multiply. Establishing additional free trade zones, such as the Djibouti International Free Trade Zone (DIFTZ) inaugurated in 2018, will give foreign businesses more incentives to set up local manufacturing facilities.
GOVERNMENT GOALS: In 2014 the government introduced Djibouti Vision 2035, a roadmap that outlines goals for the development of each of the country’s economic sectors, as well as actions to address challenges in the investment climate and policy frameworks. The strategy has the technical and financial support of three multilateral partners: the UN Economic Commission for Africa, the UN Development Programme and the World Bank. One of the document’s principal aims relates to facilitating growth in the industrial sector, which is largely based on the potential of agro-processing of local and imported food, fish and livestock. The government’s ambitions to invest in renewable energy and enable its wider access should also come to support industrial development in the medium to long term, with plans to achieve complete reliance on renewable energy to eliminate the current challenge of securing affordable and reliable power (see Energy chapter).
Industrial development is expected to support the government in some of its other goals as well, such as local job creation, improving the living standards of residents and reducing poverty levels. The authorities are seeking to reduce the unemployment rate from 48.4% in 2013 to 10% in 2035 by adding some 200,000 jobs to the economy. This would in turn help alleviate extreme poverty conditions, in which some 42% of residents lived as of 2014.
BUSINESS CLIMATE: While expanding industrial activity is a key goal for the next two decades, improving the broader business climate is among Djibouti’s top overarching priorities. With most of the country’s economic growth derived from service industries, reforms to support diversification and the ease of doing business – such as various amendments to the Commercial Code – have helped strengthen the country’s competitiveness and attract investment. Net foreign direct investment inflows represented an annual average of 11.3% of GDP between 2005 and 2016, peaking at 23% in 2007 and 2008. Foreign investment was negligible in the 1990s and early 2000s, according to the World Bank.
The establishment of the Djiboutian Industrial and Commercial Property Office (Office Djiboutien de la Propriété Industrielle et du Commerce, ODPIC) has also allowed for significant performance improvements. Established in 2012, ODPIC is a public body that helps facilitate business incorporation and manages the national trade register. It has reduced the time it takes to set up a business from 37 days before its creation to just four days. The office has also considerably lowered the price of establishing an enterprise – most recently, in June 2018, with the reduction of fees for any start-up of a natural or legal person from DJF132,500 ($745) to DJF18,000 ($101). Efforts by ODPIC have contributed to the tripling of the number of registered trademarks, from 200 in 2012 to 600 in 2017, while the number of enterprises created each year has also increased, rising from 406 in 2012 to 901 in 2017. Such results helped Djibouti climb 19 places in the starting a business category of the World Bank’s “Doing Business 2019” report, from 115th in 2018 to 96th.
In addition to these improvements, non-tariff barriers and a lack of transparency in the country’s regulatory system were addressed with recent amendments to the Commercial Code of 2009, passed by Parliament in April 2018. In a bid to shape a more attractive business climate that encourages economic and industrial development, the changes focus on four clauses of the law: insolvency, protection of minority shareholders, reliability of guarantee and security of moveable assets.
The amendments allow for more communication between creditors and debtors, as well as clearer rules for their relationship; more rights for shareholders, minority or otherwise, to sue, propose a resolution or control management; and increased transparency in relations between partners and shareholders. Changes also strengthened the process for contract execution and insolvency proceedings, in addition to protecting minor shareholders and improving access to loans.
MANUFACTURING: Such improvements to the business environment are set to benefit the development of local manufacturing, which faces a number of constraints. These include the small local consumer base, low availability of raw materials, a lack of competitiveness within the sector, elevated production costs and the high exchange rate for Djiboutian francs that affects producers when purchasing inputs from abroad.
However, perhaps the biggest hurdle for manufacturing activity, which stood at 4% of GDP in 2017, is the cost of energy. Approximately two-thirds of Djibouti’s energy is supplied by thermal power plants, with the rest imported from Ethiopia. The price paid locally is among the highest in the region, at $0.26 per KWh, according to the World Bank. This compares to Ethiopia’s $0.04, $0.08 in Yemen and $0.12 in Egypt. The cost of power accounts for about 25% of all industrial expenses, and has been highlighted by business owners as a top constraint. Policymakers are working to address this over time with continued investment in renewable energy, which Djibouti is committed to under Vision 2035.
Despite challenges, the country is looking to leverage its strategic geographic position on the Red Sea by targeting certain light manufacturing industries. “We are looking at light industries such as assembly lines for vehicles and consumer goods – things that are going to be re-exported. You have to understand that Djibouti is not a big market, but it is a gateway to bigger markets,” Aboubaker Omar Hadi, chairman of Djibouti Ports and Free Zones Authority (DPFZA), said in an interview given on the sidelines of the Africa CEO Forum in Geneva in March 2017.
Hadi also acknowledged the role that foreign investment is set to play in growing the local manufacturing base. As labour costs rise in China, large Chinese companies will likely shift their industrial bases to Africa. “In the coming five years 85m jobs will be delocalised out of China and many will go to Africa. We are preparing ourselves to attract a large share of these businesses, and to export goods from Djibouti to Europe, the Middle East and other East African countries,” he said.
AGRICULTURE & LIVESTOCK: Crop agriculture represents another nascent industry in Djibouti, with annual local production covering no more than 10% of domestic needs. According to the World Bank, 73.4% of Djibouti’s land area is classified as agricultural land, yet just 0.9% of all land is arable. Crop farming continues to be hindered by an unfavourable climate, arid land and scarce water resources. Djibouti therefore imports nearly all of its food, which leaves the country vulnerable to price swings. To tackle this, the authorities have bought agricultural land in neighbouring countries such as Ethiopia for planting. In addition to improving food security, this has the added advantage of reducing the food import bill from Europe and regions further afield.
Agriculture, which includes livestock and fisheries, comprises 3-4% of GDP. The livestock segment has a much stronger base in Djibouti, with animal rearing the dominant activity in rural regions, according to the National Investment Promotion Agency (NIPA). Roughly 90% of breeding is nomadic, while the remaining 10% of rearing is sedentary. In 2016 Djibouti exported 16,285 camels, 55,825 cattle, and 156,772 sheep and goats. Although the country is highly engaged in breeding and the regional livestock trade, more investment is needed for processing activities, such as the building of modern refrigerated abattoirs, to export more value-added meat products. The country currently hosts only one state-owned abattoir. While crop rearing may not be on the cards as a driver of economic activity for some time, given Djibouti’s unsuitable geography and climate, an expansion of infrastructure and training for livestock processing could increase the segment’s contribution to industrial activity and create jobs.
FISHING: Meanwhile, off the country’s 372-km coastline, NIPA estimates fish resources at 48,000-50,000 tonnes per year. However, actual production is 3-5% of this potential, at 1590 tonnes in 2010, 2929 tonnes in 2013 and 2012 tonnes in 2015, according to the latest data provided in the “Annual Statistics 2017” report. While these figures represent roughly 80% of domestic demand from the small consumer base, they also illustrate untapped potential to generate export revenue.
In addition to offering a path to greater diversification and economic growth, policymakers believe fisheries could generate up to 5000 new jobs – a significant number given the small population size. The authorities are looking to raise annual catches to a point where domestic demand is fully satisfied and additional volume is exported. Current underdevelopment of the industry can be partially explained by insufficient storage, processing and distribution networks, but maturation will likely begin with new fishing codes and regulations, as well as co-managing relationships between the state and fishing communities. The adoption of international standards for marine products would benefit exports in the medium term, as well.
PORT FACILITIES: Situated on the Horn of Africa, Djibouti has more to offer than just rich fishing waters. The country sits along one of the most frequented maritime routes in the world, at the crossroads of Asia, Africa and Europe. It finds itself at the heart of the New Silk Road, a global trade route being charted by China through investments in strategic infrastructure projects such as the Doraleh Multipurpose Port (DMP). The facility, an extension of the Port of Djibouti, opened in July 2017, with China Merchants Group holding a 23% stake.
The new port is expected to facilitate the handling of specialised merchandise, such as vehicles, cooking oils and large industrial equipment. It is also bolstering Djibouti’s redistribution capacity, which has been limited to the Doraleh Container Terminal since 2008. The DMP can accommodate ships carrying more than 15,000 containers and has the capacity to handle up to 9m tonnes of merchandise per year.
Crucially, Djibouti’s ports act as the international terminal for 95% of landlocked Ethiopia’s imports and exports. In his March 2017 interview, the DPFZA’s Hadi acknowledged that Ethiopia’s burgeoning economy is benefitting Djibouti, saying, “Ethiopia is really the engine of development in our region.” As Djibouti depends on its neighbours to sustain trade through its ports, maintaining and growing those relationships is vital to strengthening and diversifying the local economy. “Regional stability is fundamental for sustainable economic development in Djibouti,” Oussama Gamil, general manager of local conglomerate Groupe Al Gamil, told OBG. “Working hand in hand with Ethiopia, Yemen and Somalia can unleash many trade opportunities and help develop key sectors in the region, such as agriculture and industrial activities.”
FREE TRADE ZONES: The presence of free trade zones complements the operations of the nation’s ports. Located between the Port of Djibouti and the Djibouti-Ambouli International Airport, the Djibouti Free Zone (DFZ) has been in operation since October 2004. To build on the success of the 40-ha space, the first 240-ha phase of a new trade zone adjoining the DMP was inaugurated in July 2018 at a cost of $370m. The DIFTZ, which will take 10 years to fully develop at a total cost of $3.5bn, is slated to be the largest free trade zone on the continent, at 4800 ha.
When completed, the first phase of the DIFTZ will be home to four industry clusters: logistics, business, business support and processing manufacturing. Several companies have already set plans in motion to open facilities in the zone, including Singaporean agri-business firm Wilmar, Taiwanese lighting manufacturer Osram and Kenyan food group Golden Africa. Djibouti aims to leverage the success of the DFZ and early interest in the DIFTZ to generate local jobs, increase knowledge and skills transfer to the domestic workforce, bolster the industrial sector through foreign investment, and widen its redistribution capabilities to further serve Europe and the Middle East.
With recent investments in port, container terminal and free trade zone projects, Djibouti is helping bridge the gap between global investors and regional markets, securing products and inputs from abroad, while allowing for easier export of East African goods. However, while the government is setting its sights on supplying markets beyond East Africa, Ethiopia’s fast-growing economy will likely remain the top recipient of goods and services produced in Djibouti’s free zones, as well as cargo flowing through its ports.
TRANSPORT: The transport sector has also witnessed some important changes recently, such as the completion of the continent’s first cross-border electric railway between the Ethiopian and Djiboutian capitals. Agreed to in 2013, the 750-km line – 100 km of which is in Djibouti – became operational in January 2018. The line was constructed by China Railway Group and China Civil Engineering Construction Corporation (CCECC). The service offers four departures per day, and reduces the travel time between Addis Ababa and the Port of Djibouti from seven days by road to just 10 hours. While slower than high-speed trains, at 120 km per hour, the speed was calculated as the most profitable in terms of freight volume requirements, and construction and maintenance costs. The railway, which also offers passenger services, was established to further integrate the two countries economies, and will boost trade activity at Djibouti’s free trade zones and ports.
Regional manufacturing will benefit from the line, with plans under way for two new industrial estates along the route, both to be built by CCECC. The first is Adama Industrial Park in Ethiopia, which was two-thirds complete in March 2018. The park spans 102 ha and has an investment cost of $147m. The second, a textile plant in Dire Diwa, Ethiopia, is being developed over 40 ha and is set to be completed in 2020 at a cost of $220m. The new rail line is therefore not only facilitating trade and passenger movement, but is garnering foreign and regional investment in nearby industrial spaces.
OUTLOOK: With services and trade dominating Djibouti’s economy, industrial activity has significant room to grow. The fishing and livestock industries perhaps show the greatest potential for value-added processing, and the country would therefore benefit from investment in infrastructure and training in these areas.
For the time being, Djibouti is continuing to partner its strategically located ports with free trade zones to encourage job growth, knowledge transfer and light manufacturing. Foreign investment, mainly from China, will help expand Djibouti’s redistribution capacity, as will continued partnership with Ethiopia. Over time, these facilities will provide opportunities for increased manufacturing and contribute to economic diversification.
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