Djibouti, officially known as the Republic of Djibouti, is a francophone country and one of the smallest countries in Africa, with an area of 23,200 square kilometers and a population estimated at 1.2 million.  Djibouti is in the Horn of Africa. It is bordered by Somalia in the south, Ethiopia in the southwest, Eritrea in the north, and the Red Sea and the Gulf of Aden in the east. Across the Gulf of Aden is Yemen.

The size of the Djibouti economy limits its ability to diversify production and increases its reliance on foreign markets, making it more vulnerable to market downturns and limiting its access to external capital. Djibouti is a strategic entry point for regional business, capitalizing on its political stability, well developed financial market, and accommodating investment climate with a “World Bank 2020 Doing Business Index” of 60.5, which is the highest in the region. By virtue of its strategic geographical position in the Horn of Africa and the Gulf of Aden, proximity to commercial maritime corridors, with around 60% of world maritime trade passing through nearby shipping lanes, free zones, open trade regime, and stable currency, Djibouti’s total FDI stock amounted to USD 1.98 billion in 2020 (58.5% of GDP).

Djibouti, Vision 2035 seeks to transform the economy into a diversified, tech based, and competitive global powerhouse. The recent drivers for economic transformation were investment in infrastructure, transport sector (maritime, rail, air, and road), renewable energy, electricity and water. In line with its strategic vision and long term capital preservation, in 2021 Djibouti established a Sovereign Wealth Fund (SWF) to invest parts of the proceeds deriving from the national ports operations.

Djibouti-Ville the engine for economic growth: Djibouti Ville is the center of Djibouti’s economic activity accounting also for over 80% of total population and close to 90% of national Gross Domestic Product (GDP). The national GDP in 2021 was $3.37 billion, a 5.5% increase from 2020. Djibouti’s strength lies in its strategic location at the southern entrance to the Red Sea, marking a bridge between Africa, Asia and the Middle East.  Djibouti energy dependency is changing rapidly as the country launches its ambitious renewable energy transformation which aims to make Djibouti completely energy independent by 2030. A good step in this direction is the new installment of 60MW of wind-power which became operational at the beginning of 2023.

The economy

Djibouti’s economy is driven by state-of-the-art port infrastructure, among the most sophisticated in the world. Adjacent to some of the world’s busiest shipping lanes (between Asia and Europe), where 14-20% of global trade is handled every year and where several deep-water port facilities serve as entry points into East Africa and landlocked neighbor Ethiopia for goods from China and other Asian countries. Djibouti also hosts military bases for France, the United States, Japan, China, and the North Atlantic Treaty Organization (NATO), as well as for other countries with forces supporting global anti-piracy efforts. Djibouti-Ville is also the landing point for several underwater internet cables connecting Asia to Africa and Europe. Furthermore, Djibouti international free trade zone, is the largest in Africa and is strategically located between the trade routes between the East and the West, where more than $2 trillion of goods transit annually.

Medium Term Economic Growth: Despite the Covid-19 and more recent geopolitical crisis, and recessions risk, the country’s medium-term economic outlook remains strong. GDP growth reached 5.5% in 2021 and is expected to average 6.2% in 2023, as free zone re-exports, as well as economic activity in, and exports of, transportation, logistics, and telecommunication services to Ethiopia returns to pre-pandemic level. Furthermore, Djibouti proximity to oil rich Gulf Cooperation Countries (GCC) will likely convert in more investments particularly from Saudi Arabia and UAE, who are benefiting from massive energy trading surpluses fueled by the conflict in Ukraine. As Djibouti’s economy develops further, it is however important to note that the country is overdependent of Ethiopian demands to fuel its economic growth. Due to the conflict that started in Ethiopia in 2018, the Djibouti national economy has been progressive affected by the Ethiopian civil war, and as of recently probably cutting the sustained recovery from the recession occasioned by the COVID-19 pandemic.

Djibouti has also unexploited natural assets that could be used for tourism, untapped marine resources that could support more local fishing, and an infrastructure of undersea telecommunications cables from which it could develop new digital and service industries across Africa. Renewable energy and maritime servicing represent another source of growth, as Djibouti has geothermal, solar, green hydrogen and eolian potential.

Djibouti Geostrategic Advantage:

Djibouti is the strongest African commercial, logistic, and military hub which is at the heart of China’s Silk Road strategic investments. Up to 20% of global shipments crosses the Gulf of Aden every year, representing at leas $2 trillions of goods traded. Additionally, Djibouti hosts the most important port in the region providing 90% of Ethiopia supplies (Ethiopia is the second largest consumer in Africa with 125 million people) Military bases from France, US, China, the EU continue to provide stability and business continuity for all countries in the region particularly Ethiopia, Eritrea, South Sudan, Somalia, and Kenya.

Conclusions: Having worked in Djibouti both as a resiliency coordinator at the World Bank, and as a strategic advisor since 2009, I confirm that the country is on the path to becoming a regional business and banking hub. While the strategically importance of Djibouti is well understood, its global importance as a regional engine for economic growth and business continuity will become more marked. The recent investments in renewable energy, logistics operations and digital cables will underpin the country development towards a powerful global role that fuels local and international investments and regional prosperity.