Djibouti’s Path to Fiscal Stability and Growth: Key Insights from World Bank’s Economic Monitor

The World Bank’s Djibouti Economic Monitor, Fall 2024 report offers a comprehensive look at Djibouti’s economic progress, fiscal challenges, and the country’s outlook for sustainable growth. Key areas of focus include fiscal policy reforms, debt management, infrastructure development, and strategies to reduce poverty and unemployment.

Djibouti’s Road to Fiscal Stability and Sustainable Growth

The latest Djibouti Economic Monitor from the World Bank paints a mixed but hopeful picture of the country’s economic trajectory. Highlighting recent gains and ongoing fiscal challenges, the Fall 2024 edition of the report delves into the economic drivers, fiscal obstacles, and sectoral recommendations for ensuring resilience and equity in the country’s finances. Here’s a closer look at the report's major findings and insights, emphasizing strategies to stabilize and expand Djibouti’s economy over the coming years.

A Rebound Fueled by Trade and Domestic Investment

Following a turbulent period impacted by regional and global disruptions, Djibouti’s economy staged an impressive comeback in 2023, achieving a robust GDP growth of 6.7%. According to the report, the uptick was largely driven by renewed demand from Ethiopia for port and logistics services—a key pillar of Djibouti’s economic structure. Domestically, the construction sector saw an upswing, as public infrastructure and private investment bolstered activity across the country. This revival was further supported by a drop in global inflation, complemented by government measures to stabilize essential consumer prices.

Fiscal Challenges and the Budget Deficit

However, the report highlights a major hurdle: a persistent budget deficit fueled by declining revenues and rising debt service costs. Djibouti’s tax revenues have not kept pace with its ambitious public expenditure, largely due to an array of tax exemptions that have reduced government income. As a result, the country has a structural revenue gap, with a deficit reaching 1.9% of GDP in 2023. The report emphasizes that managing this deficit will require increased domestic revenue and prudent fiscal strategies to bring spending in line with income.

Debt Relief and Strategic Borrowing

With public debt at a substantial 67% of GDP, debt management has become a priority for the Djiboutian government. Following the end of international pandemic relief, the need for sustainable debt servicing has become more pressing. Recently, Djibouti reached an agreement with China for temporary debt relief, which grants a four-year moratorium on a significant portion of its obligations. While this move offers temporary relief, the World Bank report underscores the importance of further restructuring efforts and limiting non-concessional borrowing. These steps are essential to avoid over-reliance on debt and ensure a healthier fiscal future.

Tackling Poverty and Labor Market Inefficiencies

Despite economic growth, Djibouti still grapples with high poverty and unemployment rates. The labor market struggles with a mismatch between available jobs and workforce skills, particularly among young people and rural residents. The report notes that the private sector remains underdeveloped, which limits job creation and leaves many without opportunities for stable employment. To address these challenges, the report calls for targeted labor policies and investment in skill development to better align the workforce with market needs.

Fiscal and Social Equity: Reforming Taxation and Subsidies

The report also highlights a need for equity in fiscal policies, particularly concerning the tax structure. While direct taxes tend to be progressive, benefitting lower-income groups, the Value-Added Tax (VAT) disproportionately impacts poorer households, adding strain to their already limited purchasing power. Additionally, current kerosene subsidies, although intended to assist low-income populations, end up primarily benefiting wealthier households due to higher consumption rates among the affluent. Revisiting these subsidies and restructuring them to ensure greater benefits for lower-income groups could enhance equity across the tax system.

Enhancing Efficiency in Public Spending: Focus on Road Infrastructure

The Economic Monitor dedicates a section to improving efficiency within the road sector—an area essential to Djibouti’s role as a logistics hub. Institutional reforms are recommended to streamline responsibilities and introduce better financing mechanisms for road maintenance and development. Key proposals include establishing a dedicated road fund and supporting local enterprises in road maintenance. These changes are intended to boost the efficiency and sustainability of public spending, ensuring infrastructure investments contribute meaningfully to Djibouti’s long-term economic competitiveness.

Medium-Term Outlook: A Promising but Fragile Growth Path

Looking ahead, the report projects a positive, albeit cautious, economic outlook for Djibouti, with annual GDP growth expected to stabilize at around 5.1% from 2024 to 2026. This forecast is supported by continued foreign trade and public works, which remain the primary growth engines. However, risks such as escalating public debt, regional instability, and climate-related challenges loom large. Addressing these risks will require a comprehensive approach, including measures to enhance revenue mobilization and improve the efficiency of public expenditures.

In conclusion, the Djibouti Economic Monitor, Fall 2024 by the World Bank presents a balanced view of Djibouti’s fiscal landscape. While there are challenges, especially in managing debt and increasing fiscal equity, the report provides a roadmap for sustainable growth and fiscal stability. By focusing on prudent debt management, targeted labor reforms, and sector-specific fiscal policies, Djibouti can pave the way for a resilient and equitable economy that benefits all its citizens.