Djibouti's economic recovery hangs in the balance as it remains contingent on the situation in the Red Sea and evolving developments in neighboring Ethiopia.
A statement released by the International Monetary Fund (IMF) on January 26, 2024 following the end of an IMF staff mission highlighted the significant risks posed by these factors and their potential impact on Djibouti's economic trajectory.
Djibouti's strategic location and its role as a key transit hub for Ethiopia have been instrumental in driving its economic growth. However, the conflict in Ethiopia has raised concerns about the stability of Djibouti's economy.
The IMF warns that the outcome of the conflict in Ethiopia and its spillover effects into the Red Sea region could have far-reaching implications for Djibouti's economic recovery.
"Staff projects that the recovery will continue in 2024, albeit at a lower pace, and subject to significant risks stemming from the situation in the Red Sea and developments in Ethiopia," said Joyce Wong who led the mission.
The shocks of the COVID-19 pandemic, the conflict in Ethiopia, and rising commodity prices have further exposed the vulnerabilities in Djibouti's growth model, leading to decreased revenues and a shrinking fiscal space.
To address these risks and ensure long-term stability, the IMF team stressed the importance of Djibouti undertaking comprehensive reforms.
"The uncertain regional context stresses the need for Djibouti to strengthen its resilience by overhauling its growth model, building fiscal buffers and enhancing governance," Wong added.
One of the primary concerns highlighted by the IMF team is Djibouti's mounting debt, which stood at a worrisome 68 percent by the end of 2022.
While the country's GDP witnessed an average growth rate of over 6 percent between 2013 and 2019, the team raised concerns about the lack of commensurate employment opportunities.Â
The IMF team also emphasized the need for Djibouti to strengthen its State-Owned Enterprises (SOEs) and the Sovereign Wealth Fund as vital contributors to inclusive growth. This entails implementing the Code of Good Governance for SOEs, ensuring transparent financial reporting, and developing a clear dividend policy based on mutually agreed performance parameters.