The International Monetary Fund (IMF) projects Djibouti’s economy to rebound next year following the Ethiopian truce.
The IMF’s latest forecast predicts Djibouti’s growth will slow to 2.2% this year from nearly 5% in 2021.
The country has invested heavily in infrastructure connecting Ethiopia to global markets, driving growth to an average of 6.2% over 2013–19, before the COVID crisis.
“With investments centered on capital projects, however, few jobs have been created and unemployment remains high,” IMF Expert Brett Rayner said on Friday.
“Most investments have been financed by state-owned enterprise (SOE) borrowing, exacerbating vulnerabilities from a narrowing tax base.”
The expert said Djibouti’s external public debt rose from 34 percent of GDP in 2013 to 72 percent in 2021, with SOEs accounting for most borrowing.
Brett led IMF’s team led a team of IMF experts who concluded their Article IV Mission to Djibouti on Thursday.
The mission observed that a series of external shocks have weighed heavily on the economy and added to already significant budget pressures as debt service has tripled.
IMF’s team leader Brett said the conflict in Ethiopia particularly “weighed heavily on Djibouti’s economy”.
“The conflict saw renewed fighting this year, driving a further fall in port traffic after an already weak 2020 and 2021,” Brett said.
In addition, higher commodity prices and regional drought have eroded households’ purchasing power and further reduced government revenue.
Accordingly, the IMF experts say growth is expected to slow to 2.5 percent and the trade balance is projected to worsen in 2022.
“A truce agreed in November in Ethiopia could allow for a recovery in trade, reversing recent declines in port activity and help attract new foreign investment,” Brett noted.
Staff projects that economic growth in Djibouti will recover in 2023 with a rebound in Ethiopia, and inflation would fall in line with international trends.
“Djibouti’s key challenge is to adjust its growth model to reduce dependence on debt-financed investments while supporting an inclusive recovery from a series of external shocks,” the team leader added.