EXECUTIVE SUMMARY
Severely impacted by the COVID-19 pandemic in 2020, Djibouti’s economic activity has shown signs of recovery in 2021. GDP growth rate in 2020 dropped to a decade low of about 0.5 percent but rebounded in 2021 to a projected 5.1 percent. The recovery is mostly driven by a withdrawal of COVID-19 related lockdown measures in late 2020, which has facilitated a rebound in investment and construction. Broad containment of the virus and continued government support have also bolstered household consumption. It is worth noticing that the economic rebound was dampened by a fall in the Ethiopian demand for logistics services during the second half of 2021.
Inflation has risen with international commodity prices. Headline inflation has risen by 2.6 percent in October 2021 (year-on-year), and core inflation 3.2 percent because of several factors. These include the passthrough of higher global oil and food prices and factors which pushed up domestic prices, such as the strong demand-side pressures following real sector recovery in 2021, and periodic shortages of imported fresh products from Ethiopia.
Public finances are under pressure. The overall deficit of the central government is expected to remain low at 1.6 percent of GDP in 2021. This owes to measures such as the rationalization of wages and salaries, transfers to public agencies, and the expectation that higher dividends from companies operating in Ports and Free zones will partially offset the fall in tax revenues resulting from generous new exemptions introduced in the 2021 Finance Act. Public and publicly-guaranteed debt, however, remains high, and again rose above 70 percent of GDP after falling slightly in 2018–2019. Djibouti is assessed at high risk of debt distress with unsustainable outlook.
The 2020 Debt Service Suspension Initiative (DSSI), whereby Djibouti’s debt service to official creditors were deferred, provided budget buffers to Djibouti in both 2020 and 2021.
The current account will more likely swing to deficit. The current account surplus is expected to turn from a positive 11.6 percent of GDP in 2020 to a negative 1 percent of GDP in 2021, as import growth of goods and services (mostly for infrastructure projects) is expected to outpace exports. The financial account is estimated to have recorded a net outflow after a US$200 million bond emission by the local subsidiary of Bank of China to support a mining project in Central Africa. Nonetheless, thanks to the recent International Monetary Fund (IMF) Special Drawing Rights (SDRs) allocation (equivalent to US$40 million transferred to Djibouti in August 2021), the currency board arrangement has avoided stress.
Amid the covid-related recovery, the prolonged conflict in Ethiopia has increased downside risks for Djibouti’s economic outlook.
The declaration of a six-month state of emergency in November 2021 by the Ethiopian federal government has delayed prospects of a peaceful short-term resolution of the conflict. A prolonged conflict in Ethiopia would affect railway and road corridors through which most trade between Djibouti and Ethiopia takes place. It would deteriorate further Ethiopian’s trade and growth in both the short and medium terms and have substantial spillover on Djibouti’s economy. In light of the severe uncertainty regarding the neighboring conflict, this first edition of the Djibouti Economic Monitor considers two scenarios for the medium-term outlook: (1) a baseline scenario, whereby the conflict in Ethiopia is expected to find a peaceful solution within six months; and (2) a downside scenario, that assumes the conflict intensifies and lasts through December 2022. Economic activity is expected to rebound in 2023 with the end of the conflict.
Based on our two scenarios of the conflict in Ethiopia, real GDP growth in Djibouti could hover between 4.3 and 2.7 percent in 2022 (baseline and downside scenarios, respectively).
Under the baseline scenario, the overall fiscal deficit would widen to 2.7 percent of GDP in 2022 and 2.8 percent of GDP in 2023 mostly due to lower tax revenues and dividends from port-related SOEs.
Under the downside scenario, the adverse effect of the prolonged conflict in Ethiopia on bilateral trade, security expenditure to secure borders, and rising social expenditure to support flows of refugees, would widen the overall fiscal deficit to 3.7 percent of GDP in 2022 and 3.6 percent of GDP in 2023.
Djibouti has very limited fiscal buffers to face a prolonged crisis in Ethiopia, as the country is already at high risk of debt distress and has a narrow tax base. Domestic revenue has fallen by 3 percent of GDP to about 18.7 percent of GDP in 2020, mostly because of rising and widespread tax expenditures (these represent at least 127 percent of tax revenue or 15 percent of GDP), non-tax compliance behavior, and a large informal sector.
On the debt side, liquidity tensions are likely to arise due to the payment of deferred debt service linked to the DSSI, the maturing of the two loans on the water pipeline project connecting Djibouti to Ethiopia loan in 2022, and the Addis Ababa-Djibouti railway project in 2025. An estimated financing gap resulting from the Ethiopian crisis would be US$70.7 million in 2022 and US$52.1 million in 2023 under the baseline scenario.
Under the downside scenario, the financing gap is expected to increase to US$91.3 million in 2022 and US$72.4million in 2023. In such a context, the government would need to engage with its bilateral creditors to negotiate further debt restructurings and explore additional measures to strengthen domestic revenue mobilization, including by rationalizing tax exemptions and negotiating more favorable bilateral deals on rents paid by military bases.
The pandemic severely and negatively impacted households overall, although some welfare indicators are trending upwards—see Special Focus (Chapter 3). The Special Focus details the employment and welfare trends among urban households during the crisis and the recovery in Djibouti. The analysis is based on high-frequency data that the World Bank and the Institute of Statistics of Djibouti produced in June, September, and December 2020, and March 2021. It reveals that from a labor market and welfare perspective, the COVID-19 pandemic has taken a toll on households in Djibouti. Although, welfare indicators, including subjective wellbeing and food security, are on a positive trend, vulnerable and marginalized populations must receive special policy attention to build back better.
Source: World Bank