Djibouti

Djibouti
Team 2: Caitlin Green, Jonathan Steffy, Joshua Tucci, Patrick Wilson
OPIM-262: Global Logistics
April 24
th
, 2014
McDonough School of Business, Georgetown University
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Contents




Executive
Summary
Summary of
essential
findings
Infrastructure Transportation Utilities Communications
Banking and
finance
Economy Financial
Existing
industries and
services
Markets
Resources Human capital Education Real estate Inputs
Regulatory
Environment
Industrial
policies
Environmental
policies
Legal system
Government
Stability of
political system
Law and order
International
relations
Geography Distances
Risks from
weather and
natural disasters
Cultural and
religious
differences
Final
Assessment
Evaluation
based on report
findings
Works Cited
Resources used
in research
Appendix
Additional
Tables
Additional
Charts
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Executive Summary
In this report, we have examined the infrastructure, economy, resources, regulatory environment,
government, and geography of the Republic of Djibouti. Djibouti, located in the Horn of Africa, is a
nation of just 23,200 square kilometers bordered by the Red Sea and the Gulf of Aden to the east,
Ethiopia to the west and south, Eritrea in the north, and Somalia in the southeast. Djibouti is a multi-
ethnic nation with a population of roughly 800,000 inhabitants. However, it had a 2012 GDP of over $2.3
billion. Much of this is owed to its thriving port system. The country is strategically located at a major
crossroads of international trade via the Red Sea. Djibouti also plays host to a major US naval base, Camp
Lemonnier. However, the country is still in the process of development. Corruption is rampant,
unemployment tops 60%, access to reliable water and electricity is limited, and infrastructure (outside the
capitol city and port system) is practically nonexistent. The political climate is uneasy, with frequent
protests against political leaders and questionable electoral systems. Besides shipping, the country relies
heavily on oil exports and tourism. Although these industries are strong, the country needs to diversify in
order to make itself a more attractive target in the Horn of Africa for foreign direct investment. Djibouti
would require a great deal of capital influx in order to reduce unemployment and expand its industrial
output.



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Infrastructure

At first glance, Djibouti seems to be merely just another small, impoverished nation located on
the horn of Africa. In many respects, this would be an accurate description. However, there is more to
Djibouti than meets the eye. Djibouti is strategically located on one of the fastest-growing EastWest
international shipping routes, at the entrance to the Red Sea. This location is a major hub for trading in oil
and other goods. The Port of Djibouti (in the capitol city, also named Djibouti), helps connect major
shipping lanes to Asia, Africa, and Europe. However, until relatively recently, the port of Djibouti had
been operating at capacity, thus limiting its ability to take full advantage of its location and demand for its
port services. Thanks to an investment from the Islamic Development Bank and other lenders, Djibouti
doubled its container capacity to roughly 800,000 TEUs (twenty-foot equivalent container units) per year
(Islamic Development Bank Success Stories). Additionally, further investment of $5.9 billion is planned
in order to continue to meet the demand for container handling throughout the country (Bloomberg). In
2009, a new container port was opened in nearby Doraleh. Demand at these ports is expected to range
from 1.2 million 1.8 million TEUs per year as early as 2015. The Port of Djibouti was also expanded to
accommodate larger, more modern ships, and better facilitate the transfer of oil. Ultimately, the country
plans to create six new ports to handle commodity exports. These will include facilities at Tadjourah,
Ghoubet, and Doudah to supplement the existing port facilities (Port de Djibouti). From a supply chain
planning perspective, having multiple viable shipping ports is critical in case of natural disaster affecting
one of the ports such a disaster would not cripple the entire transportation. The addition of these port
facilities will also help Djibouti grow its exports, including salt and agriculture. With such a high
dependency on its port, it is important to examine Djiboutis waterways. Although piracy remains a
relevant concern, the International Maritime Bureau reported that offshore waters in the Gulf of Alden
have decreased noticeably since 2012. Ships are continuing to modernize with anti-piracy technology, and
the large presence of the US navy in the region also helps to diminish the threat of piracy (CIA World
Factbook).
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Although the port in the capital city is the most important piece in Djiboutis continued expansion
of the transportation industry, inland roads and railways are also critical, particularly in maintaining a fast
connection to Ethiopia. Under Ethiopias aggressive Growth and Transformation Plan, the Ethiopian
Railways Corporation (ERC) developed the Ethio-Djibouti Railway Project. This is a modern two-track
railway. Although only about 100km of the railway lies within Djibouti, it reduces the travel time to the
major Djibouti ports by half, completing the link between the key seaport and the interior of Africa. As
part of the growth and transformation plan, Ethiopia is continuing to enhance its existing rail
infrastructure, and this will only serve to make the Djibouti link and Djibouti ports even more critical to
the global supply network (Ethiopian Agricultural Transformation Agency).
Djibouti has a total of 13 airports, but only three of these have paved runways. (CIA World
FactBook). Most of the unpaved airports are small with runways less than 1,500 meters. The Djibouti-
Ambouli International Airport is the main international air terminal. In terms of freight shipping, air
freight in Djibouti is much less than fright transported by rail or ships. This makes sense given that many
of the products are heavy and high-volume, and can withstand longer transit times without losing value.
Similarly, although Djibouti has a total of 2,890 km of roadways, only 364 km is paved, and most of the
paved roadways are centered in or around the capital city (The World Bank roads paved report).
Internet use in Djibouti is however on the rise, and existing infrastructure is thought to be
adequate. At the very least, it is growing proportionally and appropriately to meet the demand. In terms of
telecom, Djibouti Telecom is the sole provider of telecommunications services and utilizes mostly a
microwave radio relay network. Fiber-optic cable is installed within the capital city, and rural areas are
connected via wireless local loop radio systems. However, some mobile phone coverage is limited in
areas away from Djibouti city (Internet World Stats).
In terms of utilities according to a report by DoingBusiness.org, it can take up to 180 calendar
days to get full electrical connectivity for a new business in Djibouti. There is a significant amount of
corruption in the area of government services, and this six-month process likely can be reduced with the
payment of bribes. However, this is obviously not ideal for setting up a new business or developing large-
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scale manufacturing that would require consistent and fairly-priced electricity (DoingBusiness.org). A
supply of consistent, fresh water is similarly difficult to obtain. Only a minority of households have clean,
reticulated water. Water-borne diseases are common in rural and some semi-urban areas. Even in the
capital Djibouti City, water supply can be intermittent. In some areas, water only flows between 2-5 hours
per day. As is the case with the supply of electricity, there is also significant corruption within the
government entities controlling the water supply, as well as widespread physical theft via illegal water
connections, meter tampering, and frequent non-payment. This is definitely not ideal for any
manufacturing requiring a consistent water supply, without the organization investing significantly in its
own water infrastructure. This too could be difficult given government corruption and the regulatory
environment (Djibouti Plan).
The US considers Djibouti to be of strategic importance, as it maintains a large naval base at
Camp Lemonnier. This is the only US military installation in Africa, and the presence of the base does
tend to improve infrastructure and telecom in the area (GlobalSecurity.org). Unfortunately, this effect is
somewhat limited to the areas closer to the base, as much of the rest of the country would not be
considered feasibly for heavy industry or manufacturing. Much of the IT infrastructure is still being
developed (Doing Business in Djibouti).
According to the World Bank, the lending interest rate in Djibouti in 2011 was 10.61%. The
lending interest rate is the rate charged by banks on loans to prime customers (Trading Economics). The
lending rate is the bank rate that usually meets the short- and medium- term financing needs of the private
sector, and is differentiated according to creditworthiness of borrowers and objectives of financing. This
is about average among African nations (see Appendix). However, this rate is significantly higher than
the United States (0.25%), the United Kingdom (0.50%) and China (6.00%). Djibouti has relationships
with the United States, France, Spain, and India for foreign direct investment, and FDI is considered
critical to the growth and development of the ports as well as other industries and infrastructure. In recent
years, Djibouti has been working more closely with the African Development Bank Group, particularly
on a project to upgrade water infrastructure to better prevents draughts. The Board of Directors of the
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African Development Group has approved US $125 million in funding for the first phase of this project,
including $15 million specifically to support natural resources management, land management,
restoration and protection of the ecosystem, as well as agriculture and livestock infrastructure in Djibouti
(African Development Bank Group).
Fortunately for any influx of business and trade, Djibouti is a free-trade zone. The economy is
dominated by port activity and related transportation services. Our favorable investment, start up and
work policies, state-of-the-art logistics and communications infrastructure, strategic location at the horn
of the continent, and exciting incentive schemes for our clients makes us the most attractive location for
big dreams and big business anywhere on the continent (Djibouti Free Trade Zone). There is little
development in the agricultural and industrial sectors. The country has a harsh climate, a largely unskilled
labor force, and limited natural resources (Heritage.org Index of Economic Freedom). The countrys
most important economic asset is its strategic location connecting the Red Sea and the Gulf of Aden. As
such, Djiboutis economy is dominated by the services sector, providing services as both a transit port for
the region and as an international transshipment and refueling center. Additionally, there is a small tourist
industry, as well as a substantial prostitution business in Djibouti city (US Department of State). Djibouti
is heavily reliant on imports for its food and most other consumer goods, but the costs of these imports
are more than covered by the profitable service sector as well as proceeds from contraband trade (CIA
World FactBook).

Economy and Resources

Because the location of Djibouti is so coveted in the trading world, it is no wonder that its
economy relies heavily on international trade. The country itself is mostly barren with limited agricultural
and industrial development coupled with an arid climate and a large unskilled labor force. These factors
force Djiboutians to rely on the work and revenues generated by its deep water port. The Port of Djibouti,
located in Djibouti City, sits at the center of one of the world's largest shipping lanes, connecting Europe
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to Asia and Southern Africa via the Red Sea. Given this vital status, the port has made its mark as a
"secure regional hub for transshipment and relay of goods" (Port).
Djibouti's economic history is marred with volatility, especially after a civil war in the early
1990s. The war broke out between the People's Rally of Progress, the government mainly run by the
Somali clan Clise and the Front for the Restoration of Unity and Democracy, the Afar rebel group
displeased with their level of representation within the government. Approximately 58 percent of the
Djiboutian population was Afar in ethnicity, however, they had very little influence over government
decisions. This group, known as FRUD, rebelled with the goal of correcting this imbalance of power. The
conflict was resolved officially in 1994, though some insurgents continued the conflict until as late as
2001. Nonetheless, the ending of this war provided the foundation for a stable and sustainable economy
(Civil). Since 2002, Djibouti's GDP has grown on average around 3-4%, and the country has established
itself as an important and reliable player in the world trade game.
Even with this growth in GDP, the country remains extremely poor. The unemployment rate
hovers at around 60% (83% in rural areas), and the country employs a labor force that is 165th in the
world. Even with the expansion projects of the Port of Djibouti, few improvements have been made to
decrease the unemployment numbers. Additionally, the country's GDP per capita, according to purchasing
power parity, is only $2,700, which is 181st in the world, and 18.8% of the population lives below the
poverty line of $1.25 per day given PPP (CIA World Factbook). All of this contributes to the country's
heavy reliance on its ports, not only for employment, but for the overall fiscal health of the nation.
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GDP and GDP growth for Djibouti for the first 10 years of the 21
st
century: euromoneycountryrisk.com

Given the widespread poverty, unemployment across the nation, and lack of education, skilled
labor is hard to come by. These statistics have forced most of the population to gravitate towards the
nation's capital. About a half million inhabitants reside within the capital city, more than the rest of the
country combined. This is due largely in part to the Port of Djibouti, since the most common jobs are in
the services sector with a heavy focus on the port itself as well as accommodating any visitors while ships
have layovers in Djibouti. Over 70% of Djiboutis revenues are generated by port activities, while the rest
is split between agriculture and industry (Bansal).

80%
17%
3%
Percent GDP by Sector 2012
Services Industry Agriculture
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The Port of Djibouti has played an important role throughout the history of the country, since its
time as a French colony. Created in 1888 by Leonce Legarde, the French Governor of Somaliland at the
time, it officially became the capital of the colony in 1892. In 1949, it became a free port and so began its
vital contribution to the Djiboutian economy as a refueling and supply station for ships sailing throughout
the Red Sea. 1985 marked the beginning of Djiboutis entering the modern age of containerization with
its first modern container terminal. The government has continued to grow the port, and in 2012 began
construction of the Doraleh Container Terminal, a $396 million project expected to accommodate 1.5
million twenty-foot container units (Bansal).
Aside from the necessary importance of the port for generating revenues for the Djiboutian
Economy itself, the port also receives the country's imports, equivalent of more than 50 percent of
Djibouti's GDP in 2013 (CIA World Factbook). With such an arid climate, the country's main natural
resources are mainly energy or minerals; however, some agricultural products include certain fruits and
vegetables, along with goats, sheep, camels, and animal hides. Given this limitation, Djibouti is heavily
reliant on other countries for the main source of food and sustenance. Last year alone, Djibouti's total
imports equaled $593.3 million, roughly six and a half times greater than its exports of $90.8 million.
Another main problem with Djibouti's economy is its lack of formal education. Only about two-
thirds of the country can read and write, leaving an extremely large portion of the population at a severe
disadvantage. The average academic life expectancy is only six years, and the country houses only one
university, The University of Djibouti. Somewhat inconsistent with the culture, this university is an
English one, while the official spoken languages are Arabic and French, with some groups also speaking
Afar and Somali (CIA World Factbook). This oddity most likely prevents a vast majority of the
population from being able to attend university and further their education within the country. Knowing
these facts, it is clear why no dominant skilled labor force exists, and why there exists such a large gap in
wealth from top to bottom.
Yet another problem is the country's lack of industrialization, though this sector did grow 8
percent last year. One main issue is an unusually large amount of red tape surrounding the building
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process. The World Bank recently ranked Djibouti 157th out of 189 countries for "dealing with and
obtaining proper construction permits." It identified fifteen separate steps in the process, and estimated it
would take at least 167 days to merely obtain all the proper permits before being able to begin
construction on any large building. The costs, thought to be around 1,949.2 percent of per capita income
are also another large obstacle to industrialization. Furthermore, the country simply doesn't have the
available resources for industry construction, and utility and telecommunications costs are extremely
high. In accordance with PPP, the cost of living is estimated to be 2-4 times higher than that of the United
States (CIA World Factbook).
All of these factors have led to the development of a one-dimensional economy that relies heavily
on international trade. Currently, the economic climate is stable; however, if anything were to happen to
the Port of Djibouti, a natural disaster or military attack, the country's economy would be crippled and the
government deficit would drastically increase, causing political and social unrest. Unfortunately for
Djibouti, it doesn't seem like this is going to change anytime soon, nor would it be an easy change to
enact. Djibouti is behind the times in terms of industry and heavily reliant on imports, making it
vulnerable in periods of war or trade embargos. The additional political unrest in neighboring Somalia is
also a major economic concern for the country. Overall, the economic landscape of Djibouti, while it may
be better than many other African nations, is still as bleak as its arid climate.



Regulatory Environment

Djibouti does not have well-established industrial policies compared to the rest of the modern
world. The nations main source of funding comes from Foreign Direct Investment (FDI) into natural
resources and construction projects. FDI increased dramatically in 2012 due to investment into salt
mining near Lake Assal and the construction at the Chabelley airport complex. In fact, most of the foreign
direct investment in Djibouti stems from the International Monetary Fund (IMF). However, there are
potential obstacles to the IMFs continued investment going forward due to slack banking regulations.
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Djibouti has one of the fastest growing banking sectors in all of Africa, yet the strict financial regulations
the rest of the world works to adhere to are not keeping up with Djiboutis growth. Specifically,
Djiboutis banking industry has been accused of money laundering and funneling money to known
terrorist groups in Africa and the Middle East (African Economic Outlook). This is a serious threat to
Djiboutis continued growth and ability to attract foreign investors as the IMF has demanded improved
banking regulations or investment will be curtailed.
The rest of Djiboutis industrial policies are pretty standard for a growing African nation.
Djibouti applies the Common Market for Eastern and Southern Africas Common External Tariff of 0%
for capital goods and raw materials, 10% for intermediate products, and 25% for finished goods (Canada
Tariff Information by Country). Similarly, Djibouti has a pretty standard corporate tax rate at around
37.8%, with most of the tax derived from social security and income tax (Doing Business). These rates
are fairly normal for African countries so there is no competitive advantage by sourcing through Djibouti.
This lack of incentives is compounded by the fact that the World Bank does not record any subsidies in
Djibouti for businesses or particular industries (World Bank). However, apparently there is some $49,000
currently subsidizing the fishing industry around Djibouti (Sea Around Us). Either way, there does not
seem to be a large amount of capital available to lure new businesses into the country. This is very
important considering that initial start-up costs can be extremely high for certain industries, such as
manufacturing. However, Djibouti does have an established process for obtaining legal building permits.
The timeline and costs are clearly presented which does provide some comfort for companies seeking to
move into Djibouti as the potential risk is minimized with this knowledge (Doing Business).
Djibouti is party to a number of international agreements about environmental issues, including
the following: Biodiversity, Climate Change, Climate Change- Kyoto Protocol, Endangered Species,
Hazardous Wastes, Law of the Sea, Ozone Layer Protection, Ship Pollution, and Wetlands. It has pledged
to uphold, or to make strides towards upholding, the standards mandated in these agreements. The
countrys current environmental issues center around inadequate supplies of potable water and water
pollution which lead to water insecurity, limited availability of arable land and land degradation through
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desertification which lead to food insecurity, and loss of biodiversity loss through a growing number of
threatened and endangered species (CIA World Factbook).
Djibouti uses more water resources than it can supply in the long run and is unable to efficiently
distribute information or take collective action regarding weather patterns and other activities that affect
water supply. Djibouti's total renewable water resources are 0.3 cubic km. Its freshwater withdrawal totals
0.02 cubic km/yr (84%domestic, 16% agricultural, 0% industrial), and per capita withdrawal is 24.84
cubic m/yr. 67.3% of the rural population has access to improved drinking water sources and 61.3% of the
total population (73% urban, 21% rural) has access to improved sanitation facilities (CIA World
Factbook). The local and national governments do not have the capacity or the information they need to
respond quickly to changing circumstances such as droughts and floods. While early warning systems for
crop production areas have been set up to reduce the effects of food and water insecurity, the capacity for
Djiboutians to respond is quite low. The warning system predictions could be valuable if the local
government was able to take timely follow-up actions. However, poor communication in addition to the
lack of ability and means to respond due to inadequate resources leads to poor response efforts. Many
local authorities do not know how to respond to problems with water supply, and others lack the means to
enforce preventative or response policies. The capacity to enforce these laws is also low- Djibouti also
suffers from a lack of enforcement resources. (Van De Giessen).
Djibouti is far behind in recycling and reuse of materials. To address its lack of resources to
respond to these problems, Djibouti received an aid grant from the European Commission under the 10th
European Development Fund. The two main thematic areas of assistance are water/sanitation and energy.
The support of the EC will contribute to improving health and hygiene conditions as well as access to
drinking water, sewage treatment, and waste disposal (European Commission). The International
Monetary Fund's Poverty Reduction Strategy paper explains that the government strategy to improve the
urban environment seeks to educate the population on the importance of preserving the environment, to
develop business opportunities for the collection and recycling of solid waste, and to adopt better
management waste water from individual septic tanks. (IMF Staff Country Reports).
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Djibouti has a mixed legal system based primarily on the French civil code as it existed in 1997,
Islamic religious law for matters of family law and successions, and customary law. It accepts
compulsory International Court of Justice jurisdiction with reservations and accepts International
Criminal Court jurisdiction. It has a president elected by popular vote for a five-year term. The president
is eligible to hold office until age 75. The last election was held on April 8th, 2011, and the next will be
held in 2016. The prime minister is appointed by the president (CIA World Factbook).
In Djibouti, corruption exists and sometimes blocks investments and business development, but is
improving. While privatization of port, airport, and customs operations has made substantial increases in
transparency of regulation as well as in government revenues in important economic sectors, corruption is
still an important issue in many areas of government involvement. The Djiboutian government has pledge
to welcome and protect new foreign investment in the country. While some foreign investors have
reported operating without government corruption or interference, smaller scale investors generally have
been pressured by government officials to obtain sub-contracts. Business owners have also reported
corruption, as they sometimes attempt to bribe government officials in order to evade import taxes. This
practice has declined, but is still occurring, as customs transparency continues to improve under the
management of Dubai World. Occasional allegations of corruption in the judicial system have occurred,
but recently public perception of transparency in the judicial courts has improved. Although prosecution
and punishment are rare for instances of corruption, in recent years the Director of the Fonds Routier, a
public service for collecting road fees, the Director of the OVD, the public garbage collection
organization, and two magistrates have been dismissed for misconduct and embezzlement. The Djiboutian
Chamber of Accounts and Fiscal Discipline is the authority for verifying and auditing public
organizations for transparency and accountability, as well as initiating legal sanctions in the case of
corruption (Bureau of Economic, Energy, and Business Affairs).
The informal market in Djibouti is flooded with sales of pirated trademarked products. A large
amount of trade with regional partners occurs informally, lending itself to Djiboutis substantial informal
sector. While the government officially protects property rights and intellectual property, patents,
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copyrights, trademarks, and trade secrets due to its inherited French legal system, Djibouti does not have
the resources to address or enforce these property rights issues past the legal code level. Djibouti ratified
the World Intellectual Property Organization convention, the Paris Convention on the Protection of
Industrial Rights, the Bern Convention on the Protection of Literature and Art Works, and Djiboutian
Law 154 which addresses the enforcement and protection of copyrights. In 2009, in addition to passing a
comprehensive law on protecting property rights, Djibouti also created the Office of Industrial and
Commercial Property Rights. In practice though, intellectual property rights are still mostly unenforced
(Bureau of Economic, Energy, and Business Affairs).
Dubai Ports World manages Djiboutis Port, Free Zone, airport, and customs services. Because
the port and its related services make up much of the countrys formal economy, Dubai Ports World has
had significant effects on Djiboutis port and customs revenues. In addition, trade partners and shipping
organizations have noticed substantial improvements in both the transparency and the efficiency of
operations. The Djiboutian government has attempted measures to similarly increase transparency
throughout the rest of the economy, but due to lack of resources, bureaucratic obstacles, and legal delays
they have been unable to improve significantly (Bureau of Economic, Energy, and Business Affairs).
Djiboutis Constitution includes the freedom for workers to join unions and to strike as long as
they comply with legal requirements. About 70 percent of workers in the formal economy were members
of either the General Union of Djiboutian Workers or the Union of Djiboutian Workers, the two largest
labor federations, before 1999. The Djiboutian government took control of these labor federations in 1999
and restricted workers rights. Since the takeover, almost no independent union activities have been able
to take place, despite repeated promises from the government to improve the situation. The Djiboutian
Labor Congress, which was composed of officials from the Ministry of Labor and created in order to
counter the two major labor unions, was dissolved. Workers now have even less representation and
bargaining power in the government than before. Djibouti sets minimum wage rates along the lines of
occupational categories, and the Ministry of Labor enforces these rules. The minimum monthly wage for
unskilled labor is 22,000DF (about $125) and was set in 1976. Because this national minimum wage does
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not provide a decent standard of living for a worker with a family, most employers pay more than
minimum wage, and some even provide housing and transportation allowances. The workweek is set at
40 hours spread over 6 days, but employers may ask employees to work up to 12 hours each day for an
additional wage. Workers are allowed daily and weekly rest periods and annual paid leave. The Ministry
of Labor is responsible for enforcing health and safety standards, wages, and work hours, but lacks the
resources and power to do so. Workers therefore face potentially hazardous working conditions and are
unable to complain out of fear that they would be replaced by another worker desperate for employment.
No laws protect workers who refuse to take dangerous assignments, so complaining or refusing an unsafe
job could result in termination or the inability to find other jobs (Bureau of Democracy, Human Rights,
and Labor).

Government

Djiboutis government is plagued by many of the common problems that are seen in developing
countries around the world. Corruption, allegations of rigged elections, and government seizures make the
political environment a potential threat to conducting business in Djibouti.
The stability of the Djiboutian political system is largely tied to the whims of the ruling elite and
specifically President Ismail Omar Guelleh. Djibouti has a poor history with protection of private
property. The ruling elite are known to exploit foreigners by expropriating investments and nationalizing
resources and property (Friends of Djibouti). This is very risky for foreign investors looking to begin
business enterprises in Djibouti. At any moment, the foreign company can risk losing all of its assets and
capital to seizure by the government. This tense situation is exacerbated by the tendency of the President
and ruling elite to incite political change without warning. These two parties control the government and
can effectively make changes at will which has led to many sudden legal code changes in previous years
(Friends of Djibouti). Actions such as these create an even more uncertain environment for a business
choosing between multiple countries for operations. Ideally, Djibouti would have a much more level track
record of dealing with foreign investment and property rights in order to appeal to most businesses.
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As mentioned earlier, Djibouti has recently come under scrutiny by the IMF due to its lax
banking regulations. The rapid growth of Djiboutis banking industry has resulted in a lack of oversight
concerning money laundering and terrorist financing. These weaknesses have caused the IMF to express
reluctance to continue to finance Djibouti as well as resulted in restricted access to credit for Djibouti
from other sources (Friends of Djibouti). IMFs response to Djiboutis banking industry forces Djibouti
into a very difficult position as it attempts to continue growth but must meet international financial
standards. Unfortunately, it can be argued that perhaps Djiboutis banking growth has come because it is
willing to provide financial services to unsavory parties in that region of the world. The restricted access
to credit will eventually force Djibouti to make changes, yet it could result in the strangulation of the
budding banking industry. From a business perspective, foreign enterprises must be aware of potential
restrictions on credit and understand the complications surrounding the financial industry in Djibouti.
As mentioned, the ruling elite and President Guelleh control all of the political power in Djibouti.
However, this power is occasionally challenged by opposition groups that claim elections have been
falsified in order to keep President Guelleh in power since 1999 (Friends of Djibouti). Protests are usually
quickly put down by the government but these are still regular disruptions that businesses should be
aware of before entering a slightly charged political climate. The overall justice system also reflects the
dominance of the ruling elite as corruption is rampant and protracted legal trials are often interfered with
for political gain (Heritage). The judicial system operates under French civil law, but Sharia religious law
prevails for family matters. Due to corruption and disproportionate power of the ruling elite, private
property protections are very weak (OSAC). This presents a large threat to potential business partners as
there are few guarantees that assets, capital, and inventory will be protected while conducting business in
Djibouti. Safety of personal property and personnel is generally adequate; however petty theft and knife
crimes are increasing in recent years (OSAC).
Clearly, the internal political climate of Djibouti has some prevalent issues, however the external
political climate also has some cause for concern. Djibouti maintains strong ties with France as it was
originally a colony and still lists French as an official language. The United States also has close ties to
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Djibouti and the only U.S. military base in Africa is located in the nation. Japan and Germany also have a
military presence in Djibouti, but to a lesser extent than France and the United States (Friends of
Djibouti). Djiboutis external climate becomes a concern due to its past history with neighboring Eritrea.
There is a past history of conflict between the two nations with the most recent occurring from 2008-2010
which had to be resolved by the United Nations after military build-up on both sides (United Nations).
There is the potential for future border disputes which can lead to military escalation and pose a direct
risk to business operations.
However, the largest risk for business ventures in Djibouti, in terms of political climate, involves
the rampant piracy that can choke transit routes offshore. The Bab El-Mandeb Strait is located between
Djibouti and Yemen making it a key area for both piracy and terrorism (CNA). In past years, numerous
attacks have been attempted and succeeded on oil tankers passing through the Strait. Pirates have even
started increasing the range they will attack from 50 miles off the coast to farther, forcing most ships to
sail 200 miles offshore for safety (CNA). This is the most significant threat to businesses assessing
Djibouti as a potential location. The value of Djibouti is largely focused around its state-of-the-art ports
which provide access to shipping for central Africa. If shipping out of these ports becomes crippled due to
piracy or terrorism then business operations could be completely shut down. Obviously, there are
measures to take in order to minimize the risk of piracy, but these are definitely associated with higher
costs of transportation. Similarly, lead times could be stretched enormously if additional measures must
be taken or alternate shipping routes utilized.
Overall, the political climate both internal and external to Djibouti presents challenges to steady
business operations. The risks of corruption, turmoil, and piracy are significant threat to businesses
looking to conduct operations in Djibouti. However, the United States and France have a prominent
presence in Djibouti and the IMF is taking a larger role in order to force regulations onto the growing
banking industry. These are positive influences that indicate Djibouti is definitely an emerging economy
that simply needs foreign investment. These factors should be weighed against the potential political risk
instead of writing Djibouti off completely.
Djibouti Team 2 Page 19


Geography

The main exports of Djibouti are hides, skins, and coffee, which consist essentially of re-exports
to Somalia (64.2%), Yemen (22.7%), and Ethiopia (5%), worth $250 million. Its main imports are food,
beverages, chemicals, petroleum, and transport equipment from Saudi Arabia (20.9%), India (12.5%),
Ethiopia (11.9%), China (10.5%), France (4.7%), US (4.5%), and Japan (4.4%) (WHO).
(Google Maps)

Major Sources of Raw Materials and Parts
Origin Destination Distance (km)
Riyadh, Saudi Arabia Djibouti City 4,618
Jeddah, Saudi Arabia Djibouti City 4,023
Mumbai, India Djibouti City 10,163
Delhi, India Djibouti City 8,835
Addis Ababa, Ethiopia Djibouti City 869
Guangzhou, China Djibouti City 4,650
Shanghai, China Djibouti City 5,118
Paris, France Djibouti City 3,477
Marseille, France Djibouti City 3,145
New York City, US Djibouti City 7,043
Los Angeles, US Djibouti City 9,049
Yokohama, Japan Djibouti City 6,111
Osaka, Japan Djibouti City 5,893
(Google Maps)

Djibouti Team 2 Page 20

Major Markets
Origin Destination Distance (km)
Djibouti City Mogadishu, Somalia 1,807
Djibouti City Hargeisa, Somalia 326
Djibouti City Bosaso, Somalia 1,285
Djibouti City Sanaa, Yemen 5,090
Djibouti City Taizz, Yemen 5,258
Djibouti City Al Hudaydah, Yemen 5,012
Djibouti City Addis Ababa, Ethiopia 867

Djibouti has a desert climate, which is torrid and dry. Its coastal plain and plateau separated by
central mountains sometimes suffer from natural hazards. These hazards include earthquakes, droughts,
and occasional cyclonic disturbances from the Indian Ocean which bring heavy rains and flash floods.
Djibouti also experiences limited volcanic activity from two volcanoes. Ardoukoba last erupted in 1979,
and Manda-Inakir (located along the Ethiopian border) is also active. In addition to these natural disasters,
the risk of infectious disease is also high. Djibouti is prone to outbreaks of bacterial and protozoan
diarrhea, hepatitis A, typhoid fever, and dengue fever (CIA World Factbook). Djibouti is located on a rift
region and has a shaking level with a 10% chance of exceedence in 50 years. The Horn of Africa has
significant seismic hazard associated with the East African rift system. A number of destructive
earthquakes, some deadly, have been reported this century. Notable events include the 1921 earthquake
that destroyed the port city of Massawa in Eritrea. In Ethiopia, the 1961 M=6.1 Kara Kore earthquake
destroyed the town of Majete, the 1969 M=6.3 Serdo event resulted in four deaths, and the 1989 M=6.5
Dobi graben earthquake destroyed several bridges between Assab and Addis Ababa. Djibouti's annual
probability of flooding is between 10% and 40% (Horn of Africa: Environmental Security Assessment).
Djibouti Team 2 Page 21

The total population of Djibouti is 792,198. Djibouti has two major ethnic groups: Somali (60%)
and Afar (35%). The remaining 5% of residents come from French, Arab, Ethiopian, and Italian decent.
French and Arabic are the two official religions, but Somali and Afar are also recognized national
languages. Djiboutians are predominantly Muslim (94%) or Christian (6%) (CIA Factbook).
18,725 refugees from Somalia currently reside in Djibouti. Djibouti is also a transit, source, and
destination country for men, women and children subjected to forced labor and sex trafficking. Economic
migrants from East Africa en route to Yemen and other Middle Eastern locations are vulnerable to
exploitation in Djibouti, and some women and girls may be forced into domestic servitude or prostitution
after reaching Djibouti City, the Ethiopian-Djiboutian trucking corridor, or Obock (the main crossing
point into Yemen). Djiboutian and foreign children may be forced to beg, to work as domestic servants, or
to commit theft and petty crimes. Djibouti does not fully comply with the minimum standards for the
elimination of trafficking, but it is making significant efforts to do so. In addition, the unemployment rate
of 59% (83% in rural areas) contributes to unrest. 18.8% of Djiboutians live below the poverty line (CIA
Factbook).
Complex relationships between the Somali and the Afar prolong cultural differences and
contribute to political discord. They compete for power and access to resources, which lead to open armed
conflict in the 1990s. After a military campaign ended the Afar revolt, the government opted for a policy
of compromise without endangering Somali dominance in order to avoid full ethnicization of politics.
Occasionally, tension between Djiboutians and newcomers (migrants and refugees) erupts into conflict.











Djibouti Team 2 Page 22

Final Assessment

In our study of the Republic of Djibouti, it cannot be denied that the country is well-posited to
face the future. Its prospects for growth are promising, particularly with changing government and private
investment in its port system, railroads, and other critical infrastructure. As Djibouti continues to
modernize in terms of infrastructure and in terms of government systems and elections, the country will
continue to grow. Unfortunately, the current political climate, especially given the surrounding nations in
the Horn of Africa, makes the country a suspect candidate for foreign direct investment. The arid,
unforgiving climate and the largely uneducated workforce make Djibouti sub-optimal for large-scale
manufacturing operations. Additionally, there are few tax-incentives to develop manufacturing in the
country. Beyond the current port system, strategically placed at a crossroads of international trade,
Djibouti is not an ideal location for a company to place a part of its supply chain. Our final assessment:
Djibouti is too risky.


Djibouti Team 2 Page 23

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