2009 Index of Economic Freedom

Quick Facts

Population:

• 0.8 million

GDP (PPP):

• $1.6 billion
• 4.8% growth
• 3.4% 5-year compound annual growth
• $1966 per capita

Unemployment:

• 59.0%

Inflation (CPI):

• 5.0%

FDI Inflow:

• $108.3 million

Djibouti's economic freedom score is 51.3, making its economy the 140th freest in the 2009 Index. Its overall score is almost the same as last year, reflecting no substantial changes in any of the 10 freedoms. Djibouti is ranked 28th out of 46 countries in the Sub-Saharan Africa region, and its overall score is slightly lower than the regional average.

Djibouti's economy is dominated by the service sector, which accounts for about 80 percent of GDP. Taxation is relatively competitive, and the financial sector is growing with more foreign participation. Inflation is moderate, but the government still controls the prices of certain key items.

Despite economic growth of around 3.5 percent over the past five years, overall economic development has been hurt by very weak business freedom and trade freedom. Tariff barriers are high, and bureaucratic inefficiency and corruption hamper many areas of the economy. Court enforcement of property rights is clouded by political interference and pervasive corruption. Stronger management of public finances is needed to help reduce unplanned expenditures. Persistently high unemployment is another drag on economic development.

Background Back to the top

Djibouti has few natural resources, and most of its territory is desert and pasture. Three-quarters of the population is urban, and most of those who live outside the capital depend on nomadic subsistence. Djibouti's most important asset is its location at the mouth of the Red Sea along the shipping route between the Mediterranean Sea and the Indian Ocean: Over half of the world's commercial ships travel through its waters. The service-based economy is centered on port facilities, the railway, and foreign military bases. Djibouti has struggled fitfully toward multi-party democracy since gaining its independence in 1977. President Ismael Omar Guelleh was elected in 1999 and re-elected in 2005, and his multi-party, multi-ethnic coalition controls all levels of government. Opposition groups boycotted the 2005 presidential election and parliamentary elections in 2006.

Business Freedom 38.1 Back to the top

Overall business freedom is seriously constrained by Djibouti's burdensome regulatory environment. Obtaining a business license requires slightly less than the world average of 18 procedures and 225 days, but licensing costs and the entry cost of launching a business are high. A lack of transparency and the inconsistent application of the commercial code discourage entrepreneurial activity.

Trade Freedom 31.8 Back to the top

Djibouti's average tariff rate was 29.1 percent in 2006. Despite some reforms, the prohibition of certain imports, variable and sometimes high import taxes and fees, import licensing requirements, and market access restrictions in the services sector add to the cost of trade. Ten points were deducted from Djibouti's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 80.8 Back to the top

Djibouti has moderate tax rates. The top income tax rate is 30 percent, and the top corporate tax rate is 25 percent. Other taxes include a property tax and an excise tax. In the most recent year, overall tax revenue as a percentage of GDP was 20 percent.

Government Size 59.4 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 36.8 percent of GDP. The government's commitment to reform programs centered on fiscal consolidation remains inconsistent. Privatization of state-owned enterprises, including pharmaceutical factories and dairy plants, has been discussed, but progress has been slow.

Monetary Freedom76.6 Back to the top

Inflation is relatively moderate, averaging 4.5 percent between 2005 and 2007. Goods and services such as medicines, 'common bread,' water, electricity, telecommunications, postal services, and urban transport are subject to price controls. The government also influences prices through its regulation of state-owned enterprises. Ten points were deducted from Djibouti's monetary freedom score to account for measures that distort domestic prices.

Investment Freedom50.0 Back to the top

No major laws discourage or discriminate against foreign investment. Certain sectors, such as public utilities, are state-owned and not open to investors. Bureaucratic procedures are complicated, and the legal system, derived from French civil law, is complex, opaque, and slow. Privatization has progressed, but the private sector remains underdeveloped outside of Djibouti's free trade zone. Corruption is also a deterrent to investment. Residents and non-residents may hold foreign exchange accounts, and there are no restrictions on payments or transfers.

Financial Freedom60.0 Back to the top

Djibouti's underdeveloped financial sector has been growing as more banks, particularly foreign banks, have entered the market. One majority French-owned bank and one fully French-owned bank together account for 95 percent of deposits and 85 percent of credit. The government retains a minority stake in Banque pour le Commerce et l'Industrie-Mer Rouge, the country's largest commercial bank. The government has made efforts to promote the integrity and efficiency of the banking sector and adopted new banking laws in 2000. Credit is allocated on market terms, but access to credit for entrepreneurial activity is still limited by high costs and the lack of other available financing instruments. Commercial banks generally provide only short-term financing and lending. The government imposes no limitations on international fund conversion or transfer, and there are no foreign exchange controls. There are no capital markets, and little formal economic activity occurs outside of the capital city.

Property Rights30.0 Back to the top

Protection of private property is weak. The courts are frequently overburdened, and the enforcement of contracts can be time-consuming. Trials and judicial proceedings are subject to corruption. Political manipulation undermines the judicial system's credibility. Commercial and bankruptcy laws are not applied consistently. The government does not enforce laws protecting intellectual property rights. Pirated goods are sold openly in the informal markets.

Freedom From Corruption29.0 Back to the top

Corruption is perceived as widespread. Djibouti ranks 105th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Most economic activity still occurs informally. It is estimated that more than 80 percent of enterprises are within the informal sector, including microenterprises that play a key role in the economy. Anti-corruption laws are rarely enforced. Administrative delays, demands for petty bribes, and a non-transparent judicial system are barriers to foreign direct investment.

Labor Freedom57.9 Back to the top

Djibouti's relatively inflexible labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee can be relatively costly. Work hours are not fully flexible.