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When Djibouti won its independence 38 years ago, the country was largely undeveloped. It faced many challenges when it came to governing. There were not many skilled workers to fill positions in civil service institutions. At the state level there were hardly any people with experience in the public sector to fill bureaucratic positions.
During the late 1970s, when Djibouti became independent, conflict was raging  between Ethiopia and Somalia, which border Djibouti.  
Mahamoud Ali Youssouf, Djibouti’s Minister of Foreign Affairs says this was a challenging time for the young nation.
“In 1977 when Djibouti became independent, the Ethio-Somali war was occurring and a few years later Mengistu Hailemariam, President of Ethiopia and Mohamed Siad Barre Somalia’s President regimes collapsed, so our small country, with limited resources, was taking baby steps as a free nation while at the same time the region was facing uncertain change,” he recalled.
“The stable government we have had has helped us maintain peace and security. We also understood early on that Djibouti needed to enhance its relationship with Ethiopia,” he explained. 
“We live in a very sensitive and geostrategic region and that means we face challenges from terrorism and piracy. Djibouti made a decision to host foreign military forces to fight terrorism and thus contribute to global peace,” Youssouf added.
“These days you do not see vessels being hijacked on our seas and that is the result of us working with foreign forces. The same is true with terrorism, we partner with other countries in the region to combat the problem,” he said.
Djibouti is the headquarters for the Intergovernmental Authority on Development (IGAD), an eight-country trade block in Eastern Africa that includes the governments from the Horn of Africa, Nile Valley and the African Great Lakes. For the past 15 years it has been addressing conflict in the region, including places like South Sudan, Somalia and Eritrea. 
“IGAD has spent a lot of resources trying to put out those fires and as a result we haven’t had the time to focus on development and integration. Even though over the last three years the leaders of Djibouti and Ethiopia and others managed to sign a blueprint that put the foundations of a symbiotic relationship with IGAD into place, we need to do more towards realizing regional integration,” the chief diplomat said. 
Officials who led the current rapid economic growth recalled that there were only 12 high school graduates when the nation was liberated from France in 1977.
There were no roads, schools, or capable teachers. Only two medical doctors were practicing in the country and only one high school was in existence about four decades ago, officials said.
During the colonial era the country did not make any noticeable gains. After its independence, however, it began trending upward.
The nation first focused on education, which was no small task considering that high school graduates were expected to travel abroad for college. As education improved so did the nation’s human resources.
“Now we’ve established higher education institutions and that has helped us develop,” Ilyas Moussa Dawaleh, Minister of Economy and Finance, said.
“We have universities and modern facilities. There are now around 6,000 high school graduates every year,” he added.
With more educated citizens has come development.
For the past 15 years the economy has been on the upswing and international companies have been investing in Djibouti’s service sector.
Hotels, logistics and port services are the areas which received the most notice. The economic growth in neighboring Ethiopia that became the most populated landlocked country without a seaport after the split of Eritrea, has also contributed to Djibouti’s economic boom. Djibouti’s location on one of the busiest sea routes in the world has attracted investment as well. The country now provides service for ships as well as refueling vessels crossing the Red Sea for the Mediterranean or Indian Oceans.  
Other than a small rebellion in 2000, the nation has experienced a stable period of peace. This has allowed the government to focus on attracting direct foreign investment. Djibouti authorities in conjunction with various non-profit organizations have launched a number of development projects aimed at highlighting the country’s commercial potential.
The government has also introduced new private sector policies targeting high interest and inflation rates, including relaxing the tax burden on enterprises and allowing for exemptions on consumption tax.
The country is currently working with several development projects to boost its economy and to eliminate poverty.
Funds have especially gone toward building telecommunications infrastructure and increasing disposable income by supporting small businesses. Because of its growth potential, the fishing and agro-processing sector, which represents around 15% of GDP, has also enjoyed rising investment since 2008.
Since the Djiboutian franc is pegged to the U.S. dollar, it is generally stable and inflation is not a problem. This has contributed to the growing interest in investment in the country.
“These last two years we developed five pillars to transform our country,” the finance minister said.
Peace and Unity is one such pillar. The government has worked on a long-term vision and hope to transform from a service led economy in the future.
“We believe there are a number of potential economic avenues we have yet to uncover and this can further help alleviate poverty,” one official said.
“We undertook very extensive studies with the World Bank and we designed a new model of growth, which allowed us to develop a workable diversification strategy,” Dawaleh said.
Djibouti is the only African country to develop fiber optic cables so it’s possible it could utilize Information Communication Technology as well as its logistics and port activity to develop its economy. Other areas include tourism and light industry. The latter two are areas that the nation could potentially link with Ethiopia.
We are talking with the Ethiopian government to establish a trans-border special industrial zone, which is a key industrial investment,” he added.
“The corridor of the two countries [Djibouti and Ethiopia] is developed in relation with the construction of the railway about a century ago. Several cities like Dire Dawa, Nazareth and Metehara came about as a result of the railway. “You can see the power of infrastructure integrating the people and the economy,” the finance minister said.
“Today we are completely interdependent in terms of economic integration and social relation between the two countries, people and government and we hope that we can work even harder to reach our full potential,” he said.
“This is why we look to core development. Every country wants to diversify their economy and Djibouti and Ethiopia are interlinked and interdependent. We have to work together so both of us can bring a better future for our people,” he added. He said this is obvious by looking at all the infrastructure projects the two nations have engaged in, such as power, ports and roads.

New developments
Even though Djibouti established one of the very few modern port services in the continent, it is undertaking several new facilities and expansion to enlarge the logistic sector as per the fast growing demand in the neighboring countries.
Infrastructures like railway, water and electricity that link the country with Ethiopia have been established and some of them are in the final stages of commencing the service.
The seaport projects are expected to increase its port capacity 15 times more than its current capacity, by 2017. The construction of new ports, as well as LNG (Liquefied Natural Gas) and crude oil terminals is planned with an investment worth USD five billion. The LNG project will be the new king of the region. It will help develop natural gas in Ethiopia.
Currently companies from all over the world including China and Turkey want to be part of the major investments and new infrastructure being built in Djibouti.
Even though the country is currently using Ethiopian electricity at a very competitive price, it is also in the process of developing its own renewable energy project using its geothermal potential. The development of new energy sources is expected to give a boost to the nation’s light industry.

Financial and economic growth

Commercial activities revolve around the country’s free trade policies and strategic location as a Red Sea transit point.
Ahmed Osman Ali, Governor of Central Bank of Djibouti told journalists from Ethiopia that Djibouti’s banking sector has experienced strong growth since 2006. It increased from 2 to 11 credit institutions.
Most arrived within the past few years, including the Somali money transfer company Dahabshiil and BDCD, a subsidiary of Swiss Financial Investments. The improvement in the banking sector was driven by a strong and stable monetary system, efficient macroeconomic frameworks, continued adjustment of regulation by national authorities and a particularly attractive general business environment, they explained.
The growth of the Djiboutian economy has significantly accelerated in recent years and macroeconomic stability has been maintained despite negative external shock, according to the central bank officials.
The GDP growth rate was five percent in 2013 and is projected at 6 percent in 2014. The dynamic of port activities, reviving construction and services and major projects of public and private investment have driven up the recent economic growth of the Djibouti economy.
The foreign direct investment (FDI) injected into the local economy over a ten years period, recorded a volume of 142 billion Djibouti Franc (USD 798 million) at the end of 2013 compared to 91 billion Djiboutian Franc (USD 511.1 million) in 2012 an increase of 55.7 percent.
Inflation remains low at 2.4 percent between 2013 and 2014. However, the projected inflation of 3.3 percent on average over the period 2015-2019 is a result of the pressure of demand raising from the strong economic growth.
The stability and strength of the monetary system of Djibouti contributes greatly to the emergence of a healthy and secure financial local market.
The financial sector is dominated by banks, with 97 percent of financial assets and a 13 percent contribution to the GDP. Currently 11 operational banks, 16 currency exchanges, two insurances, three micro finance institutions and one development fund operating in the finance sector in Djibouti.
The state owned Commercial Bank of Ethiopia, who was operating in Djibouti, is in the process of re-opening its branch in the country.
According to the information from the Central Bank of Djibouti, the amount of credit towards the private sector has experienced a significant increase, going from 20 percent in 2005 to 29 percent of the GDP in 2014.
To assure a robust credit and deposit sector, the government requires commercial banks to maintain 30% of shares in the financial institution; a minimum of 300 million Djiboutian francs in up front capital is mandatory for international banks. Lending has likewise been encouraged by the creation of a guarantee fund, which allows banks to issue loans to eligible small-and-medium sized businesses without first requiring a large deposit or other collateral.