Wednesday May 23, 2018
Djibouti may not quite be the “Singapore of Africa” yet, but the Horn of Africa’s smallest country still plays an oversized role in global affairs by providing valuable real estate to foreign militaries and positioning itself as a crucial waypoint for maritime trade. A highly strategic location has helped Djiboutian president Ismail Omar Guelleh attract significant investment and bilateral engagement from both the United States and China.
It takes more than a good location to create a healthy investment climate, however, and a new report from the risk consultancy Allan & Associates has warned outside investors to approach Djibouti with caution. Alongside problems of corruption and unsustainable debt, the risk consultants point out Djibouti is over-reliant on two partners: China, of course, but also southern neighbour Ethiopia.
For all its global pretensions, Djibouti heavily depends on Ethiopia for fresh produce, electricity, and even water. Landlocked Ethiopia, in turn, relies on Djibouti’s port to handle a full 95% of its imports. That helps explain why the two countries have gotten busy exchanging stakes in their respective public enterprises and deepening integration between their economies over the past several weeks, building off Chinese initiatives to establish better infrastructural links between Addis Ababa and Ethiopia’s primary port. Djibouti may soon be the proud owner of shares in Ethiopian Airlines, while Ethiopia will be part-owner of the Doraleh Container Terminal.Those expanded links with Djibouti haven’t kept from Addis Ababa from exploring its options and opening up alternative routes for Ethiopian goods to reach global markets (and vice versa). The Ethiopian government thinks it has an additional solution in the self-declared Republic of Somaliland and its port of Berbera.
In a region beleaguered by conflict, Djibouti’s relative stability is a major part of its strategic appeal. Like Djibouti, Somaliland is a small coastal nation that has kept the violence plaguing the rest of Somalia at bay. The Ethiopian state had been trying to attract the investment needed to build up Berbera for years, tirelessly lobbying the United Arab Emirates to provide the resources Ethiopia itself could not provide. Finally, in May 2016, Dubai’s DP World signed an agreement to build and manage Berbera port for 30 years. This past March, Ethiopia acquired its own 19% stake in the port.
For Ethiopia, the dynamics of the deal are perfect. These deals have helped Somaliland secure some of the international recognition it craves, all while infuriating Mogadishu. Boosting the international credentials of Somaliland helps maintain the status quo in a weakened Somalia and reinforces its own regional dominance. At the same time, the new port further isolates Eritrea. Domestically, a new outlet for trade serves Ethiopia’s largely export-driven growth strategy and helps Addis Ababa maintain the title of “fastest growing African economy” and connect the rest of Ethiopia to the primarily Somali east.
The investment in Berbera is turning out to be a win-win for Ethiopia, but the same cannot be said for DP World. This past February, Guelleh’s government took the abrupt step to seizing Djibouti’s Doraleh Container Terminal back from DP World, which had been managing the terminal since 2006 under the terms of a 30-year concession. The dubious pretext to the seizure was that the contract, signed over a decade ago, damaged Djibouti’s national sovereignty. More realistic was Djibouti’s accusation that DP World was investing in “rival facilities”, a direct reference to Berbera.
Washington, along with the global public opinion, saw the influence of China at play and feared Djibouti was preparing to hand control of the terminal over to Beijing. The regional dynamics behind the move, and especially Ethiopia’s role, went largely unreported.
Despite announcements DP World will contest Djibouti’s seizure of Doraleh in the courts, there is little hope Djibouti will respect any new international ruling. In seizing Doraleh, Guelleh has already ignored the outcome of arbitration proceedings in London that absolved DP World and former port authority head Abdourahman Boreh of bribery allegations levied at them by Djibouti’s government.
The irony of Djibouti’s move is that DP World will now fully focus its attention on developing Berbera’s port infrastructure, where it plans to build another berth and turn the Berbera Corridor into a booming regional trade hub. This, unsurprising, comes as welcome news to Addis Ababa. Ethiopian transport minister Ahmed Shide stated “the agreement will help Ethiopia secure an additional logistical gateway for its ever-increasing import and export trade”. To mollify Djibouti, he quickly added that “Ethiopia will continue to further invest in and develop the Djibouti corridor”.
Djibouti is also hedging its bets. Guelleh has gone all-in on his warm embrace of Chinese capital, visiting Beijing regularly and stresses that Djibouti is a “great friend of China’s”. From the Doraleh Multipurpose Port project to the Hassan Gouled Aptidon international airport, Djibouti is sinking further and further into China’s debt – fuelling American fears that Washington’s core interests in the region are at stake and prompting economists to warn of an inescapable “debt trap”.
Djibouti’s government rejects those concerns out of hand. It is Guelleh’s professed mission to turn Djibouti into a “gateway to Africa” and concessionary Chinese loans seem to be his preferred way of making that vision a reality. More than anything else, however, Djibouti’s commercial appeal depends on its status as the gateway to Ethiopia. Berbera emerging as a new alternative is sure to take a bite out of Djibouti’s lucrative market niche.