Putting Djibouti at the heart of global trade

Written byNeil Ford

PublishedMarch 24, 2020

Djibouti had little going for it when it became independent in 1977, but by exploiting its geographic position and putting into place well thought-out policies, it has developed into a global trading centre. Report by Neil Ford.

A small country in a very arid region, apparently with limited natural resources, Djibouti did not appear to be a viable economic prospect when it became independent in 1977. Yet the government has managed to make the most of the country’s strategic location to carve out a niche as an important trading centre.

It now aims to build on this by attracting manufacturing and processing investment around the various port terminals, while developing an internationally important digital communications hub.

Djibouti’s strategic position may be its main selling point today but it has always been at the centre of interactions between Africa, Arabia and the wider world. These cultural exchanges meant that the Afar and Somali people who lived in the area were quick to adopt Islam in the 7th century. Djibouti’s location on the Red Sea also attracted growing French interest, which translated into it becoming a French protectorate in 1884. The first railway to Addis Ababa was completed in 1917 as it began its long-running role supporting Ethiopia. The territory gradually gained greater self-rule until it finally emerged as an independent nation.

Two factors have driven the development of the port. Firstly, Djibouti’s strategic location at one of the world’s most important crossroads, near the entrance to the Red Sea and the approaches to the Suez Canal in one direction; and close to the Indian Ocean trade routes to East Asia in the other.

In addition, the port has established itself as the main outlet for Ethiopia. That vast country of 100m people has been landlocked since the secession of Eritrea in 1993 and so 90% of its trade has flowed through the Port of Djibouti. As the economies of East Africa begin to grow, Djibouti is also well placed to handle trade between the region, the Middle East and Europe.

Djibouti Ports & Free Zones Authority (DPFZA) acts as port landlord, regulating the activities of private sector operators. Following the cancellation of DP World’s concession to operate Doraleh Container Terminal (DCT), the government now seems to be banking on China Merchants Group driving port development in the country and fulfilling the same role in the future.

The Chinese firm jointly funded the $590m cost of building the Doraleh Multipurpose Port, which was completed in 2016, with the DPFZA, and said that it wanted to turn Djibouti into the ‘Shekou of East Africa’, in reference to the massive Chinese port. DCT has an annual handling capacity of 1.6m TEU, or twenty- foot equivalent units, the standard size of container. With the latest cargo handling equipment, it has an efficient unloading rate of 35 containers an hour.

Djibouti’s position as the main entrepôt for Ethiopia was cemented in 2017 when the new Ethiopia-Djibouti Railway was completed. It replaced the ageing colonial-era line and reduced freight transport times between Addis Ababa and the Port of Djibouti from 50 hours to 12 hours.

The first electrified cross-border railway in Africa, the 756km line was built by the China Civil Engineering Construction Corporation and China Railway Group, as Beijing looked to Djibouti to strengthen the growing Chinese-Ethiopian economic relationship. With average annual economic growth of 9% over the past 15 years, Ethiopia offers an ideal market to enable Djibouti’s economic development.

Premier port in the Horn of Africa

The government of Djibouti is determined to strengthen the country’s position as the premier port site in the Horn of Africa. Ethiopia is seeking to diversify its range of port options and has signed deals to use Port Sudan in eastern Sudan and the emerging port of Lamu in Kenya.

In addition, relations with Eritrea have thawed over the past two years, raising the possibility that Eritrean ports could again serve Ethiopian trade. Yet the Sudanese and Eritrean ports are nowhere near as developed as Djibouti’s various port terminals, while Lamu is considerably further from Addis Ababa than Djibouti, so the latter can continue to build on its lead if investment is sustained.

Djibouti has one source of income shared by few other nations. It has established itself as the most popular place in the world for foreign countries to set up military bases. Former colonial power France has been joined by Italy, China and Japan in setting up military operations in the country, while the US has about 4,000 soldiers and contractors on Camp Lemonnier, plus a drone base at Chabelley.

The forces based in Djibouti are able to undertake a vast range of activities from anti-piracy, peacekeeping and humanitarian roles to anti-terrorism, intelligence and surveillance work. Apart from the fees that the foreign governments pay Djibouti to host the installations, the presence of so many strong military nations provides Djibouti itself with a degree of security.

Economic diversification

The World Bank estimates that Djibouti’s GDP grew by 7.2% in 2019 and predicted growth of 7.5% in 2020 and 8% for the 2021-23 period. These figures are likely to be downgraded as a result of the coronavirus crisis but the country’s long-term economic prospects look very sound. The economic base is already beginning to widen with the emergence of construction materials and food processing sectors.

Under Vision 2035, the government aims to create a more diverse economy by developing a digital technology hub, promoting light manufacturing export processing zones and improving national infrastructure, as the port and logistics sector continues to grow. Plans have also been drawn up to attract investment in financial services, tourism and renewable energy. Concrete targets have been set, including creating more than 200,000 jobs and tripling per capita income by 2035.

The vision is based on five core pillars:

Peace and national unity: strengthening unity, peace and solidarity;
Good governance: reinforcing good governance and democracy;
A diversified economy: promoting competitive and healthy economic growth;
Investing in human capital: building a hardworking, healthy and educated workforce;
Regional integration: increasing trade and commerce with regional partners.

It is hoped that attracting tech companies to the country will generate economic growth but can also benefit the people of the country directly through the provision of digital services, digital literacy and ultimately, employment. The infrastructure is already being put in place, with eleven subsea cables having connections with the country and support provided by the World Bank.

Regional demand for high-bandwidth international connectivity continues to grow rapidly, with a twentyfold increase in data usage in the Horn of Africa between 2009 and 2018, so there is huge scope for Djibouti to develop an international role for itself. The government is particularly keen to attract digital financial services investors to the country.

Renewable energy

The country currently has less than 126MW of installed power generating capacity and much more is needed to back the rapid growth plans. The current focus is on exploiting the country’s renewable energy potential and two substantial projects have already been agreed.

Last June, French firm Engie signed a contract to develop a 30MW photovoltaic solar power plant in the Grand Bara region, south of Djibouti. It is expected to be the first phase of a much larger 300MW scheme with estimated investment costs of €360m.

In addition, the Africa Finance Corporation (AFC) announced in February that it would invest $63m in the 59MW Ghoubet wind farm near Lake Assal. The project is backed by a consortium of Climate Fund Managers, Great Horn Investment Holdings and Dutch development bank,
FMO.

The developers have already secured a 25-year power purchase agreement to supply electricity to power distributor Electricité de Djibouti, starting in 2021. The means of provision will involve 15 wind turbines, each with a generating capacity of 4.8MW.

In a statement, the AFC said: “Electricity demand is also expected to considerably increase due to various large-scale infrastructure projects including ports, free trade zones and railways that the government of Djibouti has undertaken.”

In the longer term, Djibouti’s position on the Great Rift Valley has given it 1,000MW of geothermal potential, which could provide the constant, baseload power production that industry craves.