Economic growth underpinned by improved external conditions
After a sharp slowdown in 2022, attributable to the fallout from economic and political instability in Ethiopia and the Russian-Ukrainian conflict, which particularly affected port activity, but also to the intensifying effects of climate change, economic growth rebounded in 2023. The upturn in international and regional trade, accompanied by a relative easing of the Ethiopian conflict, has contributed to more sustained growth, which should accelerate further in 2024. The country's activity will continue to be dominated by demand for services (83% of GDP in 2020), mainly logistics and transhipment, thanks to the growth in Ethiopian demand. However, while the country benefits from a geostrategic location that favours maritime activities, it remains exposed to the ups and downs of world trade and to the political and economic situation in Ethiopia (on which 80% of the port of Djibouti's annual freight traffic depends), which is subject to the fragility of the peace agreement signed in November 2022 between the Ethiopian federal government and rebel forces. In addition, 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.
Relative political and social stability
Ismaïl Omar Guelleh, in power since 1999, won a fifth term by winning the presidential election in 2021 with over 97% of the vote, in a ballot boycotted by a large section of the opposition. Widespread poverty (with 16.3% of the population living below the poverty line in 2022) is exacerbated by a large refugee population pouring in from neighbouring countries (Somalia, Ethiopia, Yemen and Eritrea), as well as by the food crisis exacerbated by persistent inflationary pressures and drought in the Horn of Africa. Against this backdrop, popular discontent could intensify, but the government's tight grip on power will dissuade any large-scale protests. The government will continue to implement the Vision 2035 development plan, which aims to triple per capita income and improve human and social development indicators. The business environment remains poor, suffering in particular from weak governance and corruption (130th out of 180 in 2022, according to Transparency International). Internationally, tensions with the UAE are being fuelled by the continuing dispute between Djibouti and DP World, owned by the emirate of Dubai. In 2018, the country unilaterally terminated the concession for the Doraleh container terminal in favour of port operator China Merchants Port Holdings, thereby strengthening relations with China, Djibouti's leading economic partner.