ACTIVITY DEPENDENT ON ETHIOPIAN TRADE AND INFRASTRUCTURE PROJECTS

Consistent with the favorable geographical situation, regional and international trade recovery has enormously contributed to the rebound of Djibouti’s growth after the health crisis. In 2023, the country’s activity will still be driven by activities around its international seaport, thanks to increased demand for logistics and transshipment services. However, with over 80% of Djibouti’s annual cargo traffic going to or from Ethiopia, its economic prospects are highly vulnerable to possible disruptions in its neighboring country, mainly due to fighting in the Tigray and Amhara provinces. The government will continue to implement the long-term development plan, Vision 2035, to strengthen Djibouti’s regional trade and logistics hub position. Thus, the country’s economic growth will also be supported by the continuation of various transport and port infrastructure projects financed by public and foreign investment. Among these ongoing projects are the redevelopment of the historical port into a business center, which is expected to generate more than 27,000 jobs, and the further development of the Damerjog port industrial free zone, with the construction of a new oil jetty in conjunction with Ethiopia. Nevertheless, due to the fallout from the war in Ukraine, the country’s activity will be confronted with inflationary pressures that will weigh on household consumption, given its dependence on imports of food, energy, and raw materials. However, inflation will be limited by the peg of the Djibouti currency to the U.S. dollar.

SLIGHT AND CONDITIONAL REDUCTION IN THE TWIN DEFICITS

In 2023, due to the Ethiopian conflict and the fallout from the Russia-Ukraine war, Djibouti’s financial stabilization is still likely to face serious challenges. Indeed, although its fiscal deficit is expected to narrow in 2023, improvement in customs and transshipment revenues will depend on the Ethiopian situation. Public spending on mitigating inflationary pressures through food and energy subsidy programs to protect the population will remain high. Moreover, infrastructure financing has weighed heavily on the debt dynamics, increasing the risk of debt distress. The public debt, almost entirely external, is due to China (70% of total public debt in 2021). Faced with this situation, the country is seeking to diversify its sources of financing, particularly with multilateral creditors. However, as the crisis has temporarily limited its fiscal consolidation efforts, despite IMF recommendations, Djibouti is not expected to benefit from a funded program in the immediate future. Regarding the external accounts, the trade deficit widened in 2022 due to the rising cost of oil and foodstuffs imports on which the country is heavily dependent. However, the debt is expected to narrow in 2023, provided that commodity prices continue to decline and that improved external conditions favor services exports, which will depend on developments in Ethiopia. Profit repatriation by foreign investors will continue to contribute to the income account deficit. In contrast, the transfer account will remain in surplus due to leasing land for foreign military bases and facilities (notably by France and the United States) to combat terrorist activities in the region. This deficit is expected to be financed mainly by external borrowing, particularly from China, and, to a lesser extent, by FDI. This should save foreign exchange reserves that have fallen to only about 1.3 months of imports over 2022-23.

RELATIVE POLITICAL AND SOCIAL STABILITY

Ismaïl Omar Guelleh, in power since 1999, won a fifth term by winning the presidential election in 2021 with more than 97% of the vote in a ballot boycotted by a large part of the opposition. Widespread poverty, compounded by the plight of refugees from neighboring countries, inflationary pressures, a worsening regional food crisis, and the continuing socio-economic impact of the pandemic (with vaccination rates barely reaching 22% in September 2022), could fuel frustration. Nevertheless, the government’s authoritarian stance should deter any severe protests. The government will continue implementing the Vision 2035 development plan to triple per capita income and improve human and social development indicators. The business environment remains poor, particularly from weak governance and corruption (128th out of 180 in 2021, according to Transparency International). In this respect, the dispute between Djibouti and DP World, owned by the Emirate of Dubai, following the unilateral termination in 2018 of its concession for the Doraleh container terminal, persists. Finally, the renewed collaboration between Ethiopia and Eritrea, particularly in the conflict in Tigray, after the one with Somaliland, could weigh on the country's prospects if Ethiopia were to negotiate agreements to free itself from its dependence on Djibouti’s ports.