2005 INVESTMENT CLIMATE STATEMENT - DJIBOUTI

UNCLAS SECTION 01 OF 04 DJIBOUTI 000103

SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EAID PGOV DJ
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT - DJIBOUTI


1. Summary: Lacking natural resources, Djibouti's economy is
service-based, with the country's seaport and a railroad
linking it to Addis Ababa accounting for the bulk of
economic activity. Almost all food and many other goods are
imported from Ethiopia, the Gulf, or France. The services
and commercial sectors account for 85 percent of GNP.
Telecommunications are reliable, but expensive. Obstacles to
foreign investment include bureaucratic apathy, corruption,
labor cost and a very slow judiciary system. End Summary

Openness to Foreign Investment
--------------

2. The government of Djibouti recognizes the crucial need of
foreign investment for the economic development of the
country. Djibouti's assets include a strategic geographic
location, an open trade regime, a stable currency,
substantial tax breaks and other incentives. Potential
areas of investment include Djibouti's port, tourism,
manufacturing and telecom sectors. President Ismail Omar
Guelleh has placed privatization, economic reform, and
increased foreign investment as top priorities for his
government. The president has pledged to seek the help of
the international private sector to develop the country's
infrastructure.


3. Djibouti has no major laws that would discourage
incoming foreign investment. In principle there is no
screening of investment or other discriminatory mechanisms.
Certain sectors, most notably public utilities, are state
owned and are not currently open to investors. IMF
requested privatization as a condition for structural
adjustment, which led to contracts with Dubai Port
International, for the management of the Port of Djibouti
(in 2000) and Djibouti International Airport (in 2002).
Djibouti Telecom was also handed over to private management
to prepare it for an eventual privatization, and although it
is not yet privatized, the Railway Company, has already
identified several potential investors. Finally, in April
2004, the Government of Djibouti conceded its fishing port
to a private firm, Djibouti Maritime Management Investment
(DMMI).


4. Created in 2001, the National Investment Promotion
Agency (NIPA) promotes investment, facilitates investment
operations and works to modernize the country's regulatory
framework. The NIPA has been mandated the task of
encouraging and facilitating foreign investment by assisting
with all administrative procedures. Its ultimate goal is to
serve as a one stop shopping center for investors who
currently have to deal with several ministries located at
various sites in a process with no inter-agency
coordination. The NIPA identifies tourism and manufacturing
as priority sectors for investment.


5. In 2004, the Ministry of Finances reduced taxes on some
products to encourage business sector growth. Automobile
spare parts and recording or image producing electronic
devices are subject to 8 percent taxes (instead of 33
percent) while taxes on electical, plumbing or sanitary
material decreased to 20 percent fom 33 percent. Heavy
construction engines and raw cloth are now liable to 8
percent taxes, instead of the previous 20 percent. These
tax reforms are meant to promote growth of the construction
sector, transportation and textile industry.


6. The most important direct foreign investment in Djibouti
remains the project of the Port of Doraleh, which is
estimated at a worth of US$400 million upon completion.
Located 8 kms east of the current seaport, the Doraleh
Project is intended for third generation container ships and
includes an oil terminal, a container terminal and an
industrial and commercial free zone financed by Emirates
National Oil Company (ENOC) and Dubai Port International
(DPI). The first phase of the project, the oil terminal, is
already nearing completion. It consists of jetty for
tankers and several storage tanks of around 50,000 cubic
meters capacity each. A Brazilian company is involved in the
construction of the Berth and an Italian company is
constructing the storage tanks.


7. Djibouti belongs to a number of regional integration
groups and actively promotes the seven-member Inter-
governmental Authority on Development (IGAD). It is also
part of the Common Market for Eastern and Southern Africa
(COMESA),which groups 19 countries into a common market of
more than 300 million. Djibouti is an eligible member of
the African Growth and Opportunity Act (AGOA),which grants
advantageous access to the United States market. In
addition, Djibouti is among the 34 African least developed
countries that have the option of entering the European
Union Generalized System of Preferences and is a member of
the World Trade Organization (WTO).

Conversion and Transfer Policies
--------------

8. Djibouti has no foreign-exchange restrictions. There are
no limitations on converting or transferring funds, or on
the inflow and outflow of cash. The Djibouti franc, which
has been pegged to the U.S. dollar since 1949, is stable.
The fixed exchange rate is 177.71 Djibouti francs to the
dollar.

Expropriation and Compensation
--------------

9. Djibouti Investment Code stipulates "no partial or total,
temporary or permanent expropriation will take place without
equitable compensation for the damages suffered". The
Embassy is not aware of any recent act of expropriation or
compensation related to foreign companies. Given the
government policy of promoting private investment, none are
expected either.

Dispute Settlement
--------------

10. Djibouti's legal system is based on French law. It
consists of three different levels: 1) the First Court
("Premire Instance") where a single judge rules; 2) the
Appeals Court ("Cour d'Appel") presided over by three
judges; 3) the Supreme Court (Cour Suprme ) mandated to
review the proper application of the law in a given trial.
The Supreme Court reopens the trial if irregularities are
discovered. The system is complex and far from transparent.
Government interference in the court system is common.
Djibouti has written commercial and bankruptcy laws, but
they are not applied consistently. Foreign companies in
Djibouti complained about lengthy and biased court
deliberations. Judgments by foreign courts are in principle
accepted by Djiboutian courts. According to the Ministry of
Justice, Djibouti is a member of the International Center
for the Settlement of Investment Disputes because any
international agreement signed by France before Djibouti
gained independence in 1977 is automatically binding in
n
Djibouti. The Chamber of Commerce of Djibouti is planning
to set up a Regional Mediation Center, which is designed to
settle commercial disputes in a timely and transparent
manner.

Performance Requirements/Incentives
--------------

11. Performance requirements are not a pre-condition for
establishing, maintaining, or expanding foreign direct
investments. Incentives do, however, increase with the size
of the investment and the number of jobs created. Tax
benefits and incentives fall under two categories detailed
in the investment code. Investments greater than $280,000
that creates a number of permanent jobs are entitled to
exemption from license and registration fees, property
taxes, taxes on industrial and commercial profits, and taxes
on the profits of corporate entities. Imported raw
materials used in manufacturing are exempted from the
internal consumption tax. These exemptions apply for up to
a maximum of ten years after production commences.
Investment matters fall under the jurisdiction of the
national investment board, which approves all investments.


13. Djibouti offers significant incentives to private-
sector individuals and corporate investors. The Djiboutian
investment code guarantees investors the right to freely
import all goods, equipment, products, or material necessary
for their investments; display products and services;
determine and run marketing policy and production; choose
customers and suppliers; and set prices. Foreign investors
are also free to determine their own hiring and firing
policy as long as it remains within the structure of the
labor code. A new Labor Code is being finalized to replace
the current document, which dates from the French colonial
era of 1952.

Right to Private Ownership and Establishment
--------------

13. Djiboutian laws guarantee the rights for foreign and
domestic private entities to establish, own business
enterprises and engage in all forms of remunerative
activity. Legally established private sector companies have
the same access to markets, land ownership, credit, and
other business facilities, as do public enterprises.
Although restrictions on private enterprises are minimal,
competitive equality in regard to public enterprises, namely
public utilities, remains limited.

Protection of Property Rights
--------------

14. Most of the selling of pirated trademarks occurs in the
informal market, which represents an important part of the
trade in Djibouti. A large share of trade with other
countries is also done informally. Djibouti's legal system
inherited from the French officially protects the
acquisition and disposition of all property rights and
safeguards intellectual property, patents, copyrights,
trademarks, trade secrets, etc. In addition, Djibouti
ratified World Intellectual Property Organization (WIPO)
convention, Paris convention on the protection of industrial
rights, and Bern convention on the protection of literature
and art works. In reality, however, protection of property
rights is not enforced.

Transparency of the Regulatory System
--------------

15. Although the government makes efforts to adopt a
transparent policy to foster free enterprise, bureaucratic
obstacles and delays are often a problem.

Efficient Capital Markets and Portfolio Investment
-------------- --------------

16. Two large French commercial banks, Indosuez Bank (BIS)
and Bank for Commerce and Industry (BCI),dominate the
banking system. They account for most deposits but their
exposure to the economy is limited to mostly short-term
(trade) financing and lending. Credit is allocated on
market terms and foreign companies do not face
discrimination in obtaining it. However, generally only
well-established businesses obtain bank credit, as the cost
of credit is high. Both banks offer only a limited array of
financial instruments: letters of credit, money transfer,
and short and long-term loans.

Political Violence
--------------

17. Despite past human rights violations and political
imprisonments, no significant political violence was
reported during 2004, nor was any political opposition
figure arrested or detained. The government seems still
reluctant to welcome human rights groups and continue to
monitor independent unions who are often seen as part of
political opposition. One instance of significant police
abuse, which resulted in death of a mentally ill Djiboutian,
was reported in 2004. A legal investigation was launched
into the incident but no notable changes resulted.

Corruption
--------------

18. Corruption in Djibouti remains a constant encumbrance to
investment and business development. While the government
officially encourages foreign investment, pressure from
government officials to become "partners" with the investor
(with no or minimal contribution) and approaching the
investor for sub-contracts is common. Foreign businesses
complain that establishing an enterprise requires numerous
bribes. Also, many business owners chose to bribe Customs
Officers to evade taxes. In so doing, they encourage
corruption. Corruption poses a major problem in the Court
system and results in extreme mistrust by foreign investors.


19. While laws against corruption exist, they are rarely
enforced. Prosecution and punishment for corruption is
rare. Consequently, most people prefer to deal with
corruption issues on their own rather than involving the
bureaucratic legal system. The Chamber of Accounts and
Fiscal Discipline (CAFD),and the State General Inspection
have been established to address corruption. The CAFD has
the authority to verify and audit all public establishments
for transparency and accountability and take necessary legal
sanctions. The State General Inspection, another government
institution, is designed to complement the work of the CAFD
by ensuring that human and material resources in the public
sector are properly utilized.

Bilateral Investment Agreements
--------------

20. Djibouti has several bilateral investment agreements,
most notably with Ethiopia and Yemen but also with Egypt,
Malaysia and recently with 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; Articles of Agreement of the Islamic
Corporation for the Insurance of Investment and Export
Credit; and the Unified Agreement for the Investment of Arab
Capital in the Arab States.

OPIC and other Investment Insurance Programs
--------------

21. Djibouti is eligible for Overseas Private Investment
Corporation (OPIC) programs. OPIC offers up to US$400
million in combined financial and political risk insurance
to eligible U.S. investors.

Labor
--------------

22. A Law passed in 2000 makes the school compulsory
until the age of sixteen. Gross enrollment rates have risen
from approximately 38 percent in 1998 to approximately 53
percent in 2003. Vocational or professional training
facilities are few, which results in the major problem of
lack skilled labor. Employers have also commented that
production is low and that it is difficult to find educated
and experienced workers. The government remains the main
employer but American and French military forces in Djibouti
also engage an important number of local workers. By law,
all the employers have the obligation to provide social
security to their employees. The "Caisse National des
Retraites" handles the social security of government workers
with long-term contracts, and the "Organisme de Protection
Sociale" deal with the private sector and government
employees with short-term contracts. Due to the high cost
of living, wage levels in Djibouti are among the highest in
the region.


23. The Labor Code allows for employees to form labor
unions. It also provides guidelines on wages, overtime pay,
annual leave, sick leave, work schedules and holidays. A
new Labor Code was recently completed and is in the process
of being approved by the Parliament; however it is widely
contested by the labor unions, which feel that this document
gives more rights to employers at the expenses of workers.
Two large labor unions exist in Djibouti but the Djiboutian
Workers Union (UDT) is the most viable and is recognized by
the international organizations. The Government, which has
the mandate to act as a mediator between the unions and the
employers, regularly interferes with the internal affairs of
labor unions.

Foreign Trade Zones/Free Ports
--------------

23. In 1995 the entire country of Djibouti was designated a
free-export processing zone. Any company working exclusively
for export in the industrial sector is eligible for the
status of Export Processing Company (EPC). In addition,
local investors recently developed a free zone with a
capacity of up to 100 companies. This small free zone is
designed to be a small-scale experiment before establishing
the sizable Doraleh industrial and commercial free zone is
opened. The Doraleh free zone will cover 600,000 meters
squared in the first phase. The Airport, managed by DPI is
also planning to establish a free zone within its premises
to complement Doraleh Free zone.

Foreign Direct Investment Statistics (in US$ million)
-------------- --------------

24. The major Foreign Direct Investment (FDI) stays the
project of Doraleh, which is reflected in a peak increase in
FDI as indicated in the following statistics obtained from
the Central bank.

2000: 3.3
2001: 3.4
2002: 5
2003: 21.4