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2009 Investment Climate Statement - Djibouti


2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report
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Overview

Djibouti's economy is service-based, with the country's seaport accounting for the bulk of economic activity. Almost all food and many other goods are imported from Ethiopia, the Arabian Gulf, or France. The services and commercial sectors account for more than 80 percent of GNP. Dubai World Group, Djibouti’s main private investor, is active in various sectors including the port, tourism, customs and aviation. Djibouti is also experiencing a surge in the establishment of foreign commercial banks, predominantly from the Middle East, attracted by opportunities that could result from Dubai-based investments in Djibouti. Telecommunications are reliable, but expensive. Djibouti offers significant incentives to private-sector individuals and corporate investors, but obstacles to foreign investment include a small domestic market, and high labor and energy costs.

Openness to Foreign Investment

The government of Djibouti recognizes the crucial need for foreign investment for the economic development of the country. Djibouti's assets include a strategic geographic location, an open trade regime, a stable currency, substantial tax breaks, and other incentives. Potential areas of investment include:

  • Djibouti's port: the Doraleh fuel pier was dedicated in February 2006, and the new $400 million Doraleh container terminal began operations in December 2008.
  • Tourism: a large resort hotel complex managed by the Kempinski Hotel Group opened in October 2006, and recently completed an expansion;
  • Manufacturing and fishing sectors: President Ismail Omar Guelleh has made privatization, economic reform, and increased foreign investment top priorities for his administration, and has pledged to seek out the help of the international private sector to develop the country's infrastructure.

Djibouti does not have laws that would discourage incoming foreign investment. In principle there is no screening of investment or other discriminatory mechanisms. Certain sectors, most notably public utilities, are state-owned and are not currently open to investors. Dubai World Group currently manages the Port of Djibouti (since 2000), Djibouti International Airport (since 2002), and Djibouti Customs (since 2005). In 2008, Istithmar World Aviation (IWA), a Dubai World company, partnered with Daallo Airlines and the government of Djibouti to restart the defunct Djibouti national air carrier.

The most important direct foreign investment in Djibouti is the Port of Doraleh, located just west of the current seaport. The Doraleh Project will eventually encompass an oil terminal, a container terminal, and an industrial and commercial free zone co-financed by Emirates National Oil Company (ENOC), Dubai Ports World (DPWorld), and the government of Djibouti. The first phase of the project, a modern oil terminal, was completed in August 2005 and dedicated in February 2006. The Container Terminal became operational in December 2008. The Container Terminal, which is slated to open formally in January 2009, will handle sixth generation container ships and serve as both the principal port for Ethiopian commerce and a transshipment hub. The construction of the Industrial and Commercial Free Zone is slated to begin in 2009.

In 2008, the Al-Noor Holding Group announced plans to construct a bridge linking Yemen and Djibouti. This estimated $200 billion project would include the construction of two new cities, one on each side of the bridge, with a special economic status. This is an ambitious, generational project likely to take many years to complete.

The Ethiopia-Djibouti Railway Company cancelled the management contract signed with the South African company COMAZAR in 2006 because of COMAZAR’s inability to provide solid financial guarantees. Al-Ghanem Group from Kuwait is expected to take over the private management contract. In April 2004, the government of Djibouti also conceded its fishing port to a private firm, Djibouti Maritime Management Investment (DMMI). A fish laboratory and a fish processing factory are currently under construction, and are expected to bring the country’s fish exports to international standards.

Djibouti’s National Investment Promotion Agency (NIPA), created in 2001, promotes private-sector investment, facilitates investment operations, and works to modernize the country's regulatory framework. NIPA has been mandated to encourage and facilitate foreign investment by assisting with all administrative procedures. Its ultimate goal is to serve as a one-stop shop for investors. NIPA identifies fishing, banking, insurance, tourism, health, and manufacturing as priority sectors for investment. In July 2008, the government of Djibouti named a Minister of Investment Promotion, a new cabinet level position. The Minister of Investment Promotion oversees NIPA.

In 2008, the government reduced taxes on basic food commodities to zero percent as a response to high inflation. The government will introduce Value Added Tax (VAT) system in January of 2009. The VAT consists of a flat rate of 7 per cent which will be imposed on companies with an annual turnover exceeding 80 million Djiboutian Francs (approximately US$ 450,000). Whenever VAT is levied at 7 per cent, other existing taxes on the same transaction will be reduced by 7 per cent. In 2004, the Ministry of Finance reduced taxes on some products to encourage business sector growth. Automobile spare parts and recording or image producing electronic devices are subject to 8 per cent taxes (instead of 33 per cent), while taxes on electrical, plumbing, or sanitary material decreased from 33 to 20 per cent. Heavy construction engines and raw cloth are now subject to 8 per cent tax, instead of the previous 20 per cent. These tax reforms are meant to promote growth of the construction sector, transportation, and textile industry.

Djibouti belongs to a number of regional groupings, including the Inter-Governmental Authority on Development (IGAD), and the Common Market for Eastern and Southern Africa (COMESA), which groups 19 countries into a common market of more than USD 300 million. Djibouti successfully hosted the COMESA Summit in November 2006. Djibouti is eligible to benefit from the African Growth and Opportunity Act (AGOA), and is also a member of the World Trade Organization (WTO). In addition, Djibouti is among the 34 African least developed countries that have the option of entering the European Union Generalized System of Preferences.

Conversion and Transfer Policies

Djibouti has no foreign exchange restrictions. There are no limitations on converting or transferring funds, or on the inflow and outflow of cash. The Djibouti franc, which has been pegged to the U.S. dollar since 1949, is stable. The fixed exchange rate is 177.71 Djibouti francs to the dollar.

Expropriation and Compensation

Djibouti’s Investment Code stipulates that "no partial or total, temporary or permanent expropriation will take place without equitable compensation for the damages suffered". The Embassy is not aware of any recent act of expropriation or compensation related to foreign companies. Given the government policy of promoting private investment, none are expected. In December 2007, Djibouti and France signed a bilateral agreement regarding bilateral promotion and protection of investment, which, inter alia, extends legal protections to French investments in Djibouti.

Dispute Settlement

Djibouti's legal system is based on French law, and consists of three courts: a Court of First Instance, presided over by a single judge; a Court of Appeals, with three judges; and the Supreme Court. The Government has increased funding for the judiciary and recognized the need to increase the transparency and efficiency of the judicial process. International lawyers practicing in Djibouti have reported effective application of maritime and other commercial laws, but there have been occasional reports in the past from foreign companies operating in Djibouti that court deliberations were biased or delayed.

Judgments by foreign courts are in principle accepted by Djiboutian courts. According to the Ministry of Justice, Djibouti is a member of the International Center for the Settlement of Investment Disputes, because any international agreement signed by France before Djibouti gained independence in 1977 is automatically binding in Djibouti. The Chamber of Commerce of Djibouti is planning to set up a Regional Mediation Center, designed to settle commercial disputes in a timely and transparent manner.

Performance Requirements/Incentives

Performance requirements are not a pre-condition for establishing, maintaining, or expanding foreign direct investments. Incentives do, however, increase with the size of the investment and the number of jobs created. Tax benefits and incentives fall under two categories detailed in the investment code. Investments greater than USD 280,000 which create a number of permanent jobs may be exempted from license and registration fees, property taxes, taxes on industrial and commercial profits, and taxes on the profits of corporate entities. Imported raw materials used in manufacturing are exempted from the internal consumption tax. These exemptions apply for up to a maximum of ten years after production commences. Investment matters fall under the jurisdiction of the national investment board, which approves all investments.

Djibouti offers significant incentives to private-sector individuals and corporate investors. One U.S. firm that recently established a branch in the Free Zone hailed the speed and efficiency of the process. Establishing a local company outside the Free Zone is, reportedly, significantly more time consuming. The Djiboutian investment code guarantees investors the right to freely import all goods, equipment, products, or material necessary for their investments; display products and services; determine and run marketing policy and production; choose customers and suppliers; and set prices. Foreign investors are also free to determine their own hiring and firing policy as long as it remains within the structure of the labor code.

The 2006 Labor Code incorporates the latest international recommendations and conventions on issues such as the worst forms of child labor, minimum age of working, protection for maternity, and measures against workplace discrimination.

Right to Private Ownership and Establishment

Djiboutian laws guarantee rights for foreign and domestic private entities to establish and own business enterprises, and to engage in all forms of remunerative activity. Legally established private-sector companies have the same access to markets, land ownership, credit, and other business facilities as do public enterprises. Although restrictions on private enterprises are minimal, competitive equality in regard to public enterprises, namely public utilities, remains limited.

Protection of Property Rights

There are sales of pirated trademarked products in Djibouti, especially in the informal market. A large share of trade with several countries is also done informally. Djibouti's legal system, inherited from the French, officially protects the acquisition and disposition of all property rights and safeguards intellectual property, patents, copyrights, trademarks, and trade secrets. In addition, Djibouti ratified the World Intellectual Property Organization (WIPO) convention, the Paris Convention on the Protection of Industrial Rights, and the Bern Convention on the Protection of Literature and Art Works. In July 2006, Djibouti passed a law (Law 154) enforcing the protection of copyrights. In 2006, Djibouti drafted a law on the protection of other intellectual property rights in close collaboration with the WIPO, although in 2008 the draft law had not yet been finalized. In practice, protection of intellectual property rights has not been strictly enforced.

Transparency of the Regulatory System

Djibouti’s Port, Free Zone, Airport, and customs service are now managed by Dubai Ports World. With the port and its related activities accounting for much of Djibouti’s formal economy, the effect on the whole economy has been substantial. Port and customs revenues have increased significantly and shippers note striking improvement in the transparency and efficiency of those operations. There are ongoing efforts to foster similar transparency in the rest of the economy, but bureaucratic obstacles and delays are often a problem.

Efficient Capital Markets and Portfolio Investment

Two large French commercial banks, Indosuez Bank (BIS) and Bank for Commerce and Industry (BCI), dominated the banking system for years, but now face competition from several new international banks. The French banks still account for most deposits. In the past, their exposure to the economy has been limited mostly to short-term (trade) financing and lending. Credit is allocated on market terms, and foreign companies do not face discrimination in obtaining it. However, generally only well-established businesses obtain bank credit, as the cost of credit is high. Both banks have offered only a limited array of financial instruments: letters of credit, money transfer, and short and long-term loans.

Two new banks opened in 2006: the International Commercial Bank, a Malaysian firm recently listed in London, and the Saba Islamic Bank of Yemen. A third new bank, the “Bank of Deposits and Credits of Djibouti”, a bank backed by Swiss capital, was inaugurated in December 2007. The Central Bank has approved the establishment of two additional banks, which are expected to open in 2009. In addition, other foreign banks have voiced interest in opening outlets in Djibouti. Propelled by increased competition and new loan products, including Djibouti’s first long-term home mortgages, there has been a 40 per cent rise in the volume of loans made in 2008, and a decrease in average lending rates from 14 per cent to 11 per cent.

Political Violence

In 2008, there were no reports of political violence, but police dispersed several demonstrations, including protests against high food prices. There were no deaths or reports of serious injuries as the result of such protests. There were isolated claims of official impunity, arbitrary arrest and detention, and interference with privacy rights. Enforcement of libel laws had a chilling effect on press freedom, and there were restrictions on freedom of assembly and association. Despite legal guarantees, there was also government interference with union activities and leaders. An ongoing border dispute with Eritrea, which led to fighting in June, remains a potential source of instability in northern Djibouti.

Corruption

Corruption exists in Djibouti and sometimes becomes an obstacle to investment and business development. Recent major foreign investors have reported that they have operated free of government interference or corruption, and the government of Djibouti has pledged to protect as well as welcome new direct investment. However, there have been reports in the past of government officials applying pressure on smaller investors to become their “partners" or to obtain sub-contracts. Despite a substantial improvement in customs transparency under Dubai World’s management, there are still reports of business owners attempting to bribe officials to evade import taxes. There are also allegations that corruption in the judicial system continues to fuel uncertainty and mistrust among some local and foreign investors. Two magistrates were dismissed in 2007 as the result of an investigation into judicial misconduct.

However, prosecution and punishment for corruption has been rare. The Chamber of Accounts and Fiscal Discipline (CAFD) has the authority to verify and audit all public establishments for transparency and accountability and implement necessary legal sanctions. The CAFD has reported on cases of lack of transparency and accountability in governmental agencies.

The State General Inspection (SGI), another government institution, complements the work of the CAFD by ensuring that human and material resources in the public sector are properly utilized. In its first report published in 2007, the SGI highlighted the necessity for a strategy to improve accountability and quality management, and urged strict enforcement of existing anti-corruption rules and regulations.

Bilateral Investment Agreements

Djibouti has several bilateral investment agreements. In 2007, it concluded a mutual investment treaty with France, and also maintains accords with Ethiopia, Yemen, Egypt, Malaysia, and India. Other treaties include: the Partnership Agreement between the Members of the African, Caribbean and Pacific Group of States (ACP); the Agreement for the Promotion, Protection and Guarantee of Investment Among Member States of the Organization of Islamic Conference; the Articles of Agreement of the Islamic Corporation for the Insurance of Investment and Export Credit; and the Unified Agreement for the Investment of Arab Capital in the Arab States.

OPIC and other Investment Insurance Programs

Djibouti is eligible for Overseas Private Investment Corporation (OPIC) programs. OPIC offers up to USD 400 million in combined financial and political risk insurance to eligible U.S. investors. Also, Djibouti joined the Multilateral Investment Guarantee Agency (MIGA) in January 2007. MIGA issued its first guarantees to Djibouti for the port of Doraleh.

Labor

A 2000 law makes attending school compulsory until the age of sixteen. Gross enrollment rates have risen from approximately 38 per cent in 1998 to approximately 67 per cent in 2007. The scarcity of vocational or professional training facilities has restricted the creation of a pool of skilled labor. The government of Djibouti and the Port of Djibouti remain the nation’s main employers, although there is growing private sector employment as well as jobs created by French and American military forces present in Djibouti.

By law, all employers are obligated to provide social security to their employees. The "Caisse National des Retraites" handles the social security of government workers with long-term contracts (fonctionnaires), and the "Organisme de Protection Sociale" deals with the private sector and government employees with short-term contracts (conventionnes). In 2007, these two agencies merged to form the “Conseil National de Securite Sociale”. Wages in Djibouti are relatively high, compared to other countries in the region. This reflects influence from historically high French pay scales, paid before independence in 1977, and the high cost of living. One factor affecting employee performance and income is that the majority of Djiboutian men spend a significant percentage of their income on khat, a mild narcotic legal in the region. Increasingly, employers are forbidding use of khat by their workers, but khat use remains the norm in most sectors of the economy.

The Labor Code allows for employees to form labor unions. It also provides guidelines on wages, overtime pay, annual leave, sick leave, work schedules and holidays. A new 2006 Labor Code was widely criticized by labor unions, who have asserted that it gives more rights to employers at the expense of workers. Two large labor unions exist in Djibouti, but only the Djiboutian Workers Union (UDT) is recognized by international organizations. Unions have accused the government of Djibouti, which has the mandate to act as a mediator between unions and employers, of interfering in their internal affairs.

In December 2007, the government created a National Agency for Employment, Training, and Professional Integration (ANEPI). One of the objectives of ANEPI is to become a viable interlocutor for investors. ANEPI maintains a database of national job seekers with various educational backgrounds and kinds of experience. ANEPI also delivers work permits to foreign workers.

Foreign Trade Zones/Free Trade Zones

In 1995 the entire country of Djibouti was designated a free-export processing zone. Any company working exclusively for export in the industrial sector is eligible for designation as an Export Processing Company (EPC). The 17-hectare Djibouti Free Zone (DFZ) has been operational since 2004. It has the capacity to house up to 100 companies. In 2007, use of the Djibouti Free Zone approached full capacity. An expanded free zone is planned as part of the Doraleh Project.

Djibouti's international airport, managed by Dubai Ports World, is also planning to establish a free zone within its premises to complement the Doraleh Free zone. In addition, Dubai Customs World signed an agreement with Djibouti in July 2007 to establish an automobile and heavy equipment free zone to meet the increasing demand for transport-related services in Djibouti.

Foreign Direct Investment Statistics

The main source of Foreign Direct Investment (FDI) remains the Port of Doraleh Project. Other FDIs include the construction of the five-star Kempinski Palace hotel, funded by Dubai, which opened in November 2006 and has continued expansion.

The following data on annual FDI, from Djibouti’s Central Bank, show that estimated FDI in 2008 was six times the amount in 2003 (USD million):

2003: 38.54

2004: 22.54

2005: 59.04

2006: 163.60

2007: 193.00

2008: 236.2 (estimated)



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