Large investments over the past decade have driven strong economic growth, but the benefits have not been widely shared and public debt has risen sharply; A series of external shocks have weighed heavily on the economy and added to already significant budget pressures as debt service has tripled; Urgent action is needed to restore debt sustainability and promote inclusive growth, including by creating fiscal space for additional social spending.

A team from the International Monetary Fund (IMF) led by Brett Rayner conducted a mission to Djibouti from December 4­–15. At the end of the mission, Mr. Rayner made the following statement:

“Large investments over the past decade have driven strong economic growth, but the benefits have not been widely shared. Djibouti has invested heavily in infrastructure connecting Ethiopia to global markets, driving growth to an average of 6.2 percent over 2013–19, before the COVID crisis. With investments centered on capital projects, however, few jobs have been created and unemployment remains high.

“Most investments have been financed by state-owned enterprise (SOE) borrowing, exacerbating vulnerabilities from a narrowing tax base. External public debt increased from 34 percent of GDP in 2013 to 72 percent in 2021, with SOEs accounting for most borrowing. Meanwhile, government revenues have been declining due to widespread exemptions, and lease payments from the foreign military bases have remained unchanged since 2016. The financial sector has also grown rapidly, creating supervisory challenges.

“The conflict in Ethiopia has weighed heavily on Djibouti’s economy. The conflict saw renewed fighting this year, driving a further fall in port traffic after an already weak 2020 and 2021. In addition, higher commodity prices and regional drought have eroded households’ purchasing power and further reduced government revenue. Accordingly, growth is expected to slow to 2.5 percent and the trade balance is projected to worsen in 2022. A truce agreed in November in Ethiopia could allow for a recovery in trade, reversing recent declines in port activity and help attract new foreign investment. Staff projects that economic growth in Djibouti will recover in 2023 with a rebound in Ethiopia, and inflation would fall in line with international trends.

“Djibouti’s key challenge is to adjust its growth model to reduce dependence on debt-financed investments while supporting an inclusive recovery from a series of external shocks. The authorities have responded to the shocks with a sharp fiscal consolidation and by accumulating arrears pending the outcome of ongoing restructuring negotiations with their main creditor, but spending needs are significant and debt service is set to increase further. However, to restore debt sustainability and support inclusive growth, it is essential to focus on domestic revenue mobilization and improve oversight of public enterprises. The authorities should also rationalize subsidies by shifting to more targeted support measures. Governance and public financial management reforms will also be needed to preserve economic stability and create jobs.

“Greater financial inclusion would underpin macroeconomic stability and inclusive growth. Raising the share of adults holding bank accounts and addressing the gender gap would promote growth outside of the trade hub and reduce informality. The authorities are encouraged to build on ongoing efforts to expand access to the payment system and credit registry. With a privatization of a minority stake in Djibouti Telecom generating insufficient interest, the authorities are encouraged to consider offering a larger stake, as bringing in private investment could help reduce IT prices and expand access to mobile banking. Supervision should keep pace with the rapid growth of the banking system, and while the currency board arrangement has provided the country with an effective nominal anchor and helped build confidence in international transactions, the authorities will need to introduce tools to make monetary policy more flexible.

“The mission team would like to thank the authorities for the warm hospitality and productive discussions and looks forward to continued close engagement.”