East Africa: Djibouti looks to Ethiopia to assess its economic future

President Guelleh’s controversial fifth term is more likely to be tested by regional challenges than national ones.

Djiboutian President Ismaïl Omar Guelleh, in power for 22 years, won a fifth term with 98% of the vote. The country’s political opposition criticized the April 9 electoral process for its lack of transparency and fairness.

Guelleh’s new mandate is not expected to face significant internal challenges. And the international community shows little interest in Djibouti’s lack of democratization. Political opposition is weak due to a repressive state and therefore cannot constructively challenge the government. Freedom of the press as a platform for alternative public opinions and criticism of the authorities is also lacking.

However, it will not be easy for Guelleh. Its leadership may face economic constraints due to recent regional changes, particularly related to its main financial partner – Ethiopia. These developments could aggravate internal socio-economic grievances.

Guelleh’s leadership faces economic constraints due to changes related to its key partner, Ethiopia

Djibouti’s economy and 85% of its gross domestic product is based on the service sector, which includes port, logistics and related services. This sector revolves around the country’s strategic location as a transit point for the Red Sea on the world’s busiest shipping lanes connecting Europe, the Middle East and Asia. Its geopolitical location, coupled with the global war on terrorism and piracy in the waters off the Somali coast, has also made Djibouti a prime location for foreign military bases.

But all of this could be disrupted by changes in the economy of its biggest customer – Ethiopia. Djibouti has been the main seaport for imports and exports to and from landlocked Ethiopia since 1999.

A country of 112 million inhabitants, Ethiopia relies on Djibouti’s port and transport infrastructure for 95% of its maritime trade. According to the World Bank, in 2013, 85% of Djibouti’s port activities came from Ethiopia’s import and export transactions. Little has changed since, with Ethiopia contributing substantially to Djibouti’s overall economic growth.

Any disruption to the Ethiopian economy will hurt Djibouti. At the same time, Djibouti’s stability is essential to Ethiopia’s economic well-being, indicating the interdependence of the two countries in the Horn of Africa, both economically and in terms of security. Given their ties, two regional developments could harm Djibouti’s economy if they slow down financial contacts with Ethiopia.

The first potential problem is political instability in Ethiopia. Beyond the negative effects of COVID-19 on Ethiopia’s trade in 2020, political disruptions associated with recent social unrest will weaken its economy, at least in the short term.

The ethnic violence spread across the country, and the subsequent destruction of business properties and internal displacement, mean that the government will struggle to implement its 10-year development plan that guarantees private sector-led growth. In this uncertain economic environment, risks are increased and investments are likely to decrease.

The upheavals linked to the recent conflict in Tigray are also putting pressure on the Ethiopian economy. If instability in the northern part of the country persists, trade uncertainty will increase and trade and transactions will suffer. Overall, the crisis will have a negative impact on economic growth by reducing foreign direct investment, tourism and exports.

This in turn will reduce Djibouti’s economic prospects in the short term. According to the International Monetary Fund, Djibouti experienced a 1% slowdown in its economic performance in 2020 but is expected to grow by 6% in the coming years. However, this forecast is based on Ethiopia’s rapid expansion of trade and private investment – which now seems unlikely. Concerns about the effects on Djibouti’s economy are shared by the country’s finance minister, Ilyas Dawaleh.

Ethiopia depends on Djibouti’s port and transport infrastructure for 95% of its maritime trade

The second regional development that could affect Djibouti concerns Ethiopia’s policy of diversifying its port connections. Ethiopia is aware of the danger of relying on a single outlet, as evidenced in the 1990s, when it went to war with neighbor Eritrea – then Ethiopia’s main route to the sea. This war from 1998-2000 led Djibouti to become Ethiopia’s main outlet for its trade.

The Ethiopian government bought a 19% stake in the port of Berbera in Somaliland to diversify its maritime outlets. Developments are also underway to use the ports of Massawa and Assab in Eritrea. And Ethiopia has expressed interest in Port Sudan in Sudan.

Ethiopia’s rapprochement with Eritrea and the possibility of using the latter’s ports could help Ethiopia to diversify its maritime opportunities. Construction of the Melodoni-Manda-Bure road project, which connects Ethiopia to the Eritrean port of Assab and serves as an alternative route to the Ethiopian foreign market, officially started in January.

Djibouti has a major advantage over its regional port competitors but Ethiopia is looking for alternatives

Another option is the port of Berbera in Somaliland. In March 2018, Dubai Ports World, the Somaliland administration and Ethiopia signed a shared port management agreement, with Ethiopia holding a 19% share. The port is under development and expansion, with a road under construction between the port and Ethiopia.

Djibouti currently retains a significant infrastructural advantage over its potential port competitors in the region. But its port services have become expensive over the years and could lead Ethiopia to seek alternative options. This could have an impact on Djibouti’s economic performance in the medium and long term.

Instability in Ethiopia, associated with its diversification of port outlets, could jeopardize Djibouti’s economic prospects during Guelleh’s fifth term. With high unemployment and high cost of living, new financial pressures could pave the way for socio-economic grievances. Djibouti’s new administration will have to take these threats into account to avoid instability in the country.

Selam Tadesse Demissie, Research Officer, Security Analysis in the Horn of Africa, ISS Addis Ababa

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