IMF: Djibouti’s Port Investments May Haunt Its Economy

Djibouti’s ambitions of building a competitive economy anchored on ports and ports-related infrastructure could turn out to be a mirage, according to the International Monetary Fund (IMF).

The IMF is warning that despite massive investment in port-related infrastructure in pursuit of a dream of becoming the “Singapore of Africa,” Djibouti’s bubble is on the verge of bursting, with the country’s economy facing an uncertain future.

The IMF contends that although the investments have driven strong economic growth in recent years, benefits in terms of generating jobs and tax revenues have been minimal besides exposing the country to macroeconomic shocks.

The COVID-19 pandemic and the conflict in neighboring Ethiopia are twin shocks that have had a significant impact on economic activity and exposed the country’s vulnerabilities. In recent months, port activity has fallen initially due to pandemic-related disruptions to global trade then on reduced demand from Ethiopia.

“Djibouti has invested in significant port-related infrastructure, which generated annual growth of almost seven percent between 2013 and 2019, before the COVID crisis. However, with investments centered on capital-intensive projects, few domestic jobs and little tax revenues have been generated,” said the IMF in a recent report.

Guided by its Vision 2035 blueprint, Djibouti has been on a mission to become Africa’s maritime powerhouse by exploiting its location at the entrance of the Red Sea. It has pursued a dream to become a transshipment hub connecting the Middle East and North Africa region, East Africa, the Horn of Africa, and Europe.

With loans from China, Gulf nations, and the U.S. in excess of $4 billion, the country has invested in six ports, oil and gasoline terminals, free economic zones, and a railway line connecting it to landlocked Ethiopia, its biggest inland client.

The investments have attracted global attention with the port of Djibouti ranked as Africa’s top port on the global Container Port Performance Index. However, they have also precipitated a surge in macroeconomic vulnerability, with the country’s public debt rising to about 70 percent of gross domestic product ($1.5 billion).

---

Somaliland’s Berbera port could capture 30 percent of Ethiopia’s cargo volume.

---

Djibouti handles 95 percent of inbound and outbound trade from Ethiopia, raking in over $1.5 billion in port fees annually. However, there may be challenges ahead: the conflict in Ethiopia is already having negative impacts, with port activities on the decline. Meanwhile, neighboring jurisdictions – like Kenya and Somaliland – are investing in their own port infrastructure, which is bound to bring new competition to Djibouti’s doorstep.

The World Bank believes that Kenya’s Lamu Port and the Lamu-Southern Sudan-Ethiopia Transport (LAPSSET) regional interconnection project have the capacity to reduce Djibouti’s share of Ethiopian cargo by 10 to 15 percent. Somaliland’s Berbera port could capture 30 percent of Ethiopia’s cargo volume.

“Djibouti’s port activity has fallen, initially due to pandemic-related disruptions to global trade, then on reduced demand from Ethiopia. As a result, output growth slowed to about one percent in 2020,” said the IMF.

The IMF added that with the economic outlook clouded by the conflict, the outlook for 2022 is less favorable and subject to downside risks.

Read below the IMF’s press release

IMF Staff Completes 2021 Article IV Mission to Djibouti

December 21, 2021

• Large port-related infrastructure investments have boosted growth in recent years but also increased macroeconomic vulnerabilities while generating few jobs and little tax revenue.
• The COVID-19 pandemic and the conflict in neighboring Ethiopia have had a significant impact on economic activity and exposed Djibouti’s macroeconomic vulnerabilities.
• Fiscal policies to raise domestic revenues and stronger oversight of state-owned enterprises would help to restore debt sustainability and create space for social spending.

Washington, DC: A team from the International Monetary Fund (IMF) led by Brett Rayner conducted a virtual mission ending on December 20 to hold Article IV consultation discussions. At the end of the mission, Mr. Rayner issued the following statement.

“Djibouti’s large-scale infrastructure investments have driven strong economic growth in recent years, but the benefits have not been widely shared. Djibouti has invested in significant port-related infrastructure, which generated annual growth of almost 7 percent between 2013 and 2019, before the COVID crisis. However, with investments centered on capital-intensive projects, few domestic jobs and little tax revenues have been generated, and unemployment remains high. As a result, progress on social outcomes has been slow.

“As port-related investments have grown, macroeconomic vulnerabilities have increased. Public debt has risen to about 70 percent of GDP. Furthermore, with investments increasingly carried out by state-owned enterprises and the new sovereign wealth fund, a large share of fiscal activity is now off-budget.

“The COVID-19 pandemic and the conflict in neighboring Ethiopia have had a significant impact on economic activity and exposed Djibouti’s macroeconomic vulnerabilities. Port activity has fallen, initially due to pandemic-related disruptions to global trade, then on reduced demand from Ethiopia. As a result, output growth slowed to about 1 percent in 2020.

“The economic outlook is clouded by the conflict in Ethiopia. Growth is expected to recover to about 4 percent in 2021 on a rebound in investments and construction, but the outlook for 2022 is less favorable and subject to downside risks due to the conflict in Ethiopia and a possible resurgence of the pandemic. Once the regional security and health situations are secured, growth prospects are strong, with a competitive port sector well-positioned to benefit from a rebound in regional and global trade.

“Djibouti’s main challenge is to support a durable and inclusive recovery from the COVID-19 crisis and the conflict in neighboring Ethiopia. The authorities are thus encouraged to prioritize domestic revenue mobilization to restore debt sustainability and create space for social spending. To raise revenues, the authorities should reduce tax exemptions, including for state-owned enterprises. Governance and public financial management reforms will also be needed to preserve economic stability.

“Structural reforms would help to create jobs. Improvements in the educational system would help address labor-skill mismatches. Ongoing investments in solar and wind production would reduce the price of electricity and boost the country’s competitiveness. In addition, a recently announced partial privatization of Djibouti Telecom could help to reduce IT prices and expand access to cellular services.

“The IMF staff would like to thank the authorities for their close collaboration and candid and informative discussions.”