Djibouti, a country with few resources, recognizes the crucial need for foreign investment to stimulate economic development. The country’s assets include a strategic geographic location, free zones, an open trade regime, and a stable currency. Djibouti has identified a number of priority sectors for investment, including transport and logistics, financial services, energy, and tourism. Djibouti’s investment climate has improved in recent years, which has led to a renewed interest by U.S. and other foreign firms. However, there are a number of reforms still needed to further promote investment.
The IMF has projected GDP growth at or above 6% annually for the next several years. In the nineties, Djibouti’s economy was weakened by a persistent drought, influx of refugees and migrants, a four-year civil war, and a substantial decrease of foreign aid. Recent years have seen a significant improvement driven by intensive expansion of the ports, changes in the tax and labor codes, and an influx of foreign direct investment (totaling 7.2% of Djibouti’s GDP in 2015). Real GDP growth has remained between 4% and 6% per year for the last five years, and inflation has remained below 8%.
Djibouti remains below regional and world averages in World Bank’s “Doing Business” reports, and fell from 169 in 2015 to 171 (of 189 countries) in the 2016 ranking. Some noteworthy improvements include making it easier to start a business by simplifying registration formalities and eliminating the minimum capital requirement for limited liability companies. In addition, Djibouti adopted a new commercial code, which broadens the range of movable assets that can be used as collateral to obtain credit. Another positive step was the opening in March 2017 of a “one-stop-shop,” which houses all the agencies with which a company must register.
Several large infrastructure projects are currently underway, with others in various stages of negotiation. Many of the ongoing and future projects are debt-financed with loans from China. An Independent Power Production law promulgated in 2015 has led to a surge of interest from U.S. and foreign firms, with multiple ongoing negotiations for energy generation projects, including green and hydrocarbon technologies.
The business environment in Djibouti would benefit from significant reforms to its legal and regulatory framework. Some of the needed reforms include simplifying the tax code, especially for small businesses, and streamlining the procedures for investment. In addition, the adoption of a new investment code based on international best practices is necessary as indicated by UNCTAD in its investment policy review of Djibouti:
Economic development is hindered by high electricity costs, high unemployment, an unskilled workforce, regional instability, and a need to diversify the economy.
Djibouti belongs to a number of regional organizations, 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 300 million people. 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 least developed African countries with the option of entering the European Union Generalized System of Preferences.