The rate of investment in Djibouti has fallen off sharply in the last two years. This is partly due to the global recession but mostly due to the declining conditions for investors, and the confiscatory polices and worsening political situation. The number of investors who have withdrawn or been chased away with unreasonable demands, has grown, and in the investment community in the region – especially in Dubai and Beirut – this has not gone unnoticed.
Historically the Djibouti regime, in its tribal divide and rule policy, has favoured non-Afar areas in the country for investment and the development of the commercial infrastructure. For the purposes of long term peace, this has to be rectified.
Trade policy in Djibouti has been focused not on the protection of local markets, but as a way of raising state finances, in place of local sales or value-added taxation, and in place of employment taxation (very few of the population are in formal employment). There is a certain ‘short-term’ logic to this, given that most goods are imported in Djibouti, and tax administration is weak. However, such an approach limits the scope to develop the local economy, and reduces ‘hub trade’ – consumer and capital goods consumers coming to Djibouti to purchase goods in the wake of instability in neighbouring countries.
In order to increase investment a more welcoming legal and administrative environment is necessary, leading to a more user-friendly system for investors. However, external trade and investment policy must change too.
First, it should be clear to investors using Djibouti for its traditional core geographical advantages that the local economy will be developed – including support services which make transport-related investment in Djibouti more attractive. This will necessitate a phase-out of high tariffs over a number of years and the extension of VAT to more and more sectors as the reforms are implemented.
Second specific targeted projects need to be administratively supported by the government. These include investment in oil storage and transportation, and extension of the free zone, especially to increase services.
In addition there are needs to develop industrial zones for the region, and to meet the demands for investment for export-import related undertakings from Ethiopia, related to the ports, trucking corridor and future rail investment. Similarly these are demands for transport-related, and associated industrial park investments from Somaliland, on the Southern side of the country.
The historical bias in the location of investment in Djibouti will be addressed in the development by the government of a large, and much overdue, industrial park in the North East of the country. This will require investment in water, electricity and roads, and telecoms networks. Given the profitable nature of such investments it is envisaged that these developments will be funded by the issuance of locally-denominated securities.
Getting things done
Trade policy measures can be initiated quickly. Cooperation with Dubai, Ethiopia and Somaliland (and possibly Eritrea if a ‘thaw’ can be achieved) will be initiated as a matter of urgency on the government’s agenda.