Box 5. Djibouti leverages strategic position at significant cost
Located in the Horn of Africa, Djibouti is situated on the strait of Bab-el-Mandeb, a 19-kilometre-wide chokepoint that sees roughly 30 per cent of global shipping pass through on its way to the Red Sea and the Suez Canal. Djibouti’s strategic location and deep-water port complex attracted China to establish its first-ever overseas military base there in 2017 – just six miles from an equivalent US military installation.
China has markedly increased its focus on Djibouti in the past two decades, due to its critical geostrategic location and its status as the transhipment point for 95 per cent of neighbouring Ethiopia’s import and export trade – despite challenges due to the ongoing war in Ethiopia. Djibouti has a significant shortfall in critical infrastructure, which traditional donors have proved reluctant to finance. This challenge persuaded Djibouti’s leaders to turn increasingly towards China for assistance.
In total, China provided $1.4 billion of investments and loans for infrastructure in Djibouti between 2012 and 2020. Djibouti’s relations with China have deepened further in recent years. In late January 2016, the president of Djibouti, Ismaël Omar Guelleh, signed three agreements with China, following an announcement by Beijing that it would open a military logistics facility in Djibouti. These arrangements included a legal framework for Chinese banks to operate in Djibouti, presaging a steady flow of credit and the creation of a 48-square-kilometre free-trade zone.
According to the IMF, Djibouti’s public external debt rose from 50 per cent of GDP in 2016 to over 70 per cent by 2020. Over half of the debt burden is Chinese lending, with the total debt obligation to Beijing standing at $1.2 billion, representing over 45 per cent of Djibouti’s GDP. The amount is double Djibouti’s debt to multilateral creditors, which totals $600 million.
From a Chinese perspective, Djibouti offers a clear illustration of the tension between lending to certain African countries that are likely to struggle to make repayments in the future and the geostrategic imperative of building and maintaining influence. Djibouti is in debt distress, but the country may be too important for China to allow it to default. EXIM Bank’s renegotiation of its credit line to Ethiopia for the Ethiopia–Djibouti railway line may indicate that China’s desire to capitalize on the geostrategic importance of Djibouti (and Ethiopia) is being given higher priority than its desire to minimize future financial liabilities.
But this balance is delicate, and there have been two important developments that could potentially impact Chinese calculations on Djibouti. First, at the regional level, the Horn of Africa is facing several major political-security crises and fierce competition in the region. Second, the political situation in Djibouti itself is marked by growing dissatisfaction with the government of Ismaël Omar Guelleh, mainly among young people. As a result, the Afar rebels killed seven soldiers in early October 2022 from their base near the Eritrean border.
Djibouti is a net importer of food and fuel, with the country covering up to 90 per cent of its food needs through imports from neighbouring countries, especially Ethiopia and Somalia. The country continues to be disproportionately impacted by the steep rise in global food prices and the war in Ukraine, including disruptions to food supply chains. The spillover effects of conflict in Ethiopia have also led to periodic shortages of produce imports and a depressed Ethiopian market, on which Djibouti is highly reliant. Soaring global oil and food prices have pushed up inflation – the year-on-year rate at the end of June 2022 was 11 per cent.
Measures to mitigate the impact of the war in Ukraine and worsening drought have put pressure on the fiscal deficit. Public debt service has more than tripled in 2022, leading the government to temporarily suspend some of its foreign debt payments to two creditors, China and Kuwait. On top of these shocks, the expiration of the DSSI at the end of 2021 has affected Djibouti, with the potential DSSI savings in 2021 amounting to $143.5 million, according to the World Bank. Therefore, it is unsurprising that Djibouti is having repayment troubles. Taken together, a volatile region and uncertain internal politics mean that Djibouti cannot assume that its geopolitical importance to China will continue to protect it indefinitely from facing the consequences of a mounting debt burden.