IMF Survey: Djibouti Aims to Be Regional Hub

IMF News, February 2, 2011

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Djibouti has achieved strong growth in recent years through large foreign direct investment inflows and brisk port activity.
To realize its goal of becoming a regional transport, trade, and financial hub, Djibouti must become more attractive to private investment while maintaining macroeconomic stability.

Growth remained strong despite the global economic crisis, with a modest decline from 5 percent to 4.5 percent expected in 2010.
The global crisis has affected Djibouti indirectly through lower foreign direct investment and a possible decline in aid flows.
The $20 million, three-year Extended Credit Facility (ECF) IMF loan was secured by Djibouti in September 2008 to support reforms.

Strategic location: positioned on the Bab El Mandeb straits at the entrance of the Red Sea, halfway between the Mediterranean Sea and the Indian Ocean.
The port of Djibouti serves as neighboring Ethiopia’s only access to sea.
Military and security presence: hosts French and U.S. military bases and international anti-piracy operations such as the European Union’s operation Atalanta.
Recent infrastructure and private investment highlights:
- A new container terminal at Djibouti’s port built in a public-private partnership with Dubai World expanded the port’s capacity many times over.
- The new five-star Djibouti Palace Kempinski—owned by Nakheel, a Dubai World company—has boosted tourism and business.

Unemployment remains stubbornly high at 60 percent.
Poverty is pervasive despite strong growth.
United Nations Development Program’s Human Development Index ranking for 2010: 147th out of 169 countries.
Food security has deteriorated sharply owing to low rainfall over the past four years, and malnutrition has risen.
High production costs for domestic companies—mainly energy, telecommunications, and labor—limit the benefits of foreign investment.
Economic activity has been largely confined to the free trade zone and the port, with limited positive spillovers on the rest of the economy.

Authorities incurred a larger-than-expected fiscal deficit in 2009 to address security issues from a border conflict with Eritrea and a social emergency arising from a prolonged drought.
In 2011, IMF economists noted fiscal discipline and enhancing the budget process as important corrective measures.
The ECF program aims to:
- Improve the economy’s competitiveness through lower input costs and a better business environment.
- Foster macroeconomic stability and improve fiscal discipline.

Diversify the investor base and develop a strong local private sector by improving competitiveness through a better business environment and lower production costs.
Work closely with official donors to secure needed concessional financing to support social spending and infrastructure investment.
Strengthen the budget process to address fiscal shortcomings.

Banking sector expansion since 2006 has led to increased competition, a wider offer of financial products, more attractive deposit terms, and strong credit growth.
Potential to become a low-tech, bank-based financial hub by leveraging openness and stability in the region, and exploiting electronic and mobile banking opportunities.
Opportunities to integrate banking services with port and trade-related financial services, such as insurance and trade credit.
Required actions for the banking sector:
- Update the banking regulatory framework.
- Build greater supervisory capacity, with IMF technical assistance already being supplied.

IMF Survey: Djibouti Aims to Be Regional Hub — IMF Survey online, February 2, 2011