Although East African countries appear in general to have a positive future ahead of them, political conflicts, ethnic tensions and economic problems still create instability. Unlike its neighbors in the region, Djibouti has managed to maintain its political and economic stability since 1999, helping it progress towards its goal of becoming an integral part of the regional economy. As a small country surrounded by the larger actors of East Africa, Djibouti acts as a regional hub for trade infrastructure and logistics services. Strong relations with Ethiopia and South Sudan are the basis of the country’s economy and Djibouti is extremely dependent on these countries, especially the huge Ethiopian market. Continued progress in Djibouti has allowed for an optimistic appraisal of its future, but more is needed to ensure sustainable growth and to further integrate its economy with those of its neighbors.

Djibouti is strategically located, acting as a natural port at the meeting point of the Red Sea and the Gulf of Aden, serving as a bridge between East Africa and the Arabian Peninsula. The country is well positioned as an international transit port, having one of the busiest shipping lanes in the world. After the war between Ethiopia and Eritrea, it became the main port and route to the sea for landlocked East African countries, dramatically increasing its importance. This was a turning point for Djibouti and more developments are planned to upgrade the existing port facilities with the support of major investments.

Economic Indicators

Djibouti is ranked as a lower middle-income country according to figures from the World Bank and ranks 155th in the Doing Business table of 2015, which was less than the regional average. However, GDP has been rising successively thanks to two main areas: port-related activities and FDI inflows. The country’s economic growth is stable and has continued to recover its position since the two drops it experienced in 2010 and 2012. Moreover, Djibouti is ranked 112th in the 2015 Economic Freedom Index and 18th out of 46 countries in the Sub-Saharan region, having experienced improvements in its economic freedom in recent years with a total score of 57.5.

The country is well positioned as an international transit port, having one of the busiest shipping lanes in the world. Thus, the vast majority of Djibouti’s economy stems from port-related activities, such as trade infrastructure and logistics services.

Statistics from the World Bank estimated that GDP in current prices for Djibouti was $1.5 billion in 2014 and is forecasted to reach $1.6 billion in 2015. According to figures from the IMF, GDP rose by 5% in 2013 and 5.5% in 2014, and this trend is predicted to continue, with 5.5% growth expected in 2015. Data from the African Economic Outlook show a higher growth rate, 6% in 2014 and predict 6.5% in 2015. This would make Djibouti’s GDP growth rate higher than the average for Africa, which was 4.8% in 2014 and 5.7% in 2015. In addition, statistics from Economy Watch indicate an income per capita of $1.668 (around $2.893 in purchasing power terms) in 2014, an increase of 4.2% from 2013, and this is expected to reach $1.754 (around $3.028 in purchasing power terms) in 2015.

According to statistics from the African Development Bank Group, inflation is under control at an annual rate of 2.4% (in 2014) and no change is expected in 2015. However, this is still changeable due to variations in the prices of food and oil products, which are the main import products.

The vast majority of Djibouti’s economy stems from port-related activities, such as trade infrastructure and logistics services. It also receives a significant amount of income from the French, US and Japanese military bases located in the country. The country serves as the main logistical hub for anti-piracy operations in the Red Sea. Growth in the telecommunications, construction and transportation sectors have accelerated in recent years, becoming the most important drivers of the country’s economic growth. As a result, the service industry became the country’s dominant sector thanks to port activities, making up 79.7% of total GDP. It is also the biggest employer by sector, representing 60% of total employment. The service industry drives citizens to the capital city due to the job opportunities it creates, meaning that urbanization is still very much increasing. Now, 77.2% of the total population live in urban areas.

Although at 77.2% urbanization Djibouti is one of the most urbanized countries in the region, employment options are severely limited and unemployment is the major challenge faced by the government. The country has a good supply of labor, with an active population of 300,960, nearly 60% of whom are unemployed, a figure which is higher among young people. The private sector is insufficient and needs to be stimulated in order to create more jobs. Major economic investments are also needed to reduce the high unemployment rate. In addition, the country faces widespread poverty and a significant portion of the population lives below the poverty line. Although poverty is proportionally more common in the rural areas, nonetheless, about 72% of the country’s poor populace live in cities. According to the government, current investment plans and FDI projects have done relatively little to tackle these troubles, and a new vision is still required in order to move forward.

Other sectors are still underdeveloped and continue to decline in importance. The industrial sector accounts for 16.2% of GDP and agriculture accounts for 4.1% of total GDP. The low proportional importance of the agriculture sector is due to the country’s dry climatic conditions, lack of water resources and an absence of arable lands. Fishing is a traditional profession for Djiboutians and employs around 3,000 people, but is still limited because of the small coastline, which stretches for 372 km. Although the fishing sector accounts for only 0.3% of total GDP, it is growing steadily and plays a key role in Djibouti’s exports to the Gulf countries.

Tourism is one of the fastest growing sectors in the Djiboutian economy, but does not yet hold a significant position in the economic structure, employing only 4,500 people. However, the country has great potential and could be a regional center for recreational tourism. It boasts many tourist attractions and activities, including beautiful natural landscapes, exotic beaches, and unique cultural, archeological and geological sites, receiving more than 60,000 visitors in 2013. According to the current numbers from the National Investment Promotion Agency of Djibouti, tourists from neighboring countries and from the Gulf states are the main sources, accounting for 40% of total arrivals, while European countries are the second key contributors to the tourism sector, led by France.

Tourism is one of the fastest growing sectors in the Djiboutian economy, but does not yet hold a significant position in the economic structure, employing only 4,500 people. However, the country has great potential and could be a regional center for recreational tourism.

Imports and Exports

The economy of Djibouti is highly dependent on the international market, with a total trade volume of $684 million in 2013. However, despite the fact that the country is at a transit point of major shipping lanes, its trade volumes are limited. As such, the government wants to increase its trade profile in the region, with a focus on the Ethiopian market, and become the trade center for East Africa. After its independence in 2011, South Sudan also became an important market for Djibouti’s transport facilities, with Djibouti exporting South Sudan’s oil products. South Sudan, Ethiopia and Djibouti signed an agreement in 2012 to build a new corridor for oil pipelines, an important step towards greater regional integration.

The total value of Djibouti’s imports amounted to $593 million in 2013, with food and oil products being the main imports. At the same time, the total value of the country’s exports amounted to only $91 million in 2013, resulting in a large deficit in the current account balance. Thanks to the country being the main route to accessing the sea for a number of landlocked countries, re-export represents around 80% of Djibouti’s total export volume, of which Ethiopia is the leading partner. Aside from re-exporting, Somalia is the main source of Djibouti’s exports. The United Arab Emirates and Yemen are also key clients, exporting 4.4% and 4.1%, respectively.

FDI Trends

Djibouti’s economic activity is boosted by foreign direct investment (FDI) and this has been a major source of growth in GDP. The United Nations 2014 World Investment Report determined that the country attracted $286 million in FDI in 2013, while the total amount of FDI reached $1.3 billion. The FDI came mostly from the Arabian Peninsula, with particularly strong investment from the United Arab Emirates, reflecting around 70% of total investment, concentrated on port facilities and port-related sectors (more than 50%).

The FDI came mostly from the Arabian Peninsula, with particularly strong investment from the United Arab Emirates, reflecting around 70% of total investment, concentrated on port facilities and port-related sectors (more than 50%).

Djibouti’s recent FDI growth has been spurred on by the establishment of the Djibouti Free Zone in 2004 and the National Initiative for Social Development (INDS), adopted by the government in 2007. The strategy was to create an encouraging climate for business and develop the private sector in the country. The Doraleh container port was expanded with the help of Dubai Ports World (DPW) in 2009, which is worth $397 million. Today, Doraleh has become a regional distribution hub due to its strategic location and its annual handling capacity of 1.2 million TEU, the largest in the Horn of Africa. Moreover, old ports were privatized by the government and new ones are being built, mainly by Chinese investors. The Hong Kong-based firm China Merchants Holdings International (CMHI) bought a 23.5% share in the Port de Djibouti in 2012 for $185 million, as part of the privatization efforts, and the construction is now underway. Another Chinese group, the China Exim Bank, operates in Djibouti, financing several port-related infrastructure projects in the country. Between 2011 and 2014, the bank secured more than $3 billion in loans to Ethiopia and Djibouti for the construction of the 756 km Addis Ababa-Djibouti City Railway Project. The project has been under construction since March 2012, led by the China Civil Engineering Construction Corporation (CCECC), and is expected to be completed by October 2015.

Ethiopia is another important investor, a reliable partner in working towards the main goal of increasing East-African economic integration and reached an agreement with Djibouti to invest $61 million to build a new port in Tadjoura. The Kuwait-based Arab Fund for Economic and Social Development added $36 million and the Saudi Fund for Development contributed $25 million. The new port will be an alternative route to the sea for Ethiopia’s re-exports and will greatly contribute to their trade volume.