Bridgehead to Africa

Bridgehead to Africa

Economic overview

Over the last few years, Djibouti’s economy has seen an increasingly strong growth. From 4.4 percent in 2010, it reached a 5 percent annual growth in 2013. The pillars of the Djiboutian economy are foreign direct investment (FDI) and port activity. FDI in particular has been continuously increasing as well, with a new record amount of USD 277 million in 2013. This is expected to continue in this fashion as vast investment programs—especially in the infrastructure area—are ongoing. Priority is also given to providing the country with a comparative advantage in goods trading, in par with molding it into a regional hub for trade, handling and financial services.

Bordering Ethiopia, Somalia, Eritrea—and Yemen on the other side of the Bab-el-Mandeb strait—Djibouti is located on a global crossroads between continents. The Bab-el-Mandeb strait, separating the Red Sea and the Gulf of Aden, is one of the busiest maritime lanes in the world, notably connecting Asia with Europe and Northern Africa. A quarter of the world’s hydrocarbon traffic transits on this route that is taken by nearly 30,000 ships and 700 million tons of goods a year.

Djibouti, with its “Vision 2035” development program, has decided to take advantage of this geostrategic location. On one hand it intends to become the bridgehead of choice to Africa and the Middle East for businesses, and on the other hand the powerhouse of East Africa’s economic growth at the service of its neighboring countries’ trade.

Djibouti’s location, political stability and hospitality have made the country into the ideal location for the refueling and transshipment of ships travelling between Asia and Europe. Security forces and humanitarian agencies also established themselves in Djibouti, however. Additionally, France, the United States, Japan, Spain, Italy and Germany have military bases in Djibouti, from which they guarantee regional shipping trade security. Amongst the humanitarian agencies one that figures is USAID, which decided to establish its regional office in Djibouti to serve the countries of East Africa.

Business and Investment Opportunities

The transport and logistics economic sectors play a key role in Djibouti’s development strategy and, as a result, are booming. The investment opportunities are plentiful. However, this is not to say that opportunities lie only in those sectors. Indeed, pulled by a sharp growth in transport and logistics, most economic sectors are growing at a brisk pace.

In the service area, telecommunications, real estate and tourism are expanding vigorously. In turn, this service boom creates a demand in the construction and public works sector, which now represent almost 10 percent of the GDP. Djibouti also intends to make the most out of its mineral resources—such as gold, copper, zinc, iron and aluminum—as well as of its energetic potential. Djibouti possesses natural gas, and great geothermal power potential—construction of a 300 megawatt geothermal power plant was recently agreed—and the ongoing oil exploration shows a lot of promise.

Finance is also a sector that has been bolstered by Djibouti’s development efforts. The country used to have only three banks—two subsidiaries of French banks and one of the Bank of Africa—but now it has more than 10 banks from Africa, Europe, Asia and the Middle East, appealed by the country’s growth and stable currency, the Djibouti Franc, which is pegged to the dollar. The invigoration of the banking sector also led to that of the private sector. Now, the Djibouti Central Bank is implementing new reforms to further the banks’ capacities to finance the economy.

As for manufacturing, Djibouti allows the use of the “Made in Djibouti” label for goods manufactured in Djibouti with a minimum 25 percent value addition.

Djibouti’s integration within the regional economy alongside its neighbors is showing a lot of promise. Furthermore, Djibouti is located strategically at the heart of the region. From Djibouti one can not only easily access Ethiopia’s, Somalia’s, Eritrea’s, but also South Sudan’s growing markets. The Trans-African Railways Network under construction will link Djibouti and Addis Ababa, Ethiopia, to various parts of Africa and drastically reduce transit times. The railway network’s potential annual container traffic is estimated at 42.1 million Twenty-foot Equivalent Units (TEU).

This integration is especially evident in the case of Ethiopia. Indeed, both countries enjoy a symbiosis relationship. Djibouti notably provides a maritime front to Ethiopia, while Ethiopia provides, among others, electricity and fresh water to Djibouti. The relationship between Ethiopia and Djibouti is so strong that Ismaïl Omar Guelleh, Djibouti’s President, said in 2014 that “Ethiopia is Djibouti and Djibouti is Ethiopia, no difference at all.”

However, the country is also a member of the Common Market for Eastern and Southern Africa (COMESA), and can effortlessly access its 21-country market of over 497 million people, including such countries as Egypt, Libya, Democratic Republic of Congo, Rwanda, and Madagascar. It also benefits from preferential access to the European market—through the African, Caribbean and Pacific Group of States and European Union (ACP-EU) partnership agreement—as well as to the United States market—through the African Growth and Opportunity Act.

Free Zones

The Djibouti Port and Free Zone Authority (DPFZA) acknowledges that the best way to explore the advantages of its strategic location and ground, sea, air transportation synergy is to develop free trade zones in Djibouti aiming at attracting more investors who can contribute with their experiences and capital to the development of Djibouti’s economic.

There are two free zones in Djibouti as of today. The first one is a historical free zone located inside the port of Djibouti. A second and larger dedicated free zone called Djibouti Free Zone (DFZ) was opened in 2004. It spans 17 hectares of land, office space and storage facilities, and is located between the Port of Djibouti and the Doraleh Container Terminal. It employs more than 1,000 people, mainly in the sector of light goods manufacturing, redistribution and general trading.

The new Djibouti Free Trade Zone (DFTZ) will be developed in the Project Area to be declared as Free Trade Zone, consisting of the Core Free Trade Zone District with an area of 48.2 square kilometers (32.8 km² land area and 15.4 km² sea area). This “mega-project” is expected to create 200,000 jobs over ten years. The framework agreement was signed on March 25th 2015 together with CMHI (China Merchants Holdings International).

Another free zone project was approved during a Cabinet meeting on May 2015. This free zone, called Cargo Freight Village, will be dedicated to air cargo in order to link it with sea logistics and develop sea-air cargo to serve landlocked countries in Central and West Africa. This multi-modal system is also expected to serve Western Europe and the East Coast of the Americas. The establishment of Air Djibouti Cargo airlines will expedite this process and, to accomplish this, the first dedicated Boeing freighter will commence operation on June 2015.

Benefits for businesses establishing within Djibouti’s free trade zones are numerous, including corporate tax exemption and the ability to repatriate all capital and profit. There is no requirement for a local partner, nor is there a foreign exchange control.

A system called One-Stop Shop offers businesses all necessary administrative services such as applications for visas, work permits and driving licenses, as well as registration of vehicles, in one single location.

The new Djibouti Free Trade Zone is already taking reservations from companies around the globe, particularly companies from export-based economies. The African continent is on the move and its consumer base is growing at a fast rate. Companies that are closer to their customers will have advantage over those companies trading from afar because they can serve their customers faster and more efficiently.

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