Djibouti has been navigating regional tensions well, with robust growth, moderate inflation, and recovering reserves. In response to global uncertainties and domestic debt challenges, the authorities plan significant fiscal consolidation, including leveraging state-owned enterprises (SOE) dividends meaningfully, and advancing creditor dialogue. The authorities remain dedicated to investing in human capital and creating favorable investment conditions for job creation.
Djibouti’s economic resilience and contribution to regional stability
Djibouti helps maintain regional stability by supporting maritime security and facilitating humanitarian responses during crises. Djibouti’s GDP per capita has effectively doubled over the past decade thanks to significant investments that have contributed to the modernization of the economy. However, declining government revenues and increasing debt service have placed considerable strain on public finances, leading to unsustainable levels of public debt and diminishing reserves. Growth has not created enough jobs in the formal sector, while fiscal space to finance development needs is limited.
The authorities are leveraging Djibouti’s growth resilience to advance fiscal consolidation and rebuild reserves. Growth is expected to have exceeded 6.5 percent in 2024 due to increased transshipments amid Red Sea tensions, while moderate international food and energy prices kept inflation in check. The government deficit was reduced from 3.5 percent of GDP in 2023 to 2.6 percent in 2024 following a brief period of fiscal overruns and deficit monetization, and reserves have begun to recover partially offsetting the decline observed since late 2023, though they remain below the monetary base.
The outlook is positive but subject to risks in an uncertain global context. Growth is projected to remain dynamic at around 6 percent this year and to continue over the medium term, albeit at a slower pace. Ethiopia’s robust economy is expected to boost Djibouti’s port activities; however, fiscal consolidation and the phasing out of large-scale investments may temper growth. Key risks include regional conflicts potentially increasing migration and affecting social stability amid a constrained fiscal space, and trade policy shifts that could depreciate the dollar and Djibouti franc, enhancing service exports but also raising inflation. Nonetheless, it is worth noting that Djibouti has successfully navigated several shocks over the past few years, including COVID-19, the 2022 Tigray crisis, the Ukraine war, and the 2024 Red Sea maritime disruptions.
Leveraging resilience for fiscal sustainability and rebuilding reserves
In the face of high global and regional uncertainty, Djibouti needs to quickly strengthen its economic resilience by restoring debt sustainability, safeguarding the currency board, and fostering inclusive growth. To this end, the authorities intend to strengthen fiscal consolidation and enhance financial transparency and governance of state-owned enterprises (SOEs) to unlock sustainable and meaningful dividend contributions to the national budget, restore reserves, and encourage private sector growth while protecting vulnerable populations.
Durable fiscal consolidation is essential for restoring debt sustainability. The substantial fiscal adjustment frontloaded in the 2025 budget and the balanced budget target for 2026 onward are welcome steps. To sustain progress, it is essential that all governmental entities endorse annual fiscal targets that align with a medium-term fiscal consolidation strategy. Success depends on robust expenditure management via the diligent operationalization of the recently approved Public Financial Management Reform Strategy and Action Plan 2024–27. Furthermore, a comprehensive fiscal roadmap should continue to broaden the tax base by enhancing VAT and capital income taxation, rationalizing tax exemptions included in the investment code and the Free Zones regime, and finalizing the digitization of tax agencies. The effective establishment of the tax policy unit remains a priority for accurately assessing tax bases and enhancing tax reform efficiency. Operationalizing the recently created large taxpayer office will also bolster compliance and revenue collection.
As Djibouti negotiates new terms for debt liabilities with creditors, well-managed and profitable SOEs can significantly aid national fiscal consolidation and restore reserves at the Central Bank of Djibouti (CBD), particularly following the dissolution of the Sovereign Wealth Fund (SWF). Building on ongoing efforts to improve SOE transparency and governance, it will be critical for the Executive Secretariat in charge of the State Portfolio (SEPE) to collect all SOEs’ financial statements and monitor their performance. Swiftly implementing the Code of Good Governance is also essential for establishing a more transparent dividend policy tied to SOE performance, thereby mobilizing dividends more consistently and meaningfully for the budget, improving SOE efficiency and services, and appropriately right-size them. Additionally, fiscal transparency can be strengthened by discontinuing financial settlement practices for clearing government arrears with SOEs, and by improving coordination among the Ministry of Budget, line ministries, and SEPE for more effective budget risk management.
Alongside fiscal consolidation, completing ongoing debt negotiations and addressing outstanding arrears with external partners are critical for debt sustainability. Equally important is implementing binding limits on borrowing for the central government, SOEs, including their participation in public-private partnerships, and ensuring these are enforced by the Public Sector Debt Committee.
The mission is encouraged by the recent recovery in reserves and urges continued progress. To strengthen the currency board, the authorities plan to amend the CBD law to enhance its autonomy, which will help sustain reserves, exchange rate, and inflation stability. They also plan to introduce reserve requirements as a prudential tool, with implementation expected to follow a phased approach. Additionally, under MENAFATF’s enhanced monitoring, Djibouti is reforming its AML/CFT framework, improving the business climate, and enhancing oversight of the banking sector due to its significant offshore component and rising government exposure. To facilitate policy making, the authorities are leveraging technical assistance provided by the IMF to enhance their coverage and quality of statistics relevant to surveillance, with a focus on national accounts, the fiscal and external sectors.
Advancing inclusivity through private sector development and employment creation
The government aims to foster economic growth and social equity. They aim to improve the existing targeting of the current fuel subsidy scheme. In order to create a more effective and equitable social protection system and reduce budget exposure to international energy prices, the authorities should gradually replace the current subsidy system with the strengthening of targeted cash transfers to the most vulnerable households, relying on the national social register. To attract investments and create jobs, they are enhancing access to education and job training under the 2021–35 education master plan. They aim to diversify the economy in sectors such as logistics and connectivity, tourism, agribusiness, and fisheries. To enable economic diversification, it is essential to develop a comprehensive roadmap with specific actions aimed at enhancing access to finance, streamlining administrative procedures, and expanding reliable and affordable internet services and electricity, including through increased bill collection, technical efficiency, and the adoption of cost-efficient renewable energy. These initiatives will enhance Djibouti’s business environment, which is already supported by a stable macroeconomic climate, a currency board, ports infrastructure, and connectivity to Ethiopia’s large market, all aligning with the objectives of Djibouti Vision 2035.
“The mission team expresses deep appreciation to the Djiboutian authorities and other counterparts for their warm hospitality, excellent cooperation and candid discussions, and looks forward to continuing close engagement.”
Distributed by APO Group on behalf of International Monetary Fund (IMF).
