USITC STUDY ON EXPORT OPPORTUNITIES AND BARRIERS IN

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
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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
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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
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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
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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
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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
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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
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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
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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.