Ethiopia’s truce agreement forecasted to spring Djibouti economic activities

The truce agreed between the government and TPLF is stated by the International Monetary Fund (IMF) as a potential rejuvenator of Djibouti economic activities.
The statement IMF issued early last week recommended government to offer a significant share on the way to privatizing of Djibouti Telecom.
A team from the IMF led by Brett Rayner conducted an Article IV mission to Djibouti until mid-December.
In the statement that IMF issued Rayner said that the conflict in Ethiopia had 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.”
In addition, higher commodity prices and regional drought have eroded households’ purchasing power and further reduced government revenue.
Accordingly, growth is expected to slow to 2.5 percent and the trade balance is projected to worsen in 2022.
The statement added that 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.
Projections cite that economic growth in Djibouti will recover in 2023 with a rebound in Ethiopia, and inflation would fall in line with international trends.
Like its neighbor Ethiopia, Djibouti has also embarked on a partial privatization of the state owned Djibouti Telecom. About a year ago, the government invited interested buyers for the sale of a significant minority stake – a 40 percent sale of the sole telecom operator.
On its latest statement, IMF said that with regards to the privatization of a minority stake in Djibouti’s Telecom low interest has been realized, “the authorities should be encouraged to consider offering a larger stake, as bringing in private investment could help reduce IT prices and expand access to mobile banking.”
“Supervision should keep pace with the rapid growth of the banking system, and while the currency board arrangement has provided the country with an effective nominal anchor and helped build confidence in international transactions, the authorities will need to introduce tools to make monetary policy more flexible,” the monetary fund agency added.
Rayner said that large investments over the past decade have driven strong economic growth, but the benefits have not been widely shared, “Djibouti has invested heavily in infrastructure connecting Ethiopia to global markets, driving growth to an average of 6.2 percent over 2013– 19, before the COVID crisis.”
He said that 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 authorities have responded to the shocks with a sharp fiscal consolidation and by accumulating arrears pending the outcome of ongoing restructuring negotiations with their main creditor, but spending needs are significant and debt service is set to increase further,” he further elaborated.
IMF recommended that however, to restore debt sustainability and support inclusive growth, it is essential to focus on domestic revenue mobilization and improve oversight of public enterprises.
The authorities should also rationalize subsidies by shifting to more targeted support measures. Governance and public financial management reforms will also be needed to preserve economic stability and create jobs.