US embassy cable - 05DJIBOUTI191

UNCLAS SECTION 01 OF 03 DJIBOUTI 000191 
 
SIPDIS 
 
USITC FOR LYN SCHLITT 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EAID, ETRD, PGOV, PREL, DJ 
SUBJECT: USITC STUDY ON EXPORT OPPORTUNITIES AND BARRIERS IN 
AFRICAN GROWTH AND OPPORTUNITY ACT (AGOA) ELIGIBLE - 
COUNTRIES - DJIBOUTI 
 
Ref: State 8545 
 
1. Summary:  The Government of Djibouti (GOD) has not been 
able to benefit from AGOA to date due to a lack of developed 
industries.  After a decade of uncertainty, Djibouti's 
economy looks brighter as a result of the country's foreign 
policy and assistance from donors.  Djibouti has very few 
international and domestic barriers to increased export. 
Djibouti Free Zone and the project of Doraleh Port are 
expected to boost the export industry and offer 
opportunities for AGOA. End Summary. 
 
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ECONOMY, TRADE, AND INVESTMENT 
------------------------------ 
2. Djibouti was in a state of civil war from 1991 to 1994, 
which devastated the country's economy.  Along with war, a 
substantial decrease in foreign aid, in addition to an 
influx of refugees from neighboring countries, dealt a 
significant blow to the economy.  The International Monetary 
Fund (IMF) started assisting Djibouti in 1996 to help 
reverse negative economic trends.  The IMF began with a 
stand by program, which eventually resulted in an Enhanced 
Structural Adjustment Program (ESAF) in 1999.   The ESAF 
consisted of a three-year program to assist the GOD in 
developing its Poverty Reduction and Growth Facility 
Program.  In 2004, the IMF and the GOD agreed on a Staff 
Monitoring Program (SMP) designed to monitor the country's 
implementation of its economic program for a period of one 
year.  Finally, the IMF has been very instrumental in 
assisting Djibouti in drafting its Poverty Reduction 
Strategy Papers. 
 
3. The government of President Guelleh, in power since 1999, 
has initiated an aggressive foreign policy designed to 
attract foreign investment and foreign aid.  A round table 
held by Arab donors at the request of the GOD in 2000 
resulted in a USD 20 Million loan at a low interest rate for 
a five-year economic program geared at improvements in road 
infrastructure, education, water supply, energy and housing. 
The GOD also persuaded France to pay a yearly rent for its 
military presence in Djibouti.  The GOD welcomed a U.S. 
military presence in 2003 and has a lease arrangement with 
the U.S. military that brings in revenue. The GOD is also 
negotiating with the USG to renew this arrangement.  In 
addition, good relations between the GOD and the USG led to 
the re-opening of a USAID office, which is managing U.S. 
assistance in education, health, livestock and famine early 
warning. 
 
4. Ethiopia's conflict with Eritrea eventually caused 
Ethiopia to leave the port of Assab and move to the port of 
Djibouti for its shipping needs.  This situation greatly 
contributed to the development of the port of Djibouti, 
whose management was turned over to Dubai Ports 
International (DPI) in June 2000.  DPI has improved the 
port's operation by providing it with modern technical 
operations, better organization, and more accurate 
accounting, which helped bring the port of Djibouti up to 
international standards.  Management of the country's sole 
international airport was also handed over to DPI in 2002. 
As a result, Djibouti Customs, signed an agreement with 
Dubai Customs to develop and modernize its operations.  DPI 
and Emirates National Oil Company (ENOC) are investing in 
the project of the Port of Doraleh, which consists of an oil 
terminal, a container terminal and a free zone. The oil 
terminal is expected to be operational by June 2005. 
 
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Production Base 
--------------- 
5. Djibouti relies heavily on services for its economy, 
which accounts for more than 80 percent of its GDP. 
Djibouti has virtually no manufacturing industries.  The 
primary sector consists mainly of agriculture, livestock and 
fishing.  Only 10 percent of arable land is exploited 
yielding only enough to fulfill 10 percent of the country 
needs.  The livestock industry is not developed because of 
the hot and dry climate in Djibouti.  The number of 
livestock in Djibouti is estimated at around 1 million 
heads, consisting mainly of sheep and goats with smaller 
numbers of cattle and camels.  The secondary sector shows an 
electricity production of 263.73 Mwh in 2003 (Statistics for 
2004 are not yet available).  In 2003, water production was 
13.50 million cubic meters. Consumption was 8.87 million 
cubic meters. In addition, 4.6 million cubic meters were 
lost or wasted.  Marine salt production was 128,494 metric 
tons in 2003. 
 
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Regional integration and international agreements 
--------------------------------------------- ---- 
6. Djibouti is a member of the Intergovernmental Authority 
on Development (IGAD), which consists of seven East African 
countries.  IGAD focuses mainly on political issues related 
to member states, however its Economic Cooperation Division 
has been initiating some activities such as the 
harmonization of investment codes and business forums aimed 
at increasing imports/exports of member states.  Djibouti 
also belongs to the Common Market for Eastern and Southern 
Africa (COMESA), which includes nineteen African countries 
and offers a huge market of over 300 Million persons.  With 
the completion of its Doraleh Port project, Djibouti hopes 
to become a gateway to COMESA countries and serve landlocked 
countries such as Rwanda, Uganda and Malawi.  The adoption 
of a common external tax, which will foster exports/imports, 
is currently being discussed among member states.  Finally, 
Djibouti has several bilateral investment agreements, most 
notably with Ethiopia and Yemen, and also with Egypt, 
Malaysia, and recently India.  Other treaties include: the 
Partnership Agreement between the Members of the African, 
Caribbean and Pacific Group of States (ACP); the Agreement 
for the Promotion, Protection and Guarantee of Investment 
Among Member States of the Organization of Islamic 
Conference; and the Unified Agreement for the Investment of 
Arab Capital in the Arab States. 
 
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Government initiatives or incentive programs 
-------------------------------------------- 
The Government of Djibouti does not have special incentive 
programs to develop exports because the country lacks 
exportable goods.  However, the government promotes export 
through the Chamber of Commerce and Ministry of Trade and 
Commerce. Both the Chamber and the Ministry organize 
training workshops, trade shows, trips and other activities 
to increase export.  The government encourages the export of 
salt, fish, handicrafts and livestock.  The most important 
government initiative for promoting the export industry is 
the creation of the Djibouti Free Zone (DFZ) in 2004.   DFZ, 
which is operated by Jebel Ali Free Zone International 
(JAFZI), covers 17 hectares and offers plots of land, 
warehouse facilities and office units all for lease.  DFZ is 
governed by the Free Zone Code, which offers incentives 
including tax breaks, one stop shop and 100 percent foreign 
ownership.  Djibouti International Airport is also planning 
to establish a free zone within its premises to complement 
the planned Doraleh Free Zone.  Another government 
initiative is the Economic Funds for Development (EFD), a 
financial institution that offers financing at low rates to 
encourage entrepreneurship and creation of small industries 
for local consumption and export. Created in 2001, the 
National Investment Promotion Agency (NIPA) promotes foreign 
investment, facilitates investment operations and works on 
modernizing the regulatory framework.  NIPA also encourages 
and facilitates any foreign investment to develop export. 
 
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Export sectors 
-------------- 
Exports sectors are very few.  Djibouti Maritime Management 
Investment (DMMI) is currently developing the export of 
Djiboutian fish to Gulf countries.  DMMI, which is co-owned 
by foreign and national investors, enjoys the status of a 
free zone company.  DMMI is moving step-by-step by targeting 
the local market and moving to the Arabian Peninsula and 
other destinations at a later stage.  Djibouti's export salt 
sector is still at a rudimentary stage, with several 
companies installed in the vicinity of Lake Assal to extract 
salt with light machinery.  Some of this salt is exported to 
Ethiopia, which is the sole foreign outlet.   Small 
industries are lacking in Djibouti; however, DFZ and the 
planned large Doraleh Free Zone are expected to become the 
most significant venue for industries destined for export. 
 
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Export developing Investment 
---------------------------- 
The major investment intended to boost export remains 
Djibouti Free Zone and the project of Doraleh port.  Dubai 
is investing 400 Million USD in the Doraleh project to build 
an oil terminal, a container terminal and a free commercial 
and industrial zone.  The oil terminal with a total cost of 
100 Million USD is expected to be operational in June 2005. 
Many businesses in Djibouti have offices in neighboring 
countries such as Somaliland, Ethiopia and Yemen.  Goods 
coming to Djibouti are re-exported to these countries. 
 
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EXPORT PROCESSING ZONES 
----------------------- 
A law regulating export-processing zones (EPZ) was created 
in 1994.  Any company producing goods exclusively for export 
purposes is eligible to receive the status of Export 
Processing Company (EPC).  A commission made up of 
representatives from several ministries, studies 
applications and determines the eligibility of a given 
company.  EPCs are eligible to receive incentives such as 
tax breaks for the first ten years of operation and, since 
1995, EPCs may settle anywhere in Djibouti.  It is important 
to note however, that with the development of free zones in 
Djibouti, EPZ is less and less attractive. 
 
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Domestic or international barriers 
--------------------------------- 
The most important international barrier to increased export 
is the ban on livestock imports from the Horn of Africa by 
Gulf countries and Saudi Arabia in particular. The 
development of a livestock holding facility by USAID, due to 
come on line in June 2005, is expected to end the barrier. 
Djibouti enjoys good infrastructure and have road links or 
plane connections with all the neighboring countries but 
there are a few local impediments.  The prohibitive cost of 
electricity in Djibouti is a discouraging factor for export 
industries.  Also, Djibouti's legal system is not 
transparent and is based on French law, which is complex. 
Government interference in the court system is common.