After Ethiopia and Eritrea fell out in 1998, Djibouti’s ports became landlocked Ethiopia’s only outlet and a critical lifeline for exports and imports to meet its energy and food security needs, turning the tiny country into the Horn of Africa’s (HoA) dominant transshipment hub. In the early 2000s, Djibouti turned its geostrategic location at the entrance of the Red Sea, bridging the Middle East and North Africa (MENA), East Africa, and key maritime trading routes to Europe, into a cash cow, renting space to competing superpowers to host their military bases. This gave rise to a booming local service sector dominated by shipping, freight, and telecoms. Djibouti’s port handles 95% of inbound and outbound trade from Ethiopia, earning more than $1 billion in port fees per year from Ethiopia alone. This makes Djibouti the dominant port service provider in the HoA and a major player in the Red Sea.
However, it is not without competition, and Somaliland’s port of Berbera and the Berbera Corridor connecting to the hinterland of Ethiopia have emerged as a serious potential rival, making it the most valuable real estate in the region. Despite being not internationally recognized, the Somaliland government has capitalized on its geostrategic location, striking lucrative deals with DP World, which invested more than $442 million, and Transfigura, which invested an undisclosed amount to supply oil and gas, including in port infrastructure, to tap into Ethiopia’s growing hydrocarbon demand, increasing by over 9% per year. This has made Berbera port an alternative fuel supply source for cargo ships passing through the Suez Canal and a potential rival transshipment hub. This threatens Djibouti’s services sector, which is driven by shipping and freight logistics to Ethiopia, accounting for 76% of its GDP. Moreover, to the south of Ethiopia, the newly completed Lamu Port in Kenya and the Lamu-Southern Sudan-Ethiopia Transport (LAPSSET) regional interconnection project, which would serve the hinterlands of Kenya, South Sudan, Uganda, and Ethiopia, is expected to reduce Djibouti’s share of Ethiopian cargo by 10-15%, according to a World Bank report. Combined with the possibility that Berbera port could capture 30% of Ethiopia’s cargo volume, this would likely devastate Djibouti’s economy.
In addition, Djibouti depends heavily on electricity imports from Ethiopia, which account for up to 70% of its supply, and this dependency creates an energy security risk for its economy as well. In May 2019 the Ethiopian government stopped exporting electricity to Djibouti and Sudan after the water level in the Gibe 3 Dam dropped, forcing Ethiopia to ration its domestic electricity use to manage local energy demand. As a water-scarce country, Djibouti also heavily depends on importing water from Ethiopia — up to 104,000 cubic meters. The country faces a host of pressing challenges — climate change, water and energy security, the trade deficit, and high levels of debt — that are a clear and present danger to its future. This is why Djibouti needs a Plan B for what comes next after the presidency of its long-time leader, Ismail Omar Guelleh, in power since 1999.
Ethiopia’s leverage
In the late 1990s and early 2000s, Ethiopian leader Meles Zenawi developed “hydropower diplomacy” based on a build dam first and negotiate later approach — not unlike shoot first and ask questions later — taking advantage of Somalia’s weak government that was still recovering from the Ethiopian invasion and Kenya’s political passivity and “good neighborhood” conduct. In an effort to expand Ethiopia’s power and influence in the HoA, Zenawi pursued an aggressive geoeconomic strategy, building dams to generate electricity with an eye to exporting it to neighboring countries, among them Djibouti, to earn steady revenues and gain leverage over downstream users’ energy and water security. In 2011, Djibouti, a net energy importer, linked up with Ethiopia’s electricity grid, importing 60 MW to reduce its high energy costs and reliance on fossil fuel imports. But the cheap electricity from Ethiopia carried through an transmission line came with a caveat: The power purchase agreement between Djibouti and Ethiopia is on a “best-effort basis,” which means Ethiopia only exports electricity to Djibouti when the dams generate a surplus, making it unreliable and ultimately unsustainable.
Djibouti’s poor electricity infrastructure has improved since the days of Guelleh’s predecessors, and the current electricity access rate is around 61% with per capita electricity consumption of around 330 kWh, almost two to three times higher than Kenya and Ethiopia. However, the unit electricity cost is close to $0.35/kWh, almost the same as Mogadishu and nearly twice as expensive as Kenya. This high electricity cost is due to the unreliable and intermittent power supply from Ethiopia, a lack of oil refineries, aging power generators with high maintenance costs, and dependence on imported fossil fuels (which account for around 30% of supply).
Djibouti’s decision to integrate its electricity grid into Ethiopia’s unreliable hydropower national grid comes with significant risks, as climate change frequently impacts the dams’ water levels, exacerbating the country’s existing energy shortfalls and forcing Ethiopia to ration its domestic energy supply and halt electricity exports to its neighbors. Ethiopia’s hydropower unreliability also affected the efficiency of the Addis Ababa-Djibouti Railway (ADR) link; it was originally designed to reduce travel time from three days to 12 hours and run three freight trains per day, but because of repeated power interruptions neither the travel time, nor the number of freight trains, nor the revenues have been realized to date. During the ADR project bidding, all the contractors, both American and Chinese, initially submitted tenders for a diesel-fueled railway system that was efficient and less costly. However, the Ethiopian government insisted on electrifying the railway with clean energy from hydropower to be environmentally friendly, which not only increased the project cost but also caused delays, forcing both Ethiopia and Djibouti to incur project payments while the railway was not in service.
Similar problems have also affected water projects. The Ethiopia-Djibouti water pipeline project, which carries water from Adigala town in Ethiopia via the rugged terrain of eastern Ethiopia, was intended to supply 100,000 cubic meters of water per day to three major cities in Djibouti and the capital, but this too was hindered by power shortages. All of these issues eventually came to a head. Djibouti’s failure to take into consideration the risks associated with its cross-border energy interconnection with Ethiopia and Addis Ababa’s leverage over its energy and water security, as well as its loss of millions of dollars in revenues from the ADR line, the hydropower grid connection, and the transboundary water project, even while paying millions of dollars in debt service on these three projects, forced Djibouti to restructure its debt for the first time.
China’s Belt and Road Initiative and concerns over development exploitation
China has a geostrategic and geoeconomic interest in Djibouti to protect its maritime trade routes, and thus its energy security, and to gain geopolitical influence in the HoA, MENA, and Asia. In addition, given China’s new military base in Djibouti, the country’s ports give its naval forces an advantage, aiding Beijing’s efforts, through the Belt and Road Initiative (BRI) and Maritime Silk Road (MSR), to dominate global maritime trade through chokepoints connecting the Gulf of Aden and the Suez Canal.
China’s geostrategic interest in Djibouti comes with dividends, including access to Djibouti’s ocean resources — the so-called blue economy. Despite China’s claims that it uses its military base to escort its maritime trade cargo to protect its ships from terrorism and piracy, China’s illegal fishing and illicit activities in the Djibouti sea are well documented. Worse, China has not signed the Port State Measures Agreement (PSMA), an international agreement targeting illegal, unreported, and unregulated fishing. In effect, this gives it unconstrained access to exploit Djibouti’s scarce fishing resources.
China is also pursuing the telecom sector in Europe using Djibouti as a gateway, building the Pakistan and East Africa Connecting Europe (PEACE) fiber-optic cable, which will use Huawei 5G technology. This threatens the existing Djibouti DARE1 fiber-optic cable project and future expansion of its telecom sector targeting South-South economic development.
According to the America Enterprise Institute Global Chinese Investment Tracker, China has invested $24 billion in Ethiopia, mainly in the infrastructure and power sectors, from 2005 to 2020, compared to $1.7 billion in Djibouti. Thus, it seems Djibouti has failed to capitalize on its geostrategic and economic importance from an investment and job creation perspective. This was perhaps most evident when China North Industries Group (Norinco) allowed Ethiopia’s state-owned Metals and Engineering Technology Company (METEC) to assemble all of the rolling stock (railroad wagons) for the ADR line in Ethiopia, including the Djibouti segments, meaning Djibouti citizens lost out on the associated technology transfer and employment opportunities.
Despite being a minority owner of the ADR line, Djibouti failed to assess and monitor the risks and substantial hidden costs of the project, including those stemming from ethnic conflicts along the Ethiopia segment, railway theft, and railway blockades due to local grievances, especially by those who lost their livestock as a result of train collisions. The latter was a particular problem in a large, unfenced segment of the line within Ethiopia as the Ethiopian Railway Cooperation (ERC) prioritized delivery speed, mainly driven by Chinese contractors’ incentives, to save on project costs. This created constraints such as reduced speed and operational problems with the ADR line in Ethiopia and Djibouti, including project delays.
Unsustainable rentier economics
While Djibouti benefits from its geostrategic location, its natural resources, such as mineral salts and gypsum, are trivial. It is a rentier state with an economy overwhelmingly focused on services; non-tradable goods account for 89% of GDP, depriving Djibouti of the ability to pursue import substitution and forge a sustainable path to industrialization. Its rentier economy faces many challenges to sustainability due to regional geopolitical dynamics and superpower competition; for starters, it will likely continue to rely on its foreign military bases as a major source of income for the foreseeable future. They currently earn it around $300 million annually for hosting facilities from countries as varied as the U.S., China, France, Saudi Arabia, the UAE, and Japan, among others. However, China owns 70% of Djibouti’s debt, 23.5% of Port of Djibouti, and is the financier of the majority of the country’s infrastructure. Ethiopia has plans that may call all of this into question though. Currently central to Djibouti’s GDP, Ethiopia is now reducing its dependency on Djibouti’s ports and has been planning since 2010 to shift 30% of its cargo to Somaliland’s Berbera port.
Only 0.04% of Djibouti is arable land, and as such, the country relies heavily on imported food. Despite having the highest GDP per capita in the HoA of $3,415 and robust GDP growth, Djibouti faces considerable economic problems: pervasive high unemployment of above 60%, poverty of around 70%, an unsustainable debt burden, limited progress, and a lack of job opportunities, social welfare investment, and a sustainable strategy to diversify its economy.
While giving an interview to The Washington Post, Djibouti Foreign Minister Mahamoud Ali Youssouf said without any remorse, “Yes, our debt to China is 71% of our GDP, but we needed that infrastructure.” It’s understandable that cash-strapped Djibouti has no choice to but seek Chinese soft loans to invest in infrastructure that has a positive economic impact, but this has also burdened the country with considerable debt. Djibouti politicians and elites seem to believe that the bilateral relationship with Beijing and Chinese investment will turn their country into “the Singapore of Africa.” The reality on the ground is far different, but to be hopeful and have ambition is better than having no vision at all. Djibouti government officials make matters worse, however, by refusing to admit the true extent of the challenges facing the local economy. They use a scapegoating strategy to counter international criticism and avoid admitting that 60% of service sector revenue, led by the telecom sector, is generated by Djibouti state-owned enterprises (SOEs) due to their monopoly status. Prices are higher than other regional markets as a result of the lack of competition, and this discourages both the private sector and foreign direct investment.
Life after Guelleh
Guelleh became the country’s leader in 1999, replacing his uncle, who hand-picked him to serve as his successor. The transition couldn’t have come a better time: almost one year after the Eritrea-Ethiopia war broke out, as Ethiopia shifted its import and export trade through Djibouti ports, saving the devastated local economy that was recovering from the Djiboutian civil war between the Afar and Issa tribes. At the time, Djibouti also saw an influx of refugees fleeing from Somalia, overwhelming the country; perhaps this motivated Guelleh to initiate the first Somali peace national conference in 1999, bringing all the warring parties together. Guelleh thus played a crucial role in making lasting peace in Somalia, which led to the formation of the Somalia Transitional National Government in 2000.
In 2001 at the start of the war on terror, the U.S. military set up a base in Djibouti as the first major superpower tenant, paying $63 million annually; combined with revenue from France’s military base, this enabled Djibouti to stabilize its economy, with the rent base accounting for 18% of its GDP. Under Guelleh, Djibouti appealed to the international community to invest its infrastructure and partner from a geoeconomic perspective as well, as opposed to just a geostrategic one. This created an opportunity for China to engage Djibouti with soft power by building hospitals, government buildings, and providing aid, totaling $16.6 million. With no other countries coming to help or to invest, Guelleh chose to mortgage Djibouti’s assets to finance its infrastructure development, including the telecom and power sectors. With Ethiopia’s population increasing, and thus too its need for imports to meet the demand for food and energy, and Djibouti the only outlet, the country’s GDP growth increased from -3.4% in 1998 to 5.4% in 2008. Under President Xi Jinping from 2012 to 2020, China ramped up its investments as part of the MSR and BRI, including funding the Djibouti industrial park zone and gas projects.
Although living standards improved and Djibouti developed into the HoA’s transshipment hub under Guelleh, this came at a cost, as the political democratization space was frozen for almost 21 years and all institutions became centralized. The opposition and democracy advocates are patiently waiting for Djibouti’s transition into a democracy, and the Djibouti government has started discussions on such a transition, according to one Guelleh advisor. As President Guelleh was recently re-elected to his fifth term and the constitution limits the president’s age to 75, giving him three more years, perhaps it’s time for Djibouti to prepare its institutions and citizens for the transition to democracy, just like Kenya.
Geopolitically and geoeconomically, Djibouti is at a crossroads between the West and China. In the face of rising competition with the U.S. under the Trump and Biden administrations, Beijing is pursuing a so-called “dual circulation” strategy, involving a greater focus on the domestic market and self-reliance coupled with careful expansion abroad. As a result, China has reduced its investment in Africa, which could have a huge impact on Djibouti’s long-term financing and trade.
Although China has allowed Djibouti to restructure its railway and water supply project loans totaling $700 million, which is a departure from the usual perception of Beijing’s “debt-trap diplomacy,” Sens. Chris Coons and Marco Rubio sent a letter to then-Secretary of State Mike Pompeo in November 2018 laying out their concerns over a potential Chinese takeover of Djibouti’s ports. However, despite the restructuring, Djibouti’s debt burden remains substantial and it must manage it carefully to avoid the risk of default, like Zambia and Sri Lanka.
Djibouti’s Plan B roadmap
Djibouti needs to have a Plan B to deal with the impact of climate change, regional geopolitical dynamics, and its transition to democracy with an eye to managing its soaring debt and overreliance on Ethiopia’s unreliable energy exports and building up its human resources for the next generation. To do all of this will require laying out a concrete road map, including the following steps:
- Deregulate SOEs. Djibouti has performed poorly in the ICT sector, despite its geostrategic location for global fiber-optic lines and its role as the main supplier to Ethiopia, Yemen, Somalia, and Somaliland. Consider selling a 50% share in the SOE telecom sector to the private sector to modernize and increase internet and mobile penetration access and know-how. If improved, the sector could have a significant impact on economic growth, job creation, innovation, and poverty reduction. Good examples of this include Brunei, Bahrain, Cape Verde, etc.
- Consider negotiating debt with China by restructuring the majority of Chinese loans through natural resource- or asset-backed loan arrangements and selling part of the debt to a private consortium led by local and foreign private investors. This was done by the U.S. government all the way back in 1795 to preempt foreign dependence, and this same approach will help Djibouti to build its credit rating, which would attract more investment and reduce its risk exposure to one country.
- Djibouti is democratizing energy supply at the production level through independent power producers to harness energy from a 60-MW wind farm and a 50-MW geothermal plant in the Ghoubet area, near Lake Assal, which should significantly reduce the cost of electricity and boost energy access. However, deregulation of the SOE utility Electricité de Djibouti (EDD) is a must to address poor management, poor record-keeping and tariff collection, lack of technical capacity and human resources, combined with a monopoly over transmission and distribution of the electricity; otherwise EDD will hinder the success of Djibouti’s energy transition. It should renegotiate the ADR line debt with China and push Ethiopia to convert its electrified railway system to fossil fuel or seek compensation for the revenue fall due to climate change risk that causes power distributions from Ethiopia, including the failure to improve railway performance per the original design. It should also consider partnering with Power Africa for energy development through grants and debt-equity and the U.S. International Development Finance Corporation for infrastructure and production sector diversification.
- Rather than seeing Somaliland as a regional competitor and politicizing fruitless Somalia-Somaliland talks, take a bold and giant step and advocate for Somaliland’s recognition through the African Union and the U.N. before other Intergovernmental Authority on Development (IGAD) countries, such as Kenya, recognize it. In addition, invest in Somaliland’s energy, trade, and water resources to hedge against climate change and move away from dependence on Ethiopian water as a geopolitical and geoeconomic dividend in the future.
- Diversify the economy, which is currently driven by the service sector, into a production-based economy by investing in higher education (including technical schools), incentivizing partnerships with foreign universities to open branches in Djibouti, and building an industrial park zone that targets high-end technology demand manufacturing for Africa and the EU, such as solar and wind power, cell phones, and electronics, agricultural machines and inputs, leather processing, mining, and chemical processing. Modernize investing in the finance sector by partnering with African fintech pioneers like Kenya’s Safaricom to elevate conventional Djibouti financing to global digital financing and technology standards.
The West has to understand a couple of things about Djibouti’s debt and its bilateral relationship with China: When Djibouti opened its doors for international investment, nobody showed up or had a keen interest in investing, except to rent its assets, thus it had no choice but to seek out China, which gave them a hand and helped save the country from an economic death spiral. China did not impose itself on Djibouti or aim to trap it in debt, as is often portrayed by Western media and governments. Djibouti merely took out manageable loans to invest in its national infrastructure with the aim of becoming self-reliant, instead of relying on West food aid for decades or military aid that has only driven a cycle of war in the HoA. It’s worth noting that it took the U.S. government more than two decades to pay back the loans it took out from France to finance the War for Independence against Britain — and it defaulted several times in the process.
The pandemic has had little effect on Djibouti’s economy and GDP is expected to grow above 6% per World Bank figures, mainly driven by shipyard building projects and the construction of an floating oil refinery project that will make Djibouti a leader in energy-smart management in East Africa.
The U.S. and EU countries should partner with Djibouti, assist in its transition to democracy like Taiwan and Kenya, and help facilitate the diversification of its economy, following the example of the Marshall Plan or the Taiwanese economic miracle. Doing so will enable them to truly compete against China in Africa, rather than merely sounding the alarm about the Chinese debt trap myth like a former colonial power.
By Guled Ahmed
Guled Ahmed is a non-resident scholar at MEI, a renewable energy and water infrastructure expert, and an entrepreneur. The views expressed in this piece are his own.
Source: mei.edu
