Africa Economic Forum Djibouti

Recent Macro Economic and Financial Development

The government will continue to implement the National Development Plan (2020-2024) and the long-term development plan - Vision 2035 - which aim to strengthen Djibouti's position as a regional crossroads for trade and logistics. Investment in fixed capital (33.8% of GDP in 2022) will continue to be a major driver of growth, supported by the continuation of various transport and port infrastructure projects, financed mainly by public debt from the main bilateral (China, Saudi Arabia) and multilateral (Islamic Development Bank, Arab Fund for Economic and Social Development) donors. These ongoing projects include the redevelopment of the historic port into a business centre, and the continued development of the Damerjog port industrial free zone, with the construction of a new oil jetty in conjunction with Ethiopia. In addition, household consumption (53.6% of GDP in 2022) will be supported by more moderate inflation as world prices for food, fuel and basic necessities fall, Shrinking twin deficits, but the risk of over-indebtedness remains high.

In 2024, the fiscal deficit is expected to remain on a downward trajectory, driven by the recovery in customs and transhipment revenues that accompanies the upturn in port and freight activity. However, public spending will remain high. This will be driven by increased capital expenditure. The government will also continue to support household purchasing power through food and energy subsidy programmes. Debt servicing, which has tripled to around 4% of GDP in 2022, will continue to fuel the deficit. This sharp rise in debt servicing has already led to an accumulation of external arrears, estimated at over 3% of GDP in 2022, and will continue to strain public finances. The financing of infrastructure will continue to weigh heavily on external public debt, more than half of which is owed to China, creating a high risk of over-indebtedness.

The current account deficit should continue to narrow in 2024 due to an improved external situation favourable to the resumption of export activities. Despite a rise in import volumes (mainly oil, fertiliser and palm oil), the trade deficit (25.3% of GDP in 2022) will narrow, and the recovery in port activities will help to widen the surplus on services (14.8% of GDP in 2022). Repatriation of profits by foreign investors will continue to widen the income account deficit. The transfers account will retain its surplus, fuelled by the leasing of land for foreign military bases and installations (notably by France and the United States, China and Japan) aimed at combating terrorist activities and piracy in the region. However, the surplus on the transfers account will shrink slightly as foreign aid declines against the backdrop of the war in Ukraine and a global economic slowdown. That said, foreign exchange reserves should remain at the equivalent of around 3 months of imports over 2023-24, and will be supported by the peg of Djibouti's currency to the US dollar.

Outlook and Risks

With peace returning to Ethiopia, Djibouti’s medium term economic outlook is favorable. GDP is projected to grow 5.4% in 2023 and 6.5% in 2024. Inflation is projected to drop to 3% on average over 2023–24 as the price of essential goods remains high. The budget deficit is projected to widen to 2.1% of GDP between 2023 and 2024 due to current spending and higher investment. The current account surplus is projected to continue to narrow in 2023–24 due mainly to lower exports and stagnation in revenue from foreign military bases. Public debt is projected to increase to 73% of GDP over 2023–24 thanks to foreign loans used to finance infrastructure projects. Foreign exchange reserves are projected to remain at approximately 3 months of import cover over 2023–24. Possible headwinds include a return of instability in Ethiopia, difficulties in repaying external debt, a prolongment of Russia’s invasion of Ukraine, the recurrent impact of climate change, and a resurgence of COVID-19.

Climate change issues and policy options

Djibouti is particularly vulnerable to climate change, which threatens food security and water resources. Despite the country’s negligible contribution to global greenhouse gas emissions, the government has committed to reducing emissions 40% by 2030. This voluntary commitment requires major investment in mitigation and adaptation. In 2015, climate finance need totalled $5.5 billion, some of which has been mobilized. Climate finance requires an additional 2.2% of GDP, and green economy 8.4%. Energy, water, transportation, industry, and waste management are priority areas for green economy opportunities. Private finance for climate change and a green economy remains undeveloped and low. Despite limited natural resources, the potential for developing renewable energies, ecotourism, fishing, and salt is strong. Strengthening the legal, regulatory, and incentive framework and planning capacities could mobilize further private financial resources.