Journal Issue

Djibouti: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director For Djibouti

International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
October 2019
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1. Large-scale infrastructure investments and a rapid expansion of trade and logistics activities have fueled strong growth in recent years. The authorities’ development strategy aims at positioning Djibouti as a regional trade and logistics hub. Since 2014, the government has promoted investments in ports, free trade zones (FTZs), a water pipeline, and a railway from Djibouti to Addis Ababa. Against this backdrop, real GDP growth averaged close to 7 percent during 2014–17, driven by buoyant trade and logistics activities.

Djibouti – Leveraging its Strategic Location

2. The latest national account and external sector statistics attest to the importance of these sectors in the economy. Supported by IMF and World Bank technical assistance (TA), the authorities have overhauled their national accounts and international trade statistics to include new information on the activity of ports and FTZs (Annex I). Driven by higher value added in the trade and logistics sectors, nominal GDP was revised up by close to 38 percent relative to the last Article IV Consultation. Activity in the FTZs grew by about 10½ percent during 2014–17, and now accounts for one-fifth of the economy. Exports and imports were also revised up significantly to account for the large re-exports out of the FTZs.

3. The investment boom has been accompanied by rapid accumulation of debt, part of which was recently restructured. The projects have been financed by external loans contracted or guaranteed by the government—with China playing an increasingly important role as a key partner and financier. As a result, total external public and publicly guaranteed (PPG) debt has increased from 34 percent of GDP in 2013 to about 71 percent in 2018— over two-thirds of which has been contracted for projects undertaken by State-Owned Enterprises (SOEs). Against the backdrop of raising debt service and delays in operationalizing the railway project, the authorities recently reached an understanding with Export-Import (Exim) Bank of China on the restructuring of the loan contracted for that project (see below).

External Public and Publicly-Guaranteed Debt

(In percent of GDP)

Sources: Djibouti authorities; and IMF Staff estimates.

4. Notwithstanding high growth, unemployment and poverty remain high. With investment concentrated in capital-intensive activities relying significantly on high-skilled foreign labor, job creation has been limited. The 2017 household survey shows that about half of the working-age population is not in the labor force and that 47 percent of those in the labor force are unemployed. Despite notable progress in terms of access to public services (electricity, water, education) and a reduction of extreme poverty, a fifth of the population still lives in extreme poverty, with significant inequalities between urban and rural areas.

Labor Market and Poverty

5. In addition, Djibouti faces a complex geopolitical environment. Instability in some neighboring countries has generated a significant flow of refugees—with the latter now accounting for about 3 percent of the population—and important security and humanitarian costs (Annex II). However, recent improvements in diplomatic relations between Eritrea, Djibouti, Ethiopia, and Somalia could ease regional tensions and conflicts. Relations with DP World, an investor from the UAE, became tense after the government’s decision to break a contract regarding the management of a container terminal.1

6. Progress in implementing the 2016 Article IV Consultation recommendations has been uneven (Annex III). The authorities have taken significant steps to improve statistics, the business environment, and financial supervision and regulation. However, progress has been more limited on strengthening public financial management, developing a debt management strategy, adopting a medium-term budget framework anchored on debt sustainability, expanding the tax base or reforming SOEs, partly reflecting low implementation capacity.

Recent Macro-Financial Developments

7. After a slowdown in 2017, economic growth has started to recover. Real GDP growth decreased to 5.1 percent in 2017, reflecting the completion of major infrastructure projects and a slowdown in Ethiopia’s trade. A recovery in trade flows since then has boosted trade and logistics activities, bringing economic growth to an estimated 5.5 percent last year. Inflation has been low (0.1 percent in 2018), driven by declining food prices. Combined with the depreciation of the U.S. dollar against the euro, this has allowed the real effective exchange rate to depreciate by about 3 percent since early 2017.

GDP Growth and Effective Exchange Rates

8. The overall fiscal deficit has declined significantly since 2015. Staff’s broad measure of the deficit—which includes expenditures associated with two large projects undertaken by SOEs (railway and water pipeline) given that the related debt is being serviced by the central government—has fallen from 15.7 percent of GDP in 2015 to 2.5 percent of GDP in 2018, driven by the reduction in spending related to these projects.

9. Government spending has been under increasing pressure. Budget support has declined from 2.9 to 0.9 percent of GDP during 2015–18. Because large and fast-growing sectors benefit from special tax regimes and exemptions (FTZs, military bases, investment code), tax revenue decreased relative to GDP—from 14.2 to 13.3 percent of GDP over the same period. On the spending side, since the water pipeline and railway loans are being serviced by the government and the interest rate on the latter is indexed to the LIBOR, the interest bill has picked up significantly over the past few years. Humanitarian and security costs have also been rising. Against this backdrop, domestically-financed capital expenditure has been cut by close to 4 percent of GDP. The repayment of domestic arrears initiated a few years ago has also slowed down significantly over the past couple of years.

10. The government has recently reached an understanding on the restructuring of part of its debt. Delays in operationalizing the railway project have resulted in lower than expected revenues to service the related loa which represents about 16 percent of GDP and was initially scheduled to start amortizin in 2020. In this context and given that the Ethiopian government had also launched discussions on restructuring the loan it contracted for the same joint project, the authorities engaged in discussions with the Exim Bank of China to restructure the loan. The Djiboutian authorities indicated that a memorandum of understanding had recentl been signed to extend the loan’s grace perio and maturity substantially, to reduce the interest rate, and to restructure past due interests accumulated during the restructuring discussions. The new terms of the railway loan have reduced the present value of the debt-to-GDP ratio by 4 percentage points. Pending administrative and legal processes, the Djiboutian authorities expected the agreement to be finalized within the next few months. The authorities also indicated that other arrears on external PPG debt (1.6 percent of GDP as of end-June) reflected delays in finalizing conversion and cancellation agreements and arrears of a technical nature or reflecting diplomatic disagreements.

Central Government Operations(In percent of GDP)
Revenues and grants26.324.223.623.9
Tax revenue14.213.913.513.3
Nontax revenue7.
Development projects1.
Budget support2.
Current expenditure16.317.717.717.7
Capital expenditure25.314.710.49.0
Domestically financed7.
Large projects15.
Overall balance (commitment basis)-15.3-8.3-4.5-2.9
Change in arrears-0.4-0.4-0.10.4
Overall balance (cash basis)-15.7-8.6-4.6-2.5
Overall balance (excluding large projects-0.6-2.0-0.3-1.6
Overall balance (excluding foreign finance0.
Sources: Djibouti authorities; and IMF staff estimates and projections.
Sources: Djibouti authorities; and IMF staff estimates and projections.

11. The current account balance has experienced large swings over the past few years, driven by changes in inventories associated with re-export activities. The overall current account balance has swung between -30 and +30 percent of GDP over 2013–17. However, staff’s estimated underlying current account balance, which excludes trade related to re-export activities, has been more stable, hovering around -2 percent of GDP. The current account balance reached 15 percent of GDP in 2018, reflecting a reduction in inventories for re-exports in reaction to the pick-up in Ethiopia’s trade. The underlying current account balance is estimated to have reached -0.8 percent driven by an increase in imports for the domestic market, repatriation of investment revenues and the decrease in official grants. Errors and omissions, which averaged -23 percent of GDP over 2013–18 could, however, indicate a possible over-estimation of these balances and highlight persistent weaknesses in the compilation of trade and balance of payment statistics. Official reserves decreased by $112 million in 2018, bringing the reserve coverage to 3.2 months of imports (excluding imports for re-exports).

12. Notwithstanding progress in cleaning up banks’ balance sheets, the financial sector remains fragile, and financial inclusion is low. Nonperforming loans (NPLs) peaked at 22½ percent in 2016 following the bankruptcy of two private oil companies and a tightening in loan classification requirements. Progress was made in reducing NPLs, but they still stood at about 18 percent of total claims in Q1 2019. Capital adequacy has remained broadly stable. The ratio of capital to risk-weighted assets stood at about 13½ percent at end-March, above the regulatory threshold of 12 percent. Credit to the private sector grew by 8 percent in 2018 and 10.7 percent in Q1 2019. However, it accounts for only one third of GDP. Despite some improvement over the past 20 years, access to financial services has remained limited, with only one in four adults having a bank account.

Current Account Balance and Financial Soundness Indicators

13. Correspondent banking relationships (CBRs) have been under pressure in recent years. Some banks have lost relationships with international banks. New CBRs have been rapidly established, hence preserving financial flows and stability. Nonetheless, the cost and time for processing transactions has increased.

Outlook and Risks

14. Staff’s baseline assumes a significant reduction in debt-financed public investment in the coming years. With core infrastructure in place, the baseline does not incorporate additional mega-projects financed through external debt. It also envisages a broadly stable government balance excluding foreign-financed expenditures over the medium term, as further erosion of the revenue base relative to GDP, driven by the fact that fast-growing sectors are largely tax-exempt, is offset by continued efforts to prioritize spending. The baseline scenario projects the overall budget deficit to reach 1.2 percent of GDP by 2024, with external PPG debt declining to about 60 percent of GDP.

15. Growth is nonetheless projected to remain strong. The pick-up in Ethiopia’s trade should support a recovery in trade and logistics this year. Over the medium term, the new infrastructures position Djibouti well to leverage the rapid growth in Ethiopia and increase transshipment, giving net exports a prominent role as a driver of growth. Assuming continued efforts to improve the business environment, a pickup in private-sector investment is also expected to help maintain real GDP growth at about 6 percent annually over the projection period (Annex IV).

16. The underlying current account is expected to improve. Strong export growth, especially in transport and logistics services, and a decline in investment-related imports should gradually improve the current account balance to 2.6 percent of GDP by 2024. Combined with an increase in foreign direct investment (FDI), including in the FTZs and the gas sector, this should offset the increase in debt service and allow for official reserves accumulation, maintaining the reserve coverage above three months of imports.

17. Debt service is set to increase over the medium term. Despite the understanding reached with China’s Exim Bank to lengthen the debt service profile of the railway loan, and with the water pipeline loan set to start amortizing in 2022, debt service is projected to increase over the next few years. The baseline assumes that SOEs will generate the cash flow necessary to repay the loans contracted for the projects they manage.

External Public Debt Service

(In USD millions)

Sources: Country authorities; and IMF staff estimates.

18. There are downside risks to the baseline scenario (see also Annex V):

  • On the domestic front, delays in implementing reforms to ensure debt sustainability—notably if the authorities engage in new debt-financed mega-projects or fail to raise returns on infrastructures and SOEs profitability-could worsen debt prospects, as there is limited space for consolidation at the level of the central government A slowdown in structural reforms or slower progress in improving governance, the business climate, and external competitiveness, could reduce FDI and export growth, entail lower growth and weaken the international reserves coverage.
  • Externally, regional geopolitical strains, rising trade tensions, and a slowdown in international or Ethiopia’s trade would have adverse effects on Djibouti’s exports, investment, economic growth, and fiscal prospects. In this context, lower exports and a widening current account deficit would increase external financing needs. The cancellation of DP World contract could entail reputational risks (affecting investment prospects) as well as fiscal costs. A worsening of global financial conditions could increase interest costs and worsen external financing prospects. Renewed pressures on CBRs could create financing disruptions. Finally, higher global oil prices than in the baseline scenario could weigh on the budget and the external position.

19. The authorities were more optimistic about economic prospects and had a more sanguine assessment of risks. They envisaged a continuous increase in real GDP growth to about 8½ percent by 2024. While staff recognized that, given the small size of the economy, implementation of a few large projects could lead to higher FDI and growth, it highlighted that higher sustained growth would require higher productivity gains and more ambitious structural reforms (Annex IV). The authorities expressed confidence about their capacity to service debt by mobilizing resources from SOEs. In particular, they were optimistic about the water pipeline project’s ability to pay for itself according to existing debt service schedule. They were not concerned about reputational risks associated with the nationalization of the container terminal. They stood ready to negotiate a possible compensation with DP World and welcomed ongoing mediation efforts by Saudi Arabia and France.

Policy Discussions

20. Djibouti’s main challenge is to turn public infrastructure investments into broad-based and private-sector led growth, job creation and poverty reduction. The newly developed infrastructures position the country well to become a trade and logistics hub for the sub-region. However, the development strategy has come at the cost of mounting debt vulnerabilities. Developments over the past few years also highlight the risk of creating a dual economy with fast-growing trade and logistics sectors that do not generate enough positive spillovers to fiscal revenues, job creation and poverty reduction.

21. Discussions focused on policies and reforms to address these vulnerabilities and promote higher and more inclusive growth. Staffs recommendations were embedded in a broader country engagement strategy aimed at supporting the authorities’ development strategy and reinforcing institutions through policy advice and capacity-building support.

  • Staff emphasized macroeconomic policies and structural reforms to maintain macroeconomic stability, including by reducing debt vulnerabilities, create space for poverty-reducing expenditure, ensure monetary, financial, and external stability, and foster private sector investment and job creation.
  • Staff and the authorities also engaged on reforms to strengthen governance, a theme that cuts across several state functions and is critical to achieve development objectives. Although broadly in line with some peer groups, the perception of corruption appears relatively high in Djibouti. Addressing governance weaknesses is key to limit the opportunities for corruption and enhance macro-financial stability, resource allocation, growth, and inclusion. Discussions focused on strengthening fiscal governance (particularly management and oversight of SOEs, public procurements, and cash management) to improve spending efficiency and reduce fiscal risks; ensuring that the regulatory framework fosters a level playing field; and promoting AML/CFT and anti-corruption frameworks that encourage transparency and accountability (see below).

Perceptions-Based Corruption Indicators

(Scores rebased 0–10; higher scores indicate better performance)

Sources: Country Policy and Institutional Assessment (CPIA), World Bank; World Governance Indicators (WGI); Transparency International; and IMF staff calculations.

1/ The CPIA is measuring Transparency, Accountability, and Corruption in the public sector. This assesses the extent to which the executive and its public employees can be held accountable for its use of funds and for the results of its actions by the electorate, legislature, and the judiciary.

2/ The WGI is measuring Control of Corruption, which captures perceptions of the extent to which public power is exercised for private gain.

3/ The Transparency International Corruption Perception Index is a composite indicator used to measure perceptions of corruption in the public sector within the last two years.

4/ Median value refers to the median score of all countries assessed in each respective index.

5/ Use of these indicators should be considered carefully, as they are derived from perceptions-based data.

22. The authorities broadly agreed with staff’s recommendations. They acknowledged that structural reforms are necessary to ensure the economic profitability of the newly-created infrastructure, preserve macroeconomic stability and foster high and inclusive growth. They pointed to the progress made in improving the regulatory environment and expressed commitment to sustained efforts going forward, despite significant capacity constraints. Although cautioning about the use of perception-based indicators to assess corruption risks, the authorities recognized the importance of strengthening governance. They noted the efforts made on this front over the past decade and the central role given to these reforms in their development strategy (Vision 2035).

A. Addressing Debt Vulnerabilities and Enhancing Fiscal Space for Poverty Reduction

23. While debt appears sustainable, staff’s Debt Sustainability Analysis (see accompanying Bank-Fund DSA) concludes that Djibouti is at high risk of debt distress. With the railway loan restructuring having eased debt service prospects over the next few years, debt is assessed to be sustainable, as the authorities are expected to be able to service their debt under current terms. However, the country is classified in high risk of debt distress, reflecting the fact that the present value (PV) of the external debt-to-GDP and the debt service-to-revenue ratios still breach their respective thresholds during most of the projection period.

24. A multifaceted approach is needed to address debt vulnerabilities and preserve macroeconomic stability. This includes a rapid ramp up of operations of several key projects to generate the revenues necessary for debt service. This requires addressing the bottlenecks that have prevented the realization of returns on some key projects, including for instance by operationalizing rail connections to the various ports and securing the railway and electricity supply to limit interruptions, finalizing commercial agreements with large water customers to increase the pipeline project returns, and strengthening cooperation with other partners given the regional dimension of some projects. Staff also recommended a combination of policies to reduce the pace of borrowing and, prioritize concessional financing and FDI for projects that lend themselves to such financing to limit their fiscal consequences, as well as reforms to strengthen the fiscal framework, public investment management, SOEs oversight, and debt management capacity. Spending should be better prioritized and tax policy should aim at mobilizing more revenues. Strengthening the governance of SOEs and the frameworks for public procurements, investment management and public financial management is also key to these objectives. The authorities recognized the importance of reducing debt vulnerabilities and were broadly in agreement with staff’s recommendations. They expressed confidence about their capacity to service the debt contracted for various projects by mobilizing resources from the SOEs managing these.

25. Staff recommended developing a medium-term debt strategy and strengthening debt management. Laying out high-level debt policy priorities would help anchor macroeconomic management. In this context, staff suggested introducing a formal ceiling on external PPG debt. In cooperation with the World Bank, the authorities have prepared a reform plan aimed at improving coordination between the different agencies that contract and manage debt, increasing transparency, and developing a medium-term strategy. Staff encouraged the government to advance these reforms without delay, including by operationalizing the recently-created national committee in charge of public debt issues. It also suggested strengthening the capacity to perform DSAs, publishing regular reports, and modernizing accounting practices. The authorities broadly agreed with staff’s assessment but did not see the debt ceiling as an immediate priority, given the importance of strengthening inter-agency coordination first. Staff noted both aspects were important. The authorities thought the Fund could play an important role in supporting their capacity development efforts in these areas.

26. Formulating fiscal policy in the context of a medium-term framework would help achieve fiscal objectives consistent with debt sustainability. Staff advised the authorities to develop a multi-year fiscal framework that covers the central government and considers fiscal risks stemming from SOEs and PPPs. Adopting a top-down budget approach and moving progressively towards a programmatic basis for budget allocations would also help. While generally agreeing with staff, the authorities highlighted the significant resource constraints they had been facing. Against this backdrop, they agreed that Fund TA would be useful.

27. In this context, staff advised the authorities to adopt a fiscal anchor consistent with debt sustainability. It suggested to aim at bringing the net present value (NPV) of PPG debt-to-GDP and debt service-to-revenue ratios back to levels consistent with “moderate” risk of external (and overall) debt distress within 5–6 years. For example, reaching an NPV of PPG external debt-to-GDP ratio below 35 percent—well below the 40 percent threshold established in the DSA and equivalent to a nominal debt-to-GDP ratio of about 47 percent—would require an overall public sector primary surplus of around 0.9 percent of GDP annually, compared to an implicit public-sector primary balance of -1½ in the baseline scenario. With a central government primary deficit projected at about 0.1 percent of GDP over this period, this would require SOEs to achieve a surplus of about 1 percent of GDP. Given that the central government has limited fiscal space and that most public debt is borne by SOEs, most of the effort would likely need to come from SOEs. Nonetheless, reforms to create fiscal space at the central government level could also play a role (see below). Bringing the ratio of debt service to revenue down is also key to underpinning debt sustainability. Reforms to enhance revenue mobilization through tax and SOE reforms are fundamental in this respect (see below). While acknowledging the importance of reducing debt and debt service, the authorities also felt that the DSA thresholds were overly conservative for a small economy with large investment needs, many of which related to projects aimed at fostering regional integration, with large potential economic returns. They also noted that the government was considering options to better manage public sector resources and investment that could help generate overall savings.

28. Tax policy reforms are needed to enhance domestic resource mobilization and generate fiscal space for priority spending and debt reduction. With support from IMF TA, the authorities prepared their first report on tax expenditures and published a summary of key findings with the 2019 budget law. Staff encouraged the authorities to broaden the scope of the report, notably to analyze the impact of FTZs regimes. Despite this gap, the report has already identified implicit costs of more than 7 percent of GDP. Staff recommended that the authorities design a strategy to rationalize special tax regimes and exemptions and broaden the tax base, while bolstering Djibouti’s attractiveness as an investment destination through structural reforms (see below). The authorities noted they would reflect on an overall strategy and may request Fund TA in this area. They were confident that ongoing efforts to strengthen tax administration would help raise government revenue beyond staff’s projections. In this context, staff suggested to continue building capacity in the tax and customs administrations, strengthen controls and ensure effective dispute management systems. Reforms to enhance SOEs profitability (see below) would also help mobilize additional resources for the budget through higher taxes and dividends.

Tax Revenue, 2018–24

(In percent of GDP, group average)

Sources: National Authorities;IMF World Economic Outlook; and IMF staff calculations.

29. On the spending side, staff and the authorities saw scope for better prioritizing spending. A functional expenditure review would help identify staffing needs and prioritize recruitment Staff commended the authorities for introducing the Social Program Registry, a database of beneficiaries of social programs, and for completing the 2017 household survey. These two actions will help improve targeting and analysis of poverty-reduction programs. It encouraged the government to sustain efforts to identify the most vulnerable households and develop adequate social policies as part of the new national social protection strategy.

30. Accompanying reforms to strengthen fiscal governance are important to enhance government efficiency, reduce corruption vulnerabilities, and help attain the fiscal objectives noted above:

  • SOE governance. Given the prominent role of SOEs in the economy, including in implementing debt-financed investments, strengthening their governance and oversight is critical to reduce costs, improve the quality of public services, and control debt accumulation. The authorities have recently started auditing a few large SOEs. These audits should help identify the SOEs that no longer fulfil a public purpose and those that satisfy a social need but require support, setting the stage for the preparation of performance contracts and restructurings. However, progress in implementing the Code of Good Governance for SOEs adopted in 2016 has been limited. Staff recommended accelerating implementation, including the preparation of performance contracts, and reinforcing the ministry of finance’s ability to monitor SOEs’ financial situation. It also advised introducing limits on public guarantees and setting-up a requirement for SOEs to obtain formal government authorization to contract debt without a guarantee. The authorities emphasized their commitment to SOEs governance reform, attributing the delays in fully implementing the new Code to capacity constraints.
  • Public investment management. Staff recommended improving procedures for selecting, evaluating, planning, implementing, and managing future investments, including PPPs, to ensure that they are economically profitable and limit fiscal risks.
  • Public procurement. Given Djibouti’s reliance on large contracts, strengthening procurement practices, including for SOEs, is important to preserve government resources and foster efficiency gains. In 2009, a new procurement law was enacted which better aligned the legal framework for public procurement with best international practices. Nonetheless, there are vulnerabilities in the current framework—including the risk of conflicts of interest associated with the concentration of procurement and regulatory control functions and the absence of a role for the civil society in dealing with complaints—and its implementation. Staff welcomed the ongoing World Bank-supported evaluation (MAPS) which should help address potential weaknesses as well as the authorities’ plan to set up an online platform for public procurements to promote transparency.
  • Cash management. Staff recommended improving cash forecasting and consolidating the government’s accounts into a Treasury single account (TSA) to limit the occurrence of domestic and external arrears. Prerequisites to setting-up such an account include analyzing existing bank agreements and accounts and reviewing the IT capabilities of the central bank and the ministries concerned. The authorities noted they had already started making an inventory of bank accounts and expressed interest in follow-up TA in this area.

B. Maintaining Monetary, External and Financial Stability

31. Djibouti’s currency board is appropriate. The arrangement has provided the country with an effective nominal anchor and has played a key role in instilling confidence and predictability in international transactions. The international reserves coverage, which currently stands at 3.2 months of imports (excluding re-exports flows), is broadly adequate. Staff’s analysis (Annex VI) suggests that the external position is weaker than implied by fundamentals and desired policy settings, with a real effective exchange rate (REER) overvaluation of between 5 and 26 percent. However, the current account’s sensitivity to real exchange rate changes is likely to be low given the structure of the economy. Against this backdrop, the authorities agreed with staff’s analysis that the currency board should be maintained at the current parity and that the external position should be strengthened through structural reforms aimed at improving external competitiveness. Policies to address debt vulnerabilities are also important to strengthen the external position.

32. Continued efforts are needed to strengthen financial stability. The Central Bank of Djibouti (CBD) has been implementing a multiyear action plan to strengthen banking regulation and supervision. In this context, it has made progress in ensuring compliance with the Basel Committee on Banking Supervision’s standards and guidelines, especially regarding the definition of capital, internal controls, risk management, and asset classification and provisioning. Staff stressed the importance of continuing these efforts, notably by implementing newly-adopted regulations for asset classification and provisioning of old claims, governance, capital adequacy buffers and exposures to affiliated parties and recommended sustained efforts to clean up banks’ balance sheets. The authorities agreed with these recommendations and noted that the Fund’s Financial Sector Stability Review (FSSR), scheduled for later this year, would provide an opportunity to conduct an in-depth assessment of the financial sector’s vulnerabilities and to design a capacity development plan to address them.

33. Staff welcomed the progress made in recent years to strengthen the AML/CFT framework. Djibouti has upgraded its legislative and regulatory framework and recently became a member of the Middle East and North Africa Financial Action Task Force (MENAFATF). The CBD has been strengthening the AML/CFT supervision of banks, exchange bureaus, and money transfer operators, and the financial intelligence unit (FIU) has stepped up its efforts to analyze suspicious transactions. Finally, the authorities should improve their understanding of money laundering and terrorism financing (ML/TF) risks, building on the ongoing national risk assessment.

34. Nonetheless additional efforts are needed to strengthen the framework’s effectiveness to tackle financial crimes and avoid pressures on CBRs. Staff highlighted a number of areas for improvement including: (i) enhancing AML/CFT risk-based supervision and improving compliance of financial institutions in implementing preventive measures, particularly those related to the verification of beneficial ownership information, and detecting and reporting suspicious activities related to politically exposed persons; (ii) enhancing the transparency and availability of beneficial ownership information related to companies established in Djibouti including in the free trade zone; (iii) strengthening the FIU’s operational independence and capacity to receive, analyze, and disseminate financial intelligence; (iv) ensuring that law enforcement agencies are properly using financial intelligence; and (v) properly prosecuting ML/TF offenders and subjecting them to effective sanctions. Finally, staff encouraged the CBD to continue monitoring closely correspondent banking relationships to detect possible pressures and to maintain close communication with foreign regulators. The authorities welcomed staff’s diagnostic and recommendations. They were keen on further strengthening the effectiveness of the AML/CFT framework, particularly given the upcoming MENAFATF mutual evaluation scheduled for 2023, and to sustain the recent progress made in reducing pressures on CBRs.

35. The CBD has made some progress in strengthening its governance in response to the 2012 safeguards assessment, but several recommendations remain outstanding. In recent years, a central bank’s audit function has been developed, an audit committee has been created, and efforts have been made to publish audited financial statements. Staff welcomed these developments and recommended to further strengthen board oversight and autonomy, bolster internal control and audit, and adopt an action plan for the implementation of International Financial Reporting Standards. While generally agreeing with staff’s recommendations, the authorities highlighted the need to prioritize reforms due to the resource-constrained environment.

C. Fostering Higher and More Inclusive Growth

36. The limited fiscal space together with the need to bolster external competitiveness and reduce poverty put a premium on structural reforms that promote private sector development and job creation. Djibouti’s Vision 2035 aims at strengthening economic diversification through a wide range of reforms, including improving the business climate, reducing factor costs, supporting small and medium-sized enterprises (SMEs), combined with large-scale infrastructure projects. Significant progress has been made in some areas, but additional efforts are needed to address the most binding constraints that limit returns on investment, the appropriation of these returns, and access to—and the cost of—financing.

37. Staff commended the authorities on the progress made in improving the business climate and encouraged them to sustain efforts in this area. Significant progress has been made over the past couple of years in simplifying business creation, facilitating access to finance, protecting minority investors, and registering property. This has led to an improvement in Djibouti rank in the World Bank’s Doing Business from 171st to 99th between 2017 and 2019. Staff encouraged the authorities to continue their efforts, for example by strengthening contract enforcement and property rights. Further progress along those lines, which the authorities indicated they intend to pursue, could help mitigate the potential reputational risk associated with the cancellation of DP World’s contract.

38. Lowering production costs and raising labor productivity is necessary to boost external competitiveness and job creation. Electricity and telecommunication prices are high in Djibouti (panel chart). Staff expressed support for the authorities’ plans to strengthen Djibouti Telecom’s governance and set up an independent regulator, as a first step toward opening the telecommunication sector to competition. Regarding electricity, efforts to enhance the governance and management of the national operator and to seek efficiency gains are important to encourage private investment, lower costs and improve service quality. Djibouti’s labor costs are also high compared to other countries in the region. Over time, the prudent wage policy being conducted in the public sector should contribute to lower unit labor costs. In addition, as the private sector often faces a shortage of skilled labor, it is important to improve the quality of the education system and labor productivity.

Djibouti: Business Environment and Factor Costs

Source: World Bank Enterprise Surveys; Doing Business Indicators, 2019; International Telecommunications Union (TCU); and IMF staff calculations.

1/ After being presented with a list of IS business environment obstacles, business owners and top managers in 266 firms were asked to choose the biggest obstacle to their business.

2/ The ease of doing business score captures the gap between an economy’s performance across a measure of best practice across the entire sample of 41 indicators for 10 Doing Business topics. The highest score rep resents best practice within a topic.

3/ The ICT development index measures countries’ability to use information and communication technologies to enhance growth and economic development. It is a composite index that reflects various measures of access, use and skills related to these technologies.

4/ The bars represent the distribution of country rankings in the MENA and SSA regions. The lines bisecting the boxes rep resent the median ranking. The boxes cover the 25th to 75th percentiles. The bars outside the boxes rep resent the first and second quartiles.

39. Strengthening the anti-corruption framework is also important to enhance the investment climate and inclusive growth. The perception of corruption ranks high among cited obstacles to private sector activity. Staff recommended focusing reforms on improving the understanding of corruption risks and developing a strategy to address them, strengthening the independence and capacity of the National Anti-Corruption Commission, improving the capacity of law enforcement agencies and courts to enforce against corruption offenses, and enhancing the implementation of the asset declaration system by senior officials, by ensuring that all senior officials submit their disclosures and that these are published in the official gazette as required by the law. The AML framework should also be leveraged to detect and deter corruption and its proceeds.

40. Staff and the authorities agreed that improving access to—and reducing the cost of— financing was also important to support private sector development. Staff welcomed the creation of a national register of loan guarantees. It encouraged the authorities to step up efforts toward modernizing the credit bureau and operationalizing the new credit guarantee fund. These reforms should help reduce information asymmetry for banks and encourage access to finance, including for SMEs. Ongoing steps to streamline judicial procedures for commercial cases should also help. Efforts by the CBD to modernize payment systems and strengthen financial stability should also contribute to reduce risks and costs associated with financial transactions and promote financial sector development.

D. Strengthening Statistics and Building Capacity

41. Progress has been made in improving statistics, but some important shortcomings remain. Significant progress has been made in recent years in improving national accounts statistics and financial soundness indicators. Commendable efforts have also been made to strengthen the exchange of information and coordination between relevant government bodies. Staff encouraged the authorities to continue improving the quality and timeliness of statistics, especially regarding balance of payments, where large errors and omissions complicate the analysis of external sector developments. Notwithstanding recent steps taken to gather information on SOEs’ financial information, further progress in this area would help better monitor the public sector’s financial situation. The authorities were keen on addressing these weaknesses and hopeful that the surveys of firms in the FTZs currently being developed would help improve the understanding of trade and financial flows.

42. As part of the broader country engagement strategy, staff and the authorities agreed on priority areas for capacity-development (CD) activities. Djibouti faces significant capacity and institution-building challenges, which are being addressed with tailored Fund TA and training. Staff and the authorities agreed on a CD strategy (Annex VII) for the next 18 months that would help address the policy challenges identified above.

Priority Areas for IMF Capacity-Development Activities
AreaCapacity Building ActivityRelevant Article IV Policy Advice
Debt managementTA on developing a medium-term debt strategy / Training on debt-sustainability analysisEnsure debt sustainability / Strengthen debt-management capacity
Public financial managementTA on developing a medium-term fiscal framework

TA on cash management
Ensure that fiscal objectives are consistent with debt sustainability

Implement single treasury account
Tax policyFollow-up TA on tax expenditure report

TA on tax policy diagnosis and strategy
Broaden scope of tax expenditure report

Develop and implement strategy to reduce tax expenditure and enhance fiscal space
Bank supervision and regulationFollow-up TA on bank regulation and supervision

Financial Sector Stability Review
Continue strengthening financial stability

Assess vulnerabilities and design CD plan to address them
StatisticsTA and training on external sector, government finance and public sector debt, national accounts statistics, as well as data disseminationContinue to improve data quality and timeliness

Staff Appraisal

43. The newly-developed infrastructures present an opportunity for Djibouti. They position the country well to become a regional logistics and trade hub and leverage the rapid expansion in Ethiopia’s trade and transshipment activities. This should allow growth to remain robust over the medium term, at about 6 percent annually.

44. Going forward, deepening structural reforms is critical to underpin debt sustainability and achieve broad-based and private-sector led growth, job creation and poverty reduction. The infrastructure boom has been accompanied by a rapid increase in external public and publicly guaranteed debt. While the railway loan restructuring has eased debt service prospects over the next few years, debt service is still projected to pick up over the medium term. Tax revenues have lagged due to large tax expenditure, limiting the government’s ability to redistribute the growth dividends more widely. Notwithstanding some improvement in recent years, unemployment and poverty have remained elevated.

45. Addressing debt vulnerabilities requires a multi-faceted strategy. Debt is assessed to be sustainable, as the authorities are expected to be able to service it under current terms. Nonetheless, Djibouti faces a high risk of debt distress in light of the high net present value of external debt and debt service-to-government revenue ratio. It is therefore important to ramp up operations of key projects and boost their profitability to generate the resources necessary for debt service. High-level debt policy objectives need to be developed and supported by efforts to (i) reduce the pace of borrowing, including through strict limits on government guarantees and SOE borrowing embedded in an explicit debt strategy; and (ii) prioritize concessional financing and FDI. In parallel, the authorities should advance reforms aimed at developing a medium-term fiscal framework and a fiscal anchor consistent with debt sustainability. Institutional reforms focused on strengthening public investment management, SOEs oversight, and debt management capacity are also paramount.

46. Enhancing domestic resource mobilization is necessary to create fiscal space for poverty-reducing spending and debt reduction. The authorities’ plans to enhance tax collection and customs administration are welcome. The key priority should be to design and implement a strategy to reduce the significant implicit costs from tax exemptions and special regimes. Further efforts to better prioritize spending would also help create space for spending targeted at the most vulnerable households.

47. Strengthening fiscal governance would help enhance government efficiency. Improving SOEs governance, including by expanding the coverage of audits and accelerating preparation of performance contracts, is critical to reduce costs, improve the quality of public services, and control debt accumulation. Ongoing efforts to assess the public procurement framework and to enhance its effectiveness are also important to enhance spending efficiency. The authorities are also encouraged to improve cash management, including by adopting a treasury single account.

48. The currency board arrangement has remained appropriate. It has provided an effective nominal anchor, fostering low inflation and confidence. The external position is weaker than implied by fundamentals and desired policy settings. It should be bolstered through reforms aimed at enhancing external competitiveness via a reduction in internal costs and continued efforts to strengthen the business environment.

49. Financial sector policies should continue to focus on strengthening stability and inclusion. The CBD should continue to upgrade banks’ regulatory environment and reinforce risk-based supervision. Ongoing efforts to modernize the credit bureau, operationalize the credit guarantee fund, and modernize the payment system are important to improve access to, and reduce the cost of, finance. The authorities should also place emphasis on making the AML/CFT framework more effective to limit opportunities for corruption and preserve CBRs.

50. The authorities should continue to address impediments to private sector investment. Reforms implemented over the past few years to improve the business environment are welcome and need to be sustained to strengthen contract enforcement and property rights. Lowering production costs by fostering competition in the telecommunications’ sector and making the national electricity company more efficient are paramount to boost external competitiveness and job creation. Raising labor productivity by enhancing the skills of Djiboutian nationals is also key in this respect. Fully implementing the anti-corruption framework, including by strengthening the capacity of relevant institutions, is also important to reduce the perception of corruption and enhance private investment.

51. Continued efforts to strengthen capacity are important to enhance policy analysis and implementation. Areas identified as priorities include tax policy, public financial and debt management, financial sector regulation and supervision and statistics, particularly for the external sector.

52. Staff recommends that the next Article IV consultation with Djibouti be held on the standard 12-month consultation cycle.

Figure 1.Djibouti: Selected Economic Indicators, 2013–24

Sources: National authorities; and IMF staff estimates.

Figure 2.Djibouti: Monetary and Financial Indicators, 2009–19

Sources: National authorities; and IMF staff estimates.

Figure 3.Djibouti: External Sector Indicators, 2012–24

Sources: National authorities; and IMF staff estimates.

1/ Imports excludes re-imports.

Figure 4.Djibouti: Central Government Operations, 2013–19

Sources: National authorities; and IMF staff estimates.

Table 1.Djibouti: Selected Economic and Financial Indicators, 2015–24
National accounts(Annual percentage change)
Real GDP7.
Consumer prices (annual average)-
Consumer prices (end of period)-1.62.4-
Saving and investment(In percent of GDP)
Fixed capital investment32.429.922.816.617.118.418.316.215.214.7
Central government25.314.710.
Gross national savings60.128.919.331.616.919.019.417.917.517.3
Savings/investment balance27.7-1.0-3.615.1-
Central government(In percent of GDP)
Revenues and grants26.324.223.623.923.121.720.720.319.619.0
Tax revenues14.213.913.513.312.912.712.312.312.111.9
Nontax revenue7.
Current expenditure16.317.717.717.716.715.815.214.714.313.8
Capital expenditure25.314.710.
Domestically financed7.
Overall balance (commitment basis)-15.3-8.3-4.5-2.9-1.5-1.7-2.4-0.8-0.9-1.0
Change in arrears-0.4-0.4-0.10.4-0.3-0.3-0.3-0.2-0.2-0.2
Overall balance (cash basis)-15.7-8.6-4.6-2.5-1.8-1.9-2.7-1.0-1.1-1.2
Memo: Overall balance, excluding large projects-0.6-2.0-0.3-1.6-1.6-1.5-2.0-1.0-1.1-1.2
Monetary sector(Annual change in percent of broad money)
Broad money19.08.821.9-5.68.410.39.29.510.210.2
Net foreign assets15.48.020.7-
Net domestic assets3.
Of which : Claims on government (net)0.30.7-0.70.5-0.4-0.4-
Of which : Claims on non-government sector4.
Credit to non-government (in percent of GDP)23.722.623.124.524.724.925.125.325.525.7
Currency board cover (in percent) 1/104107104108109109109108108108
External sector(In millions of US dollars)
Current account balance678-26-99441-821406799121
(In percent of GDP)27.7-1.0-3.615.1-
Underlying current account balance 2/-15.1165.3-4.4-22.1-8.320.840.066.999.3120.6
(In percent of GDP)-0.66.3-0.2-0.8-
External public and publicly guaranteed debt1,2181,6471,9512,0872,2312,3422,4762,6022,7042,783
(In percent of GDP)49.862.970.571.470.568.466.965.062.559.5
Foreign direct investment124160165170222240259280303327
(In percent of GDP)
Exports of goods and services (percent change)-2.0-23.855.310.
Imports of goods and services (percent change)-4.5-4.551.2-2.817.
Gross official reserves355398556445422443466480516564
(In months of next year’s imports of goods and services, exc. re-exports)
Gross foreign assets of commercial banks1,1571,1901,4231,3451,4351,5391,6581,7951,9532,134
(In months of next year’s imports of goods and services, exc. re-exports)10.09.711.09.710.110.310.711.211.712.0
Exchange rate (DF/US$, end of period) 3/177.7177.7177.7177.7
Real effective exchange rate (yearly average, 2005=100) 3/101.4101.9101.0100.7
(Change in percent; depreciation -)4.70.5-0.9-0.3
Memorandum items
Nominal GDP (in millions of Djibouti francs)434,612465,375491,728519,540562,724608,417657,820711,235768,988831,429
Nominal GDP (in millions of US dollars) 3/2,4452,6192,7672,9233,1663,4233,7014,0024,3274,678
Nominal GDP per capita (US dollars) 3/2,5332,6382,7112,787
Population (million)0.9660.9931.0201.0491.0781.1091.1381.1671.1961.226
Sources: Djibouti authorities and IMF staff estimates and projections.

Ratio of central bank gross total assets over liabilities (except the government deposits at the central bank).

Current account balance excluding imports and exports associated with re-export activities.

Latest available.

Sources: Djibouti authorities and IMF staff estimates and projections.

Ratio of central bank gross total assets over liabilities (except the government deposits at the central bank).

Current account balance excluding imports and exports associated with re-export activities.

Latest available.

Table 2.Djibouti: Central Government Operations, 2015–24(In millions of Djibouti francs)
Revenues and grants114,222112,771116,138123,930130,027132,036136,065144,712150,800158,252
Tax revenues61,77964,79166,21069,00472,80677,43781,01487,51092,90598,619
Direct taxes26,72427,76227,41828,77931,05633,00034,48637,17339,34741,650
Indirect and other taxes35,05537,02938,79240,22541,74944,43746,52950,33853,55856,969
Indirect taxes31,28032,21534,80636,62137,74839,63541,42744,93647,85750,967
Other taxes3,7754,8143,9863,6044,0014,8025,1025,4025,7026,002
Nontax revenue31,32333,27641,00137,30738,58940,85341,30543,45644,14945,886
Development projects8,4746,0204,64312,7116,1716,1716,1716,1716,1716,171
Budget support12,6468,6844,2844,90812,4617,5757,5757,5757,5757,575
Current expenditure70,68582,57787,02591,84193,77496,243100,177104,730109,735114,893
Wages and related expenditure31,02334,52937,09339,07039,07141,02543,07645,23047,90250,733
Wages and contributions27,74831,07133,57935,50435,50537,28039,14441,10143,56846,182
Housing subsidies3,2753,4583,5143,5663,5663,7443,9324,1284,3344,551
Goods and services22,99929,55029,77629,97529,31029,89631,17932,51833,94035,425
Civil expenditure19,05524,82822,92322,95222,95223,41124,34725,32126,33427,388
Military expenditure3,9444,7226,8537,0236,3586,4856,8317,1977,6068,038
Loans to central government796541,6251,4742,0502,3802,0652,2112,2782,229
Large projects9513,7533,5754,9925,9895,2635,3345,3615,2715,182
Rail road02,3803,1294,2714,6264,0134,0134,0394,0394,039
Water pipeline9511,3734467211,3631,2511,3211,3211,2321,143
Foreign-financed current spending1,3576233837381,0841,0841,0841,0841,0841,084
Capital expenditure110,12068,63551,26646,98844,74045,95051,67445,59148,06851,750
Capital expenditure (excl. large projects)44,55537,62230,14742,35943,74042,95047,64545,59148,06851,750
Domestically financed30,70422,17318,22517,24322,00519,36021,12320,95622,02424,286
Loans to central government5,3779,4297,27912,40515,56417,41920,35018,46319,87421,293
Large projects65,56531,01321,1194,6291,0003,0004,029000
Rail road53,92213,8439,8674,629000000
Water pipeline11,64317,17111,25101,0003,0004,029000
Overall balance (commitment basis)-66,582-38,441-22,152-14,898-8,487-10,157-15,786-5,609-7,003-8,391
Change in arrears-1,698-1,700-3631,993-1,700-1,700-1,700-1,700-1,700-1,700
Overall balance (cash basis)-68,280-40,141-22,515-12,905-10,187-11,857-17,486-7,309-8,703-10,091
Central bank682-1,760-8891,761-4,085-62-31-31-31-31
Commercial banks-3643,459-1,588-1,125-1,335-1,367-1,054-125-630
External (excl. large projects)2,5236,7723,9997,76614,73210,28614,54211,86813,19914,525
Loans to central government5,3779,4297,27912,40515,56417,41920,35018,46319,87421,293
Large projects65,56531,01321,1194,6291,0003,0004,029000
Rail road53,92213,8439,8674,629000000
Water pipeline11,64317,17111,25101,0003,0004,029000
Loans to central government-2,854-2,657-3,210-3,769-4,898-7,133-5,809-6,595-6,675-6,768
Large projects0000000-4,403-4,403-4,403
Rail road0000000000
Water pipeline0000000-4,403-4,403-4,403
Overall balance (excluding large projects)-2,716-9,128-1,397-8,277-9,187-8,857-13,456-7,309-8,703-10,091
Overall balance (excl. foreign-financed expenditures)4,0189246,2654,8667,4619,6467,97812,23812,25512,286
Sources: Djibouti authorities; and IMF staff estimates and projections.
Sources: Djibouti authorities; and IMF staff estimates and projections.
Table 3.Djibouti: Central Government Operations, 2015–24(In percent of GDP)
Revenues and grants26.324.223.623.923.121.720.720.319.619.0
Tax revenues14.213.913.513.312.912.712.312.312.111.9
Direct taxes6.
Indirect and other taxes8.
Indirect taxes7.
Other taxes0.
Nontax revenue7.
Development projects1.
Budget support2.
Current expenditure16.317.717.717.716.715.815.214.714.313.8
Wages and related expenditure7.
Wages and contributions6.
Housing subsidies0.
Goods and services5.
Civil expenditure4.
Military expenditure0.
Loans to central government0.
Large projects0.
Rail road0.
Water pipeline0.
Foreign-financed current spending0.
Capital expenditure25.314.710.
Capital expenditure (excl. large projects)
Domestically financed7.
Loans to central government1.
Large projects15.
Rail road12.
Water pipeline2.
Overall balance (commitment basis)-15.3-8.3-4.5-2.9-1.5-1.7-2.4-0.8-0.9-1.0
Change in arrears-0.4-0.4-0.10.4-0.3-0.3-0.3-0.2-0.2-0.2
Overall balance (cash basis)-15.7-8.6-4.6-2.5-1.8-1.9-2.7-1.0-1.1-1.2
Central bank0.2-0.4-0.20.3-
Commercial banks-0.10.7-0.3-0.2-0.2-0.2-
External (excl. large projects)
Loans to central government1.
Large projects15.
Rail road12.
Water pipeline2.
Loans to central government-0.7-0.6-0.7-0.7-0.9-1.2-0.9-0.9-0.9-0.8
Large projects0.
Rail road0.
Water pipeline0.
Overall balance (excluding large projects)-0.6-2.0-0.3-1.6-1.6-1.5-2.0-1.0-1.1-1.2
Overall balance (excl. foreign-financed expenditures)
Sources: Djibouti authorities; and IMF staff estimates and projections.
Sources: Djibouti authorities; and IMF staff estimates and projections.
Table 4.Djibouti: Balance of Payments, 2015–24(In millions of U.S. dollars, unless otherwise indicated)
Current account678-26-99441-821406799121
Current account, excluding trade for re-exports-15165-4-22-821406799121
Trade balance456-228-239307-180-135-113-87-53-28
Of which: re-exports2,2941,4582,7413,0973,2783,5833,9224,2014,5004,823
Of which: imports for re-exports-1,601-1,650-2,836-2,634-3,278-3,583-3,922-4,201-4,500-4,823
Current transfers78601734756363636363
Capital and financial account3811,180528374-105-12-51-64-72
Capital transfers48342670707070707070
Foreign direct investment124160165170222240259280303327
Public sector41642630610710618320612610179
Commercial banks-192487-1-29-77-91-106-124-145-169
Other investment-15733156-330-396-441-403-392-379
Errors and omissions-1,082-1,109-267-924000000
Overall balance (deficit -)-2345162-109-182528163549
Central bank23-45-16210918-25-28-16-35-49
Memorandum items
Current account (in percent of GDP)277-1.0-3.615.1-
Exports of goods and services (percent change)-2.0-23.855.310.
Imports of goods and services (percent change)-4.5-4.551.2-2.817.
Central bank gross reserves (in millions of US dollars)355398556445422443466480516564
In months of next year’s imports of goods and services1.
In months of next year’s imports of G&S (excl. re-exports)
Currency board cover104.1107.1104.1107.9108.8108.6108.5108.4108.2108.0
FDI (in percent of GDP)
External public and publicly guaranteed debt
In millions of US dollars1,2181,6471,9512,0872,2312,3422,4762,6022,7042,783
In percent of GDP49.862.970.571.470.568.466.965.062.559.5
In percent of exports of goods and services35.462.948.046.446.945.444.143.542.440.9
Debt service
In millions of US dollars4369656592129130159165180
In percent of GDP1.
In percent of exports of goods and services1.
Sources: Djibouti authorities; and IMF staff estimates and projections.
Sources: Djibouti authorities; and IMF staff estimates and projections.
Table 5.Djibouti: Monetary Survey and Banking Sector Indicators, 2015–24(End-of-period, in millions of Djibouti francs, unless otherwise indicated)
Broad money279,448303,944370,565349,879379,255418,240456,760500,133551,069607,453
Currency in circulation30,82132,92335,54236,62628,37629,10230,06729,16731,61836,057
Demand deposits161,568180,538230,450214,520253,134292,370334,763379,956429,351472,286
Djibouti francs90,34298,504109,890124,875147,352170,192194,870221,177249,931274,924
Foreign currency71,22682,034120,56089,645105,781122,178139,893158,779179,420197,362
Time deposits87,05990,483104,57298,73397,74596,76891,92991,01090,10099,110
Djibouti francs44,67453,28153,26656,70056,13355,57252,79352,26651,74356,917
Foreign currency42,38537,20151,30642,03241,61241,19639,13638,74538,35742,193
Net foreign assets210,075232,506295,572272,669286,505311,327339,305368,758405,773449,280
Central bank54,13362,29991,12572,12967,30570,97875,14177,58183,85092,523
Commercial banks155,942170,207204,447200,540219,200240,349264,164291,177321,923356,757
Net domestic assets69,37371,43874,99377,21092,750106,912117,455131,375145,296158,173
Claims on government (net)1,1673,2281,1082,8991,564197-857-982-1,013-1,045
Central bank-3,274-4,673-5,205-2,311-2,311-2,311-2,311-2,311-2,342-2,374
Commercial banks4,4417,9016,3135,2103,8752,5081,4541,3291,3291,329
Claims on nongovernment sector102,874105,126113,493127,228138,923151,428165,061179,921196,122213,783
Public enterprises9,36410,5119,54115,21516,48017,81819,26520,82922,52024,349
Private sector93,51094,615103,952112,013122,444133,611145,796159,093173,602189,434
Of which: in foreign currency23,27120,64431,88638,95143,30848,05053,28759,07265,46072,511
Capital accounts-24,765-27,797-33,254-36,285-33,176-33,217-34,712-34,449-34,189-35,727
Other items (net)-9,904-9,119-6,354-16,631-14,561-11,496-12,036-13,116-15,624-18,838
(Annual change in percent of broad money)
Broad money19.08.821.9-5.68.410.39.29.510.210.2
Net foreign assets15.48.020.7-
Central bank-
Commercial banks16.05.111.3-
Net domestic assets3.
Of which Claims on government (net)0.30.7-0.70.5-0.4-0.4-
Claims on nongovernment sector4.
Memorandum items
Central bank
Gross foreign assets (in U.S. dollars million)355.4398.2557.2445.2422.2442.9466.4480.2515.5564.4
In percent of foreign currency deposits55.659.357.660.150.948.246.343.242.141.9
In percent of total deposits25.426.129.625.321.420.219.418.117.617.6
Banking system
Credit to the private sector, 12-month percent change7.
Share of foreign currency deposits/total deposits45.744.051.342.
Commercial banks’ foreign assets/liability ratio1.
Money velocity1.
Sources: Djibouti authorities and IMF staff estimates and projections.
Sources: Djibouti authorities and IMF staff estimates and projections.
Table 6.Djibouti: Financial Soundness Indicators, 2013–19Q1(In percent, unless otherwise indicated)
Capital adequacy
Regulatory capital to risk-weighted assets 1/9.411.013.513.314.114.913.5
Asset quality
Nonperforming loans to gross loans15.318.519.822.316.317.818.2
Nonperforming loans net of provisions to capital30.539.038.635.117.823.126.9
Provisions to nonperforming loans67.862.461.261.276.770.267.9
Banks exceeding maximum single borrower limit10111110
Earning and profitability
Return on assets (ROA)
Return on equity (ROE)38.022.917.420.914.613.420.0
Interest margin to gross income72.469.769.368.768.866.566.3
Noninterest expenditures to gross income60.564.365.162.268.467.559.9
Salary expenditures to non-interest expenditures41.848.442.442.040.843.546.6
Liquid assets to total assets65.362.966.967.569.264.261.2
Liquid assets to short-term liabilities70.567.871.973.074.975.967.2
Liquid assets to demand and saving deposits251.6266.9286.7
Liquid assets to total deposits82.379.983.884.
Source: Central Bank of Djibouti.

The ratio of tier I capital to risk-weighted assets is equal to the regulatory capital ratio, as tier I capital equals tier II capital and there are no adjustments under current Djiboutian regulations.

Source: Central Bank of Djibouti.

The ratio of tier I capital to risk-weighted assets is equal to the regulatory capital ratio, as tier I capital equals tier II capital and there are no adjustments under current Djiboutian regulations.

Table 7.Djibouti: Sustainable Development Goals
Prevalence of undernourishment (%)32.222.319.419.7
Health and Education
Maternal mortality ratio341.0275.0229.0
Under-five mortality rate (deaths per 1,000 live births)89.376.765.763.761.7
Number of new HIV infections per 1,000 uninfected population (per 1,000 uninfected population)
Malaria incidence per 1,000 population at risk (per 1,000 population)1.12.420.429.331.9
Proportion of seats held by women in national parliaments (% of total number of seats)10.813.812.712.710.826.2
Proportion of total government spending on essential services, education (%)22.712.3
Proportion of population with access to electricity (%)55.053.352.051.8
Internet users per 100 inhabitants1.06.511.913.155.7
Sources: UN SDG Indicators Global Database; and National authorities.
Sources: UN SDG Indicators Global Database; and National authorities.
Table 8.Djibouti: Inclusive Growth Indicators
IndicatorLIC AverageIndicatorLIC Average
GrowthLabor Markets (ILO estimates)
GDP per capita growth (percent; 2016–18 average)3.72.1Unemployment rate (% of total labor force, 2018)11.15.6
Gross Fixed Capital Formation (percent of GDP; 2016–18 average)39.923.6Female (% of female labor force, 2018)12.06.5
Youth (% of total labor force ages 15–24, 2018)21.310.6
Poverty and InequalityLabor force participation (% of total population ages 15+, 2018)63.066.4
Poverty headcount ratio at $3.20/day (percent of population; 2017)40.056.4Female (% of female population ages 15+, 2018)54.858.2
Multidimensional poverty (percent of population)26.949.7Youth (% of population ages 15–24, 2018)45.947.7
Prevalence of stunting (% of children under 5, 2012)33.531.5
GINI Index (2017)41.640.5Business Environment1
Child mortality (per 1,000, 2017)62.062.1Ease of doing business (DTF, 2018)49.649.8
Growth in mean consumption (growth, %, bottom 40th percentile)n.a.1.8Registering property (DTF, 2018)42.752.7
Enforcing contracts (DTF, 2018)34.847.7
Human Development and Access to ServicesPaying taxes (DTF, 2018)68.956.5
Human Development Index (2017)0.50.5Getting electricity (DTF, 2018)40.845.9
Life expectancy at birth (years, 2017)63.063.8Trading across borders (DTF, 2018)68.953.5
Access to electricity (% of population, 2016)51.852.1
Net school enrollment, secondary, total (% population, 2015)35.043.1Governance1
Individuals using internet (% population, 2016)13.119.5Government Effectiveness (WGI, 2017)-1.0-0.9
Literacy rate (% population)n.a.62.7Regulatory Quality (WGI, 2017)-0.7-0.8
Rule of Law (WGI, 2017)-1.0-0.8
GovernmentControl of Corruption (WGI, 2017)-0.7-0.8
Commitment to reducing inequality index (2017)0.420.33Corruption Perceptions Index (2017)31.029.3
Government spending on social safety net programs (percent of GDP, 2018)0.21.3Gender Equity and Inclusion
Coverage of social safety net programs in poorest quintile (% population, 2012)30.823.4Account at a financial institution (female vs male, %, 2011)52.772.9
Female employment to population ratio (%, 2017)46.255.4
Government expenditure on education, total (% GDP, 2010)4.54.5Literacy rate (female vs male, %)n.a.75.7
Health expenditure, domestic general government (% of GDP, 2016)1.62.0Net school enrollment, secondary (female vs male, %, 2017)83.589.6
Gender Gap Index (2017)n.a.0.7
Access to FinanceFemale seats in Parliament (share of total seats, 2018)26.220.2
Account at a financial institution (% age 15+, 2011)12.327.5
Domestic credit to private sector (% GDP, 2017)31.725.4
Loans to SMEs (% of GDP)n.a.3.2
Better than LIC AverageWorse than LIC Average
Sources: IMF World Economic Outlook, World Bank, World Economic Forum, International Labour Organization, Transparency International, UNDP, Oxfam International.

Indicators use official sources and surveys to summarize perception of the quality of governance and business environments. The LIDCs are countries that have per capita income levels below a certain threshold (set at $2,700 in 2016 as measured by the World Bank’s Atlas method), structural features consistent with limited development and structural transformation, and external financial linkages insufficiently close for them to be widely seen as emerging market economies.

Sources: IMF World Economic Outlook, World Bank, World Economic Forum, International Labour Organization, Transparency International, UNDP, Oxfam International.

Indicators use official sources and surveys to summarize perception of the quality of governance and business environments. The LIDCs are countries that have per capita income levels below a certain threshold (set at $2,700 in 2016 as measured by the World Bank’s Atlas method), structural features consistent with limited development and structural transformation, and external financial linkages insufficiently close for them to be widely seen as emerging market economies.

Annex I. Data Revisions

1. The authorities have overhauled their national account and balance of payment (BoP) statistics. Supported by technical assistance (TA) from the IMF and the World Bank, they have made large revisions to their national accounts and BoP statistics over the last few months to reflect new information on activity in the ports and free trade zones (FTZs). Consistent with the general trade system, they have also taken into consideration the large trade flows that are channeled through Djibouti’s FTZs—mainly re-exports to neighboring countries, especially Ethiopia—to compile trade, BoP and national account statistics. They have also made improvements to the financial account statistics. The new national account and BoP data cover the period 2013–17. The authorities are planning to extend the revisions back to 2008.

2. The latest national account and external sector statistics attest to the importance of the trade and logistics activities in the Djiboutian economy. Driven by higher value added in these sectors, nominal GDP was revised up by 38 percent compared to the last Article IV consultation. Growth over 2014–16 was also revised up from 6.3 percent at the time of the 2016 Article IV to 7.3 percent, reflecting the dynamism of the FTZs relative to the rest of the economy—value added generated in the FTZs grew by about 10½ percent during 2014–17, and it now accounts for one-fifth of the economy. Given the central role of the FTZs and the large size of re-exports, both imports and exports of goods and services have been revised up significantly (about 3.5- and 6-fold, respectively). The current account balance was revised from an average deficit of US$366 million over 2013–16 to a surplus of US$140 million. However, the latest statistics also point to higher current account balance volatility, reflecting large variations in inventories associated with re-export activities. Staff estimates that the underlying current account balance (which excludes these activities) averaged about US$80 million over 2013–16. Because of the nominal GDP revisions, fiscal revenue mobilization appears even lower as before. The revenue to GDP ratio over 2015–18 is now estimated at 24.5 percent against 32.6 percent in the last Article IV consultation staff report.

Djibouti Data Revisions

Sources: National authorities; a nd IMF staff calculations.

1/ Underlying current account balance excludes imports and exports related to re-export activities.

3. The new data better capture the economy’s structure, but shortcomings remain. The information on activity in the FTZs is still incomplete. The BoP errors and omissions are also very large (-23 percent of GDP on average over 2013–18), pointing to a possible overestimation of the current account balance. The statistical agency (INSD), is currently conducting surveys in the FTZs to better capture and classify trade flows and activity. Improve the compilation of trade and financial flows are key to address these shortcomings and facilitate the analysis of the external position.

Annex II. Refugee Surge in Djibouti

1. Djibouti has faced significant inflows of refugees over the past decade. The country has traditionally been a destination for migrants, refugees and asylum seekers. Refugee inflows have more than tripled over the past 10 years (now representing some two-thirds of total population inflows), reflecting heightened regional geopolitical tensions and conflicts. After a reduction in 2015, the number of arrivals has increased again over the past few years, with a surge in inflows from Yemen and Ethiopia. Refugees, about half of which are from Somalia, now account for about 3 percent of Djibouti’s population.

2. Against this backdrop, humanitarian costs have increasingly weighed on the country’s public finances and services. Djibouti has traditionally aimed at ensuring a favorable environment for refugees, granting them with fundamental rights, including access to services such as education and health, with some also benefiting from a monthly allowance. Refugees have in some instances contributed to business creation in retail services and restaurants, but these activities have remained largely informal. Overall, notwithstanding some support from international organizations, the cost of hosting increasingly large numbers of refugees has been important.

Refugee Population in Djibouti

Annex III. Implementation of 2016 Article IV Recommendations
Public Debt Policy and Debt Management
Slow the pace of borrowing by the public sector; avoid non-concessional borrowing

Strengthen debt management: prepare a debt management strategy; adopt a debt law and adopt a public-sector debt anchor; establish a national public debt committee; consolidate and monitor SOEs debt; publish debt data regularly; avoid arrears; and perform regular DSAs.
Disbursements for publicly-financed megaprojects have been slowing down.

The World Bank conducted a Debt Management Performance Assessment (DeMPA) in 2017 that laid out a reform plan. Progress is being made slowly—for example a decree on the creation of the national public debt committee was recently enacted and efforts are being made to foster greater coordination between relevant ministerial departments and to build capacity.
Revenue Mobilization and Phasing Out of Exemptions
Continue reforming the tax system by reviewing and reducing tax expenditures, exemptions, and special regimes, such as free zones, to expand the tax base and increase government revenue.With support from FAD TA, the authorities have prepared a tax expenditures report. A summary of the report was attached to the 2019 Budget Law. No progress has been made in rationalizing tax exemptions and special regimes to broaden the tax base.
Spending Efficiency
Conduct a functional expenditure review and better prioritize spending.No progress was made in this area.
Governance of State-Owned Enterprises (SOEs)
Reform SOEs to enhance their efficiency and the competitiveness of their services and improve their capacity to manage large investment projects.There have been significant delays in implementing the “Code of Good Governance” for SOEs. Recent progress has been made in conducting audits of public administrative establishments and a few key large public enterprises.
Business Environment
Improve the business environment and governance to attract investors, develop the private sector, create jobs.Djibouti made significant progress on the World Bank Doing Business indicator thanks to reforms in the areas of: (i) starting a business (one-stop shop for business start-up), (ii) registering property (reduced registration fees, improved transparency), (iii) strengthening access to credit, (iv) protecting minority investors (improved transparency on transactions and disputes), (v) enforcing contracts (streamlined processes for commercial cases, new Code of Civil Procedure), and (vi) resolving insolvency (simplified processes). However, there hasn’t been any progress on opening some sectors to competition (telecommunications, electricity).
Financial Stability
Strengthen risk-based bank supervision, introduce a bank rating system, reduce credit concentration, better enforce prudential ratios, introduce a minimum reserve requirement, and put in place bank resolution mechanisms.With support from Fund TA, the authorities have been reforming prudential regulations in line with Basel II/III. They have recently revised the regulations on corporate governance, credit risk management, interbank risk management and foreign exchange risk management.
Strengthen the AML-CFT framework.The authorities have requested Fund TA support in this area. LEG participated in the Article IV mission to produce a detailed diagnostic and key policy recommendations.
Statistics and Technical Assistance
Finalize the revision of national accountsWith support from Fund and World Bank TA, the authorities have produced GDP statistics for the period 2013–17.
Consolidate the financial statements of the public sector and central government.No progress.
Annex IV. Economic Growth Performance and Prospects

Djibouti’s economic growth performance has improved over the past three decades. Assuming ongoing structural reforms aimed at improving the business climate and enhancing competitiveness are sustained, staff’s baseline scenario envisages that real GDP growth would remain strong, at about 6 percent on average over the medium term, with a slowdown in public capital accumulation offset by higher private investment and productivity gains.

A. Stylized Facts

1. Real GDP growth in Djibouti has improved gradually over the past few decades.1 To simplify the analysis, three subperiods can be identified:

  • Civil war and dismal growth (1992–2001). During and for a few years after the civil war (1991–94), military and civil unrest weighted down on economic activity. Throughout the decade, public investment contributed positively to GDP growth, but private investment and consumption growth were low. There was a small positive contribution of net exports. A decomposition of growth based on production factors indicates that, although an increase in total employment (mostly in the public sector) contributed positively to overall growth, the sharp decline in total factor productivity brought average growth rate down to -1 percent annually.2
  • Return to stability and pickup in growth (2002–12). During the 2000s, against the backdrop of geopolitical stabilization, Djibouti started to leverage its strategic location, encouraging the installation of foreign military bases and foreign direct investment in logistics and trade infrastructures. Key projects included a petroleum terminal, a refinery, and a container terminal. During this period, annual real GDP growth averaged about 4 percent, driven by large investments. The contribution of capital to growth increased significantly and total factor productivity improved.
  • Infrastructure investment boom (2013–17). The authorities continued to promote investments aimed at positioning Djibouti as a regional logistics and trade hub serving fast-growing but landlocked Ethiopia as well as East-African countries. Large projects included a railway connecting Djibouti and Addis-Ababa, a large multipurpose and other specialized ports, free-trade zone, and a water pipeline. These projects were mainly financed through government-guaranteed debt. The contribution of capital to growth increased further during this period, but the contribution of total factor productivity became negative. Real GDP growth averaged about 6V4 percent during this period.

Contributions to Growth and Financing

Sources: National authorities; Penn World Tables; and IMF staff estimates.

B. Prospects for Medium-Term Growth

2. The authorities’ growth strategy is based on continuing to develop infrastructures and implementing structural reforms to boost productivity and encourage private investment. They have identified additional possible projects to develop trade and logistics infrastructure. They are also implementing an ambitious reform program aimed at strengthening the business environment and boost competitiveness. Key areas of progress in the past couple of years— rewarded by a marked improvement in the WB Doing Business ranking—include: (i) starting a business (one-stop shop for business start-up); (ii) registering property (reduced registration fees, improved transparency); (iii) strengthening access to credit; (iv) protecting minority investors (improved transparency on transactions and disputes); (v) enforcing contracts (streamlined processes for commercial cases, new Code of Civil Procedure); and (vi) resolving insolvency (simplified processes).

3. Given Djibouti’s limited fiscal space, significant emphasis will need to be given to promoting FDI. With debt vulnerabilities having increased significantly, there is little scope for the government or SOEs to take on more debt to finance new infrastructure and growth. Against this backdrop, the key challenge for the authorities is to accelerate structural reforms to turn existing infrastructure investments into broad-based and private sector-led growth and encourage FDI as the main source of financing for economic development. This needs to be done while ensuring debt sustainability and improving the discipline and effectiveness of the SOEs to ensure that debt can be repaid in due time.

4. Staff’s baseline scenario assumes that ongoing structural reforms and past efforts to develop infrastructure start bearing fruits. The recently-developed trade and logistics infrastructures position Djibouti well to leverage the rapid growth in Ethiopia (projected to average about 7½ percent over the medium term) through an increase in export growth. Under this scenario, real GDP growth would remain at close to 6 percent over the medium term. On the demand-side, consumption, private investment and net exports would drive growth. On the factor side, new infrastructures and ongoing reforms would start bearing fruits allowing TFP growth to contribute significantly to output growth, along with labor and capital growth.

5. A more ambitious reform agenda could generate even larger growth dividends. The empirical literature on the macroeconomic impact of structural reforms finds that reform episodes are typically associated with a significant pick up in post-reform productivity growth rates. Even larger productivity payoffs are observed when multiple reform episodes occur in parallel. An IMF study shows that low-income and developing countries that implemented 3 or more large-scale reforms in different areas within the same 3-year period experienced pick-ups in the average 5-year total factor productivity growth rates of close to 5½ percentage point.3 Reforms are also likely to boost private sector investment, hence raising the contribution of capital accumulation to growth.

6. In the case of Djibouti, a more ambitious reform agenda would entail more rapid and concomitant progress on several macro-critical areas. First, the authorities should continue to advance reforms to improve the business environment. There remains significant scope to enhance the rule of law, level the playing field, and strengthen the return on existing infrastructures. Second reducing input costs through energy and telecommunication reforms is important. Progress in strengthening competition and governance, including through the restructuring of SOEs, is also key to boost foreign direct investment.

7. In a scenario where a critical mass of reforms is achieved in these areas, staff could envisage medium-term growth in the order of 7–8 percent. In this enhanced reform scenario, staff assumes an increase in the average annual growth of private-sector investment—from about 13 percent during 2018–24 under the baseline to close to 20 percent—bringing the contribution of capital to annual growth up by ⅔ percentage points. The contribution of total factor productivity could also increase by ½ percentage point compared to the baseline. An output growth of 7–8 percent appears realistic given the country’s strategic location and the potential to serve the East-African region, not only with logistics and transport-related services, but also with financial and ICT-oriented activities. More rapid and comprehensive structural reforms would, however, be necessary to foster such diversification.

8. Nonetheless, under certain circumstances, medium-term growth prospects could also be less promising. Djibouti remains highly dependent on the economic situation in Ethiopia and its specialized port and transport-related infrastructures. A slowdown in Ethiopia would have a direct impact on output growth in Djibouti. In addition to possible external shocks, economic prospects could also be affected by a slowdown in reforms or a smaller impact than expected in improving the business climate and competitiveness, with adverse consequences for private investment. Additional delays in operationalizing the new infrastructures could also slow productivity gains. An illustrative scenario with lower productivity and investment growth brings Djibouti’s medium-term output growth to 4 percent in the medium-term.

Scenarios for GDP Growth, 2018–24

Sources: National authorities; Penn World Tables; and IMF staff estimates.

Annex V. Updated Risk Assessment Matrix1
Source of RiskRelative LikelihoodPotential ImpactRecommended Policy Response
Global Risks
Rise in protectionism and retreat from multilateralism.HighMedium. This could affect Djibouti’s export and real GDP growth prospects given the country’s dependence on transport and logistics services.Accelerate structural reforms to promote private sector investment and diversify the sources of growth.
Sharp rise in risk premium.HighMedium-High. This could increase the interest payment burden (part of the debt is indexed to the LIBOR) and put renewed pressures on CBRs.Adopt a debt strategy anchored on ensuring debt sustainability; limit new borrowing and avoid financing on non-concessional terms. Strengthen public debt management and SOEs governance.
Weaker-than-expected global growth in the Euro Area, the US, China or emerging markets.Medium-HighLow. This could affect Djibouti’s export and real GDP growth prospects through weaker service activities related to ports. It could also lower FDI and external financing prospects.Diversify the economy and the sources of investment finance.
Large swings in energy prices. Risks are broadly balanced, reflecting offsetting—but large and uncertain—supply and demand shocks.MediumMedium. Fluctuations in oil prices would affect the budget and external position.Create fiscal space and strengthen the external position.
Higher frequency and severity of natural disastersMedium-LowHigh. Djibouti is vulnerable to climate change. It faces an arid climate and most of the production capacity is located in coastal and other low-lying areas.Create fiscal buffers for mitigation and adaptation policies
Regional Risks
Intensification of security risks and conflicts in the region.HighMedium. This could affect foreign direct investment and growth and put further pressure on the budget in the case of additional security costs and refugee inflows.Diversify the sources of growth and maintain a prudent fiscal policy to better absorb shocks. Seek donors’ assistance.
Slowdown in Ethiopian growth or reduced reliance on Djibouti ports on the part of EthiopiaLowHigh. This would affect export, investment, real GDP growth, and fiscal prospects as Djibouti is the main access to the sea for Ethiopia and its activity is highly dependent on Ethiopia’s international trade.Diversify economic activity (to reduce dependence on ports) and trade partners (expand trade networks to new markets in Africa and elsewhere – transshipment).
Domestic Risk
Failure to implement reforms needed to ensure debt sustainability.MediumHigh. Notably if the authorities engage in new debt-financed mega-projects or fail to raise the return on infrastructures— would increase further debt vulnerabilities.Adopt a medium-term fiscal framework with a debt anchor to ensure debt sustainability, strengthen debt management, improve governance of SOEs, strengthen investment management including selection and implementation of projects.
Lack of implementation of structural reformsMediumHigh. Resistance from vested interests to strengthen governance and foster private sector participation could reduce investment and export and GDP growth; weaken reserves coverage and maintain or increase poverty and inequalities.Continue reform effort to improve the business environment, foster private sector activity, including foreign investment, and promote inclusive growth.
Annex VI. External Sector Assessment

The currency board remains appropriate. The arrangement has provided an effective nominal anchor and played a key role in instilling confidence and greater predictability in international transactions— an important consideration given Djibouti’s role as a regional trade hub. On balance, staff’s analysis suggests that the external position is weaker than implied by fundamentals and desired policy settings, with the magnitude of the current account gap and exchange rate misalignment subject to considerable uncertainty.1 However, the structure of the economy is such that import and export price elasticities are low; and, there is significant room to improve external competitiveness through structural reforms aimed at improving the business environment and reducing internal costs (especially electricity and telecommunications). The international reserve coverage is broadly in line with the estimated optimal benchmark for low-income countries.

1. Based on the latest data (Annex I), the overall current account balance has experienced large swings over 2013–18, but the underlying deficit has been less volatile. The overall current account balance has posted large variations, with balances from -30 to +30 percent of GDP. This is largely driven by stocks variations in imports and re-exports to neighboring countries that channel through Djibouti’s ports and free zones. The underlying current account balance (excluding import/re-export activities) has hovered around 2 percent of GDP over 2013–18 (about -1 percent last year).2 The underlying trade balance has been largely negative (about -15 percent of GDP on average). This has been partially compensated by surpluses of net income, transfers, and most importantly the service balance (11 percent of GDP on average), driven by transport and logistics services exports associated with the ports and free zone activity. Errors and omissions have been large and mostly negative (except in 2013). They amounted to -33 percen of GDP on average over 2014–18. Official reserves decreased by $112 million last year, lifting the currency board’s coverage to 108 percent of reserve money.

Current Account Balances

(in percent of GDP)

2. The underlying current account balance is projected to improve over the medium term. Imports growth (goods and services, excluding re-exports) is expected to gradually decline to about 4.5 percent annually as large-scale publicly-financed investment projects come to an end. With new logistics infrastructure in place—particularly the multipurpose port and the Djibouti-Addis Ababa railway—the country is well positioned to leverage Ethiopia’s rapid growth. Against this backdrop, export growth (goods and services, excluding re-exports), which is expected to be driven by fast-growing services exports, is projected to continue to rise from 5 percent in 2018 to about 6 percent annually over the medium term. Overall, this would help bring the current account balance to 2.6 percent of GDP by 2024.

3. The improving current account path and an increase in FDI should help offset increasing amortizations on external loans. Foreign direct investment is projected to pick up gradually over the medium term, consistent with the reported interest from investors for the new free trade zone. This will be supported by the authorities’ efforts to switch from debt-financed to FDI-financed investment supported by reforms to improve the business environment. Notwithstanding the projected increase in external amortizations, this would allow for international reserves to increase by about $25 million a year.

4. The net international investor position (NIIP) has been weakening over 2013–18. It has decreased from US$-0.48 billion in 2013 (-23 percent of GDP) to an estimated US$-2.15 billion (-73 percent of GDP in 2018). Djibouti is not vulnerable to sudden changes in financial market sentiment as there are no portfolio investments. However, the large external public debt, part of which has been contracted with variable interest rate and the very large errors and omissions do present risks to external sector sustainability.

5. The international reserve coverage is broadly in line with the optimal benchmark for LICs estimated by staff. Reserve buffers are needed to cope with potential terms of trade shocks, including from economic slowdowns in the main trading partners (e.g., Ethiopia), or shifts in the international financing environment. The optimal level of foreign reserves in low income credit-constrained economies, which compares the marginal benefits and costs of holding reserves versus spending them, indicates an optimal benchmark of 3.4 months of imports.3 As of end-2018, Djibouti’s international reserves covered 3.2 months of imports (excluding imports for re-exports), broadly in line with the recommended reserve adequacy metric. Djibouti’s reserve coverage is projected to fall to 3 months of imports in 2019 and to gradually increase back to 3.2 months of imports by 2024.

Reserve Adequacy Assessment

(Months of imports)

6. Djibouti’s real effective exchange rate (REER) has remained broadly stable over the past decade, with some depreciation since staff’s last external sector assessment (2016). The REER has remained broadly stable despite a rise in the NEER, which reflected mainly the strength of the dollar (to which the Djibouti franc is pegged) against major currencies and Djibouti’s trading partners. Since staff’s latest external assessment, the NEER has been broadly stable (+2 percent) and the REER has depreciated by about 3 percent, amid domestic deflationary pressures that led to a negative inflation differential with trade partners.

Effective Exchange Rates

(Index, 2010 = 100)

Sources: Information Notice System, IMF staff.

7. The external sector analysis suggests that the external position is weaker than implied by fundamentals and desired policy settings. Staff’s analysis—based on the External Sustainability and the Real Effective Exchange Rate approaches (EBA-lite) —shows a REER overvaluation that ranges between 5 and 26 percent. The Current Account (CA) approach indicates a negative current account gap but appears subject to considerable uncertainty given the shortcomings in BoP statistics, including the large error and omissions and the significant revision of import data made over the past couple of years. On balance, given the uncertainty around the current account approach estimates and in spite of the improved debt position after the recent restructuring, staff assesses the external position to be weaker than fundamentals.

  • The EBA-lite regression-based REER model suggests the actual REER is slightly above the norm, implying a small REER overvaluation of about 5 percent
  • The external sustainability approach method suggests an REER overvaluation of about 26 percent to stabilize the net external investor position to its 2018 level. Although the weakening of the NIIP does not reflect the accumulation of volatile foreign liabilities that would put Djibouti at risk of financial market sentiment reversal, the deteriorating NIIP over the past few years, and the fact that the country is in high risk of debt distress as measured by the LIC-DSA, suggest that a reduction in net external liabilities is needed through a slowdown in official foreign debt, as envisaged in staffs baseline scenario.
  • The EBA-lite regression-based CA model does not seem adequate given the uncertainties around the BOP statistics. The underlying CA deficit in 2018 (of about -0.8 percent of GDP) is well below the level implied by economic fundamentals (the current account norm is estimated at -6 percent of GDP). In this context, this approach suggests a REER undervaluation of about 15 percent. However, assuming that the large errors and omissions (-31 percent of GDP in 2018) correspond to unrecorded imports, the CA model would then suggest an overvaluation of 57 percent.
CA and REER, and ES assessments
CA ApproachCA Approach (assuming errors and omissions are unrecorded imports)REER ApproachES Approach
Net IIP (%GDP, 2018)-80.9
CA Actual (2018) *-0.6-32.0
CA Norm *-5.9-5.9
CA Gap5.4-26.0
Ln(REER) Actual4.66
Ln(REER) Norm4.61
REER Gap-14.757.15.026.1

cyclically adjusted

cyclically adjusted

8. Strengthening the external sector position should be achieved primarily through a slowdown in the build-up of public sector external liabilities and structural reforms to improve external competitiveness. Djibouti depends heavily on imports of food and other staples, and the scope for domestic production of these goods is very constrained by non-price (climate) factors. Imports are therefore not elastic with respect to exchange rate movements. Imports of capital goods related to infrastructure investment are expected to decline rapidly as these projects near completion. Moreover, the main sources of foreign exchange—port services and rental fees for military bases—are not sensitive to exchange rate changes as they are set in long-term contracts. For this reason, an improvement in the external competitiveness of the economy should be achieved through structural reforms that aim to lower the cost of services, such as electricity, water and telecommunications, and to improve the business and investment environment, rather than relying on changes in the nominal exchange rate. Improving the quality of BoP statistics is critical to allow for more precise analysis of the external sector position.

Annex VII. Capacity Development Strategy3

As a low-income fragile country, Djibouti faces significant capacity and institution building challenges, which are being addressed with tailored Fund technical assistance (TA) and training. Consistent with the Article IV Consultation policy recommendations, capacity development (CD) priorities for the year ahead cover the following areas: tax policy, public financial and debt management, financial sector regulation and supervision, macroeconomic statistics, and AML/CFT.

A. Main Macroeconomic Challenges

1. The overarching objective for the Djiboutian authorities is to turn infrastructure investments into broad-based and private sector-led growth and job creation, while ensuring debt sustainability. To do so, macro-financial policies and structural reforms need to tackle the following challenges: fostering higher and more inclusive growth in a context of limited fiscal space; ensuring debt sustainability; improving public financial management and spending efficiency; curtailing tax expenditure; continuing to improve financial sector regulation and supervision. Tackling governance weaknesses is also an important cross-cutting theme that affects many state functions, especially public procurement, PFM, central bank governance, regulatory frameworks, contract enforcement, and AML/CFT.

B. Assessment of Capacity Development Efforts

2. CD activities in recent years have reflected demand from the authorities and were broadly aligned with the reform priorities identified in the context of Article IV consultations. The IMF has provided Djibouti with abundant TA in the following areas: fiscal issues (public financial management; tax policy and administration), banking supervision (including Islamic banking), and statistics (all sectors). IMF TA engagement has taken place through HQ-based and METAC (Middle East Technical Assistance Center) missions.

Several key accomplishments were achieved with TA support over the past year:

  • Preparation of tax expenditure report
  • Continued progress on upgrading bank regulatory and supervisory environment
  • Preparation of national account estimates for 2015–17
  • Production of financial stability indicators consistent with international standards

Nonetheless, low capacity to implement TA recommendations has remained an important challenge, and progress in public financial management and other statistical areas (trade and balance of payment statistics) has been slower.

The authorities have also taken advantage of CEF (IMF Middle East Center For Economics And Finance) training and other courses provided by the Fund (including on the new debt sustainability analysis framework), but there may be room to take better advantage of the IMF’s e-learning platforms.

C. Main Priorities for IMF Technical Assistance and Training

3. Given Djibouti’s high CD needs and low capacity, the TA and training agenda focuses on areas for reforms with potential high payoffs for inclusive growth and macroeconomic stability. Consistent with the AIV consultation policy recommendations, the TA and training agenda aims at supporting the authorities in their efforts to ensure debt sustainability and improve debt management, broaden the tax base and strengthen public financial management, identify and manage financial sector risks, and strengthen macroeconomic statistics.

4. More specifically, the priorities for the next 18 months include:

  • Tax policy: possible follow up on tax expenditure report and tax reform strategy to address widespread tax exemptions and special regimes (STX visits throughout FY2020).
  • Public financial management cash management (cash forecasting, single treasury account); public investment management (capital budgeting in the short term; PIMA later on); SOE governance; and development of a medium-term fiscal framework.
  • Debt management: ongoing training on new IMF-WB DSA framework; TA to develop a medium-term debt strategy.
  • Macroeconomic statistics: (i) standards (e-GDDS), (ii) national accounts statistics (ongoing METAC program); (iii) BoP (follow up to recent BPM6 missions); (iv) government finance statistics (expand coverage of fiscal accounts beyond central government; public sector debt, including SOEs)
  • Financial regulation and supervision: risk-based financial supervision (ongoing METAC program); FSSR (FY2020) to provide overall diagnosis and underpin broader medium-term TA program.
  • AML/CFT framework: An expert from the IMF Legal department joined the Article IV Consultation mission to identify weaknesses and make policy recommendations. Further TA could be envisaged once progress has been made.
1In February 2018, the government seized control of a container terminal run by DP World in a long-running legal dispute. The London Court of International Arbitration ruled that the contract could not be revoked. The Djiboutian authorities indicated to staff that they were not represented in court, and that they were contesting the decision, finding the initial contract unbalanced.
1For 2013–17, this analysis is based on the latest national account statistics (see Annex I). For 1992–2012, since the Djiboutian authorities are still in the process of re-estimating national accounts, staff uses retropolated data based on growth rates derived from the previous set of national account data. As such, the analysis presents some caveats for these anterior years, since both the levels of the various national account aggregates and growth rates could end up being revised significantly.
2The growth accounting framework is based on a Cobb-Douglas production function with elasticities of output to labor and capital of respectively 0.6 and 0.4.
3See Structural Reforms and Macroeconomic Performance: Initial Considerations for the Fund (IMF, 2015)
1The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
1The External Sector Assessment (ESR) for Djibouti is based on the IMF’s External Balance Assessment (EBA-lite) methodology using the current account, real effective exchange rate and the external sustainability approaches (See Methodological Note on EBA-lite, IMF 2016:
2Re-exports are reported in official BoP statistics. Imports for exports are estimated by staff based on customs data for imports entering warehouses and free zones (adjusted for FOB price and corrected for imports in warehouses and free zones later directed to the domestic market).
3Based on a marginal product of capital of 6.2 percent, which is the net return on using reserves to invest in real assets, the optimal level of reserve is 3.4 month of imports.
1This note, which was prepared in consultation with functional departments, lays out capacity development achievements and challenges and aims at aligning future priorities with the team’s Article IV policy recommendations.

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