Whilst specific measures can be taken to improve debt and cash management in government, reform taxation, and improve macroeconomic stability, these steps improve the conditions for growth but do not necessarily generate growth directly. More direct pro-growth measures relate to the legal and regulatory framework for business and the role that government takes in the economy.
In Djibouti the key problem is that the circumstances for business and economic growth have declined. The government’s rapacious attitude towards the private sector appears to be based on an association made between business success and opposition to the government – or at least the harbouring of suspicions in this regard.
The symptoms are stark. Project investment related to ports and transport has tailed off. A number of apparently committed investors have withdrawn. It has become prohibitively expensive and administratively burdensome to start a formal business – and when new entities are formed, the tax authorities and licensing authorities chase proprietors for money not yet made. Some firms get into ‘gridlock’, with licences only issued to those with business permits; and business permits only issued to firms with licenses. Indeed, in most cases there is no logical justification for either.
There are other, quite extreme, anti-growth features of the business landscape. In Djibouti it is almost impossible to enforce a contract through the domestic legal system. Most businesses have some relationship with government – ranging from arduous and arbitrary regulations and taxes, to demand for equity without the commensurate investments. This makes them subject to random demands and confiscations, which if not complied with, can lead to wildly exaggerated tax demands – forcing businesses to close.
These are many of the reasons why the economy is in such a poor state, and why investment and growth has halted, and for example, why the one-million-ton-capacity container terminal is running at volumes below 180,000 containers (ETU).
The economy of Djibouti is based on the Suez/Red Sea/Gulf of Aden maritime route – ports, free zone, warehousing, access to the sea and the Suez Canal by landlocked countries – and protection of the shipping lanes by foreign military forces from outside the region.
The domestic economy which is not directly linked to these operations is also vitally important – providing employment for the population (where multiplier effects are in play), and providing support services for the maritime industries, such as various services, hotels, catering, fuel supplies, technical & construction skills, IT & telecoms, training, engineering maintenance, and so on.
The growth of the sector, hindered by inadequate support services, has stagnated. In turn those support services are victims of the poor environment for business, just as the major sectors for investment have been.
To address such issues and make a difference to the entire economy, and to the specific problems of the maritime business support sector, a complex range of reforms needs to be introduced with considerable urgency. Forgetting the sources of Djibouti’s wealth and ‘killing the goose that laid a golden egg’ has been a grave existential error, and now security is threatened.
First, for small businesses, the formalisation of the firm will be made easier. Minimum capital requirements will be virtually removed as is common in Europe. Rule-based transparent taxation will help to eliminate tax demands not based on income, at the same time that taxes are rationalised. Offices allowing fast track business registration in the districts will be opened. Banking will be simplified and banking reforms will provide access via retail commercial banks.
The Djibouti Development Bank will be restructured and focused on financial support (including concessionary finance) for SMEs. The aims will be recast to ensure that longer term active debt & equity finance is used instead of shorter term passive finance.
The complex system of ‘permissions’ and licenses will be swept away, and licensing will be focused on sensitive internationalised sectors like telecoms or where health and safety are paramount. No longer will the state decide how many market entrants should operate in any one sector.
Land and planning processes will need to be streamlined. Property taxes will be simplified and prohibitive transaction taxes (40%) will be reduced nearer the international average (10%).
Support services are needed for expats such as schools, homes, medical services, and recreation, and the regulatory frame for this will be streamlined.
Legislation will be introduced to prevent government officials demanding ‘free equity’ in return for permissions, and this will be criminalised as extortion. The practice of demanding up to 40% of equity for key politicians’ personal benefit (eg in the cement sector) should be stopped in its tracks.
New investors, by contrast should face much more user-friendly rules, and be able to progress their investments via a one-stop shop approach, implemented successfully in Singapore, Ireland, Taiwan and elsewhere.
This will be supported by a special Economic Council of persons from within and outside Djibouti to prevent extortive relations with officials, which include academics and former diplomats with valuable experience.
Getting things done
Enshrining such reforms in law will be a very major task, but the arduous and necessary process of disentangling the regulatory mess will be the subject of appeals to the aid donors for financing and technical support. It will be a one-off process.