Strong Growth, Rising Debt: The Road Ahead for Djibouti’s Economy in 2024

Djibouti’s economy experienced strong recovery in 2023, with 6.7% GDP growth driven by Ethiopian demand and infrastructure investments, though rising debt and fiscal pressures remain concerns. The World Bank recommends reforms in taxation, debt management, and social spending to sustain growth and address poverty.

The World Bank’s Fall 2024 Djibouti Economic Monitor, prepared by a team led by Rick Emery Tsouck Ibounde, Senior Economist for Djibouti, highlights the country’s economic performance and the challenges it faces in strengthening the sustainability and equity of its public finances. The report reveals that Djibouti’s economy witnessed a robust recovery in 2023, surpassing growth forecasts with a GDP growth rate of 6.7%. This resurgence was primarily driven by an increase in demand from Ethiopia for Djibouti’s port and logistics services, following Ethiopia’s political stabilization. The report underscores the role of Ethiopia as Djibouti’s main trading partner, with the majority of the goods handled at Djibouti’s ports destined for Ethiopian markets. In addition to the boost from Ethiopian demand, domestic economic activity was also supported by public investments, particularly in infrastructure, as well as a recovery in private investment. Djibouti also saw improvements in its primary sector, notably in livestock exports to Gulf countries. However, despite these positive trends, the country faces significant fiscal challenges.

Inflation Under Control but Fiscal Pressures Mount

The inflation rate, which peaked at 11% in mid-2022 due to global economic disruptions, especially the Russian invasion of Ukraine, stabilized at 3.8% by December 2023. This stabilization was largely achieved through government interventions aimed at controlling prices of essential goods and mitigating the impact of rising costs. Key measures included price controls on basic foodstuffs and tax exemptions for vital products. While energy prices remained relatively stable, the prices of fresh food continued to rise, largely due to supply issues stemming from Ethiopia. Despite these challenges, the annual average inflation rate was contained at 1.4%, providing some relief to consumers. Yet, this stabilization came at the cost of rising fiscal pressures. Djibouti’s budgetary situation deteriorated in 2023, with the tax burden declining steadily due to increased tax exemptions. By 2022, tax exemptions accounted for 19% of GDP, contributing to a reduction in tax revenues to 11.5% of GDP in 2023, down from 13% in 2019. This fiscal strain was compounded by an increase in public spending, particularly in capital investments, and rising debt servicing costs. As a result, the budget deficit widened to 1.9% of GDP in 2023, financed mainly through external borrowing.

Rising Public Debt and Cash Flow Tensions

The country’s public debt remains a key concern, with the debt-to-GDP ratio reaching 67% by the end of 2023. External debt arrears also accumulated, particularly with major creditors like China Eximbank and EXIMBANK India, leading to cash flow tensions. The Djibouti government secured a four-year moratorium on its debt to China Eximbank, which will take effect in 2024. This agreement allows Djibouti to pay only 20% of the service due during the moratorium period, offering some short-term relief. However, the World Bank’s debt sustainability analysis warns that Djibouti remains at high risk of debt distress. Returning to a sustainable debt level will require freezing non-concessional borrowing, restructuring the country’s bilateral external debt portfolio, and intensifying efforts to mobilize domestic revenues.

Optimistic Medium-Term Outlook Despite Challenges

The medium-term outlook for Djibouti remains cautiously optimistic, with annual GDP growth projected at 5.1% from 2024 to 2026. This growth is expected to be driven by foreign trade and major public works projects, such as the development of the Damerjog industrial park, the construction of a new fuel storage terminal, and the expansion of renewable energy projects. However, the report highlights that Djibouti’s growth model is vulnerable to several risks, including regional instability, climate shocks, and rising public debt. Furthermore, the country’s heavy reliance on global maritime transport exposes it to fluctuations in international trade and transport costs. Geopolitical tensions, particularly in the Red Sea region, also pose risks to Djibouti’s economic stability, as disruptions in shipping routes could lead to higher import costs and reduced revenues from port services.

Inequality and Poverty Remain Key Concerns

The World Bank report also examines the redistributive effects of Djibouti’s fiscal system, focusing on how taxes and social spending impact poverty and inequality. The analysis, based on the Commitment to Equity (CEQ) methodology, reveals that while the fiscal system reduces inequality, it exerts upward pressure on poverty. Direct taxes, such as income tax, are progressive and contribute to improving equity, but indirect taxes like VAT, which are crucial for revenue mobilization, disproportionately burden poorer households. The National Family Solidarity Program (PNSF), which provides targeted cash transfers to low-income households, helps mitigate some of these effects, reinforcing the progressivity of the fiscal system. However, subsidies on kerosene, though aimed at reducing the cost burden for the poorest, mainly benefit wealthier households, as they consume more of the subsidized product. The report calls for a rethinking of subsidy policies, suggesting that kerosene subsidies be redirected toward more targeted cash transfers to support the poorest households more effectively.

Banking Sector Resilient but Labor Market Struggles

The banking sector in Djibouti has shown resilience to external shocks, with a notable increase in credit to the private sector and a significant reduction in non-performing loans. However, international reserves fell by 14.7% in 2023, reflecting the end of pandemic-related international aid and ongoing cash flow difficulties. The balance of payments improved at the end of 2023, driven by an increase in exports of goods and services, particularly in the shipping sector. Despite these positive trends, Djibouti’s labor market remains weak, with high unemployment rates and limited job creation. Poverty levels, though declining, remain high, particularly in rural areas. The World Bank emphasizes that strengthening the sustainability and equity of Djibouti’s public finances will require continued efforts to increase revenue mobilization, improve the efficiency of public spending, and address the country’s debt vulnerabilities.