26th September 2015    4 minute read

The Investment Hotspot Of Djibouti

The Investment Hotspot Of Djibouti

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The small East-African country not widely recognised as a hotspot for growth has recently made a number of developments towards what might be promising future.

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History

The former French colony gained independence in 1977. It has a population of under a million and total area of 23,300 square kilometers. Its economic performance has improved in recent years due to a series of fiscal reforms and the pegging of the Djiboutian Franc to the US Dollar. However it is estimated that 30% of their population is below the poverty line, mainly due to lack of educational standards leading to an unskilled workforce and thus a shortage of development in their agricultural and industrial sectors. Unemployment is over 45%, and there are no real policies for private sector job creation. Unlike other African countries who have turned to their prosperous agricultural advantages to create employment, Djibouti suffers from low rainfall and unfertile soil and therefore are unable. This is exacerbated by the negative impact on their balance of payments by the need to import food products.

It is ranked 177th safest investment destination in the world by Euromoney Country Risk rankings, mainly due to lack of patent laws, high bureaucracy levels and mistrust of institutions. However there is one key aspect of the economy that is driving billions to be invested into this tiny African Country.

Location, Location, Location

Djibouti is situated on one of the busiest shipping lanes in the world. The majority of its GDP is derived from the services it can provide to ships mainly resupplying and refueling. It is estimated 60% of the world’s maritime traffic will pass along this route. Significantly for China, it is also along its ‘21st Century Maritime Silk Road.’

Railroad

The most recent development has been the construction of a $4bn railway, more than 750km long to connect Addis Ababa, the Ethiopian capital to the Djibouti port. As well as cutting transport time and raising capacity by around seven times, it is hoped to act as a stimulus for bilateral trade increasing the demand for the services the port can offer. Currently 90% of Ethiopia’s imports arrive in Djibouti, so the gains made from this increased efficiency could be monumental when the railroad begins operations in October.

There is also hope that given successful competition, a further expansion will take place to connect the Atlantic Coast to the Djibouti Red Sea.

The Chief executive of state-owned Ethiopian Railways noted ‘it will be one of the most vibrant economic corridors in the world’.

Port

Development to the incumbent Doraleh port are also under way, including new motorways, an additional 3 terminals added to the port and construction of new shipyards. This will allow larger ships to stop off and a wider range of services on offer. The creation of employment both in the building and inevitable operations will hopefully instigate change in the stagnant unemployment rate of nearly 50%.

Free Trade Zone

A 10-year project has begun to create new warehouse and office space facilities near the port. Aimed to cover 4350 hectares and costing $7 billion, it will be the largest free trade area in Africa according to the president of the Djibouti port. Djibouti GDP is now expected to grow by 7% in 2015.

So who, you may ask is paying for all of this? China

Money from various Chinese institutions including China Railway Group, China Civil Engineering Construction Corporation, China Development Bank, Industrial and Commercial bank of China and the Export-Import Bank of China.

Djibouti gained global attention when it recently ordered US troops to vacate the military base Camp Lemonnier, which is situated in Djibouti and handing it to the Chinese, the ‘new friends from Asia’, the Djibouti President noted. Perhaps unsurprising considering the US paid around $63 million a year for use of the camp, compared to the billions the Chinese have invested in the past couple of years.

China are not the only country Djibouti have sought closer ties to, they have recently made agreements with Turkey to build an economic zone in the country for manufacturing and processing along the Turkish new possibilities when it comes to exporting goods to East Africa. They have also launched a Sea Air Cargo service to Nigeria, in an attempt to increase trade with the country.

Djibouti is of course still highly controversial, its high levels of corruption and human rights abuses make doing business there extremely off-putting for many western economies and firms.

However the General Manager for their Port of Djibouti is optimistic:

“We are on a good path and we have a great partner behind us especially Ethiopia and all the other African countries. Djibouti is the Singapore of Africa tweet

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The Market Mogul

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