Does Foreign Direct Investment (FDI) Accelerate Economic Growth in Djibouti?

Djibouti is a country located in the Horn of Africa. It is bordered by Eritrea in the north, Ethiopia in the west and south and Somalia in the southeast, is strategically placed between Africa, Asia and Europe. Djibouti enjoys peaceful social coexistence and relevant political stability. Growth in annual gross domestic product (GDP) increased from an average of 4.2 % in the period 2002-2012to 5 % in 2013. Foreign Direct Investment (FDI) percent of GDP increased from an average of 8.7 % in the period 2002-2012 to 19.6 % in 2013. Since the early 2000s, Djibouti incorporated foreign direct investment matters in its policy documents; more over in 2001 the country established the National Agency for Investment Promotion (ANPI) to promote investment in the country.

Does Foreign Direct Investment (FDI) Accelerate Economic Growth in Djibouti? - GEOPOLITICA.info

Political, Economic and social context

More importantly the government of Djibouti adopted the National Initiative for Social Development (INDS) in 2007 to boost economic growth via development of private sector and they pointed out the importance of FDI, so to increase the inflows at 20 % of GDP over the period of 2011-2015.In the 2000s the country has never received considerable FDI flows that higher than in 2007 (23 % of GDP) so Djibouti performing better than the other countries in the Common Market for Eastern and Southern Africa (COMESA).Although great efforts made to promote FDI, the country does not yet have a formal strategy to attract FDI.

Djibouti is located in a conflict-vulnerable region, it enjoys over a decade-long period of political stability. Djibouti is a semi-presidential republic; the executive power is under the control of Djibouti government while the legislative power is shared by both the government and country’s parliament. National assembly represents the legislative branch of the government of Djibouti which consists of 65 members. The constitution is influenced by the French constitution. France was the formal colonial power in the East African region.

The president is democratically elected to the post and he has the power to appoint ministers. The current president is Ismael Omer Guellah from People’s Rally for Progress (PRP) party, who has been in power since May 8th, 1999, was re-elected with strong majority for third term on April 8th, 2011. At the regional level, Djibouti tries to keep good relations with neighbouring countries of Ethiopia and Somalia.It played important role in Somalia by arranging discussions that progressed to the Djibouti agreements of August and December 2008 instituting the transitional federal government of Somalia.

Economic and Social context

Since the beginning of the new millennium, the country launched enormous infrastructural investment programme to take advantage of its Geo-strategic location in the Horn of Africa aims to extend electricity and water supply besides increasing trade with neighbouring countries e.g Ethiopia, Somalia, Gulf countries,…etc. GDPis continuing the acceleration that begun in 2012, the rate of growth increased from 3% to 5% and the sources of growth are port activity and FDI flows generate revenue from service activities.

The economy in Djibouti faces many issues. It is relying on Ports (free zone and transhipment to landlocked Ethiopia) and revenue from the existence of foreign military bases. Therefore; some international financial institutions such as International Monetary Fund (IMF) attempting to persuade the government of Djibouti to address and rectify some macroeconomic and fiscal problems but the government of Djibouti has been resisting to these reforms. The reforms that have been strongly proposed such as: an increase on FDI and diversification of the economy not to depend only on ports besides reforms to increase economic growth to enhance business climate and better allocation of funds for the alleviation of unemployment and poverty. Moreover the IMF in 2013 talks with the government of Djibouti to increase domestic funding through reforming tax      exemption and reducing invisible oilproduct.

Port activity represents the backbone of the economy. Djibouti concluded commercial agreement with landlocked Ethiopia and after the independence of South Sudan in July 2011, Djibouti signed with South Sudan an economic co-operation in 2012 and the agreement comprises the construction of oil pipeline, freight and rail infrastructure linking South Sudan to Djibouti via Ethiopia.

The average of FDI inflows (% of GDP) during 2006-2008 was 20% which demonstrates that the highest level of FDI inflows in the country that boosted the growth during that time and the FDI inflows mainly from the Gulf States for instance Dubai, Saudi Arabia and Kuwait. In 2013 FDI rose to 18.6 % of GDP and most of it coming from China, a new investor in the region.

Social context and human development   

Crucial improvement has been made in education as the level of gross primary school enrolment rose to 82.8% in 2012. Maternal mortality still high, at 300 per thousand births in 2010 while infant mortality is 58.0 per thousand in 2012.

Although the number of health workers has noticeably increased, they are at administrative level than in the field. Malnutrition affects almost one third of the population while poverty reduction is the main challenge for the government of Djibouti and there is a great effort to tackle this issue, many projects were started in 2014 such as the distribution of coupons to buy food. The country also faces continuous flow of immigrants from Ethiopia, Somalia and Eritrea on their way to Arabian Peninsula (according to the International Organization for Migration100 000 people pass the country each year).

Trends in Foreign Direct Investment inflows

In 2013 FDI inflows reached to levels not seen since the global economic crisis in 2008 growing by 260% to an estimated 286 million. In 2008 the level of FDI was 228 million declined to 37 million in 2010 due to the economic crisis of 2007-2008 then started to increase in 2011 and 2012 until it reached a new high record of 286 million in 2013. In 2007 FDI totalled 23% of Djibouti’s GDP then decreased to 3% in 2010 and started to grow to reach about 20% in 2013.

Investment climate

Djibouti belongs to many regional organizations such as Common Market for Eastern and Southern Africa (COMESA), which consist of 19 member states into a common market, Inter-Governmental Authority on Development (IGAD) and a member of World Trade Organization (WTO) since May 31, 1995 (GATT: December 16, 1994). Country’s law favours foreign investment, in 2011 the government established National Investment Promotion Agency (NIPA) to promotes and facilitates investment operations. Djibouti has no restrictions on foreign exchange. Djibouti signed several bilateral investment agreements with, France, Sudan, South Sudan, Egypt, Malaysia, China, Ethiopia, Yemen and India.

Djibouti is politically stable when compared with the other countries in the region such as Somalia, Eritrea and Yemen. Regarding efficient capital markets and portfolio investment, there are two large Banks control country’s banking sector these bank are Industry Mer Rouge and Bank of Africa. There are some issues related to corruption and labour ; Djiboutian laws and regulations proscribing  corrupt practices, but punishment for corruption is few and far between and also labour laws favour the employee.

Conclusion

It can be said that the correlation between FDI net inflows % of GDP and GDP growth is estimated to be strong positive (0.64) and the relevant coefficient estimate (0.306) statistically is highly significant. Some impacts of FDI in the host country cannot be seen for short run and also cannot be evaluated or calculated quantitatively for instance technology and knowledge acquisition, and it may take a considerable time before these variables affect growth.

When attracting FDI it should be directed to some specific sector where foreign investment is needed most to address and solve major issues in the host country.In order to maximize the positive impacts of foreign investment,government of Djibouti should verify that the existing policies, regulations and institutions are adequate, and consultations with all stakeholders.For further empirical studies, it will be interesting to study how FDI inflow contributes to economic development in Djibouti.

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