The Ethiopia-Somaliland Port Deal Could Sink Djibouti’s Economy

[Deeq A.]

With a population of just over 1 million people and few tangible resources, Djibouti has long depended on its strategic location alongside the Gulf of Aden and at the entrance to the Red Sea as its main economic asset.

Besides renting out land to countries seeking to set up military bases in the Horn of Africa—including the U.S., the U.K., France and China—Djibouti has built its economic model around shipping services and maritime logistics. And among its most prominent partners is its landlocked neighbor, Ethiopia. With one of Africa’s fastest-growing economies, Ethiopia has relied on the tiny coastal nation to handle virtually all of its imports and exports, with an estimated 95 percent of its total trade going through Djibouti’s port.

To cater to Ethiopia’s needs, Djibouti has built a host of new infrastructure, including ports for cargo and hydrocarbons as well as several industrial zones. It has also constructed a pipeline to transport gas from Ethiopia, while renovating and electrifying a 465-mile railway linking Ethiopia’s capital, Addis Ababa, and several surrounding industrial areas to the port of Djibouti. Reflecting the depth of economic ties between the two neighbors, over 75 percent of Djibouti’s GDP is currently dependent on transport services to Ethiopia.

Overall, the arrangement has served Djibouti well. According to the World Bank, annual GDP per capita has more than doubled, to $3,136, between 2010 and 2022. Water and electricity links with Ethiopia have ensured more reliable access to basic utilities for a growing number of Djiboutians. Its total foreign direct investment as a percentage of GDP expanded significantly, from 0.6% in the early 2000s to 5-6 percent between 2015 and 2022.

Unsurprisingly, then, the news that Ethiopia is looking for another long-term transit and logistics partner in the region is likely to cause alarm in Djibouti. In early January, Ethiopian Prime Minister Abiy Ahmed and Somaliland leader Muse Bihi Abdi announced they had signed a Memorandum of Understanding that will allow Ethiopia to use the breakaway Somali region’s coast for both trade and security purposes.

Under the agreement, Ethiopia will gain access to Somaliland’s Berbera port for commercial use. But it will also be granted a 50-year lease on a 13-mile stretch of Somaliland’s coast on the Gulf of Aden, allowing it to establish a naval base in the area. In exchange, Ethiopia will fast-track diplomatic recognition of Somaliland, something the breakaway republic desperately craves: Since unilaterally declaring itself independent from Somalia in 1991, it remains an unrecognized quasi-state.

Ethiopia, a massive country with a population of over 123 million people, lost its maritime access when Eritrea declared its independence from Addis Ababa in 1993. For several years, Ethiopia used the Eritrean port of Assab to access the sea. But after war between the two countries broke out in 1998, Ethiopian authorities began to look to Djibouti for the country’s maritime trade with the rest of the world.

Addis Ababa’s interest in an additional trade route, and in the Berbera port specifically, is no surprise. It already signed a deal to secure more favorable rates and increase trade through Berbera in 2016, when Ethiopia’s urgent need to increase cereal imports due to a severe drought were frustrated by congestion at the port of Djibouti. Later, in 2018, Addis Ababa went further and acquired a 19 percent stake in the Berbera port. But poor road transport links between Ethiopia and Berbera, as well as Somaliland’s lack of international recognition, have hindered a dramatic increase in Ethiopian trade through the facility.

The most recent deal, which would likely also see Addis Ababa invest in large-scale infrastructure at Berbera, would certainly amount to a more serious commitment to using the port for Ethiopia’s imports and exports.

The announcement triggered immediate reactions across the region, with Somalia, which views Somaliland as part of its sovereign territory, understandably having the most to say about it. In a recent interview with Al Jazeera, Somali President Hassan Sheikh Mahmud warned Ethiopia not to follow through on the deal, raising the possibility of a joint military operation by Somalia and Egypt to prevent it from happening. Cairo, which has been in a long dispute with Addis Ababa over the construction of the Grand Ethiopian Renaissance Dam and its impact on the flow of Nile water into Egypt, declared its support for Somalia’s territorial integrity. Turkey, which has a military base in Somalia, also openly backed Mogadishu.

For Djibouti, the deal between Ethiopia and Somaliland would be a severe blow to its economic positioning and long-term strategic bet on port services in the region.
The United Arab Emirates, which has close ties with Somaliland and has established its own presence at the Berbera port through the state-owned operator DP World, favors the deal moving forward. It has strengthened its military and commercial presence around the Gulf of Aden and Red Sea trade corridor and has increasingly woven closer ties with Ethiopia.

The geopolitical implications of the deal, should it go through, are huge. It could trigger a new war between Ethiopia and Somalia, which won’t look kindly on the presence of Ethiopian troops on what it considers to be its own territory. Though Somali forces reportedly helped the Ethiopian government in its war against the Tigray region, the two countries also have a long history of border tensions and even fought a short war over Ethiopia’s Ogaden region in the late 1970s. A conflict now would likely draw in the armies of multiple countries in the region.

Given the immediate backlash against the deal—which also included criticism from the European Union, the U.S. and the Arab League, of which Somalia is a part—it is clear that the matter is far from settled.

For Djibouti in particular, the deal between Ethiopia and Somaliland would be a severe blow to its economic positioning and long-term strategic bet on port services in the region. And despite the economic growth that strategy has delivered, the country continues to face major challenges. President Ismail Omar Guelleh, in power since 1999, has staked the country’s development on the premise that the foreign investment into Djibouti’s transport services will help domestic firms expand and eventually drive growth in other sectors of the economy.

But this is taking time to materialize. Unemployment is over 27 percent, and roughly 23 percent of the country’s population lives in extreme poverty, according to the World Bank.

Meanwhile the large-scale infrastructure projects have left a heavy debt burden. In essence, Djibouti has staked its economic future on being Ethiopia’s gateway to international markets. Its ratio of public debt to GDP was at 65 percent in 2022, according to the Central Bank of Djibouti. And in 2021, the International Monetary Fund declared that Djibouti’s debt level was unsustainable.

Most of this debt is owed to China, which directed $14 billion to the tiny country in investments and loans between 2012 and 2020. But many of the major projects financed with debt, such as the railway link and electricity interconnection to Ethiopia, are taking time to generate the necessary returns.

How much transport activity Djibouti can afford to lose to Berbera without seeing an acute economic impact remains to be seen. But it probably would not take that much of a reduction in trade flows through its port for the country to see its ability to pay back its loans further weakened.

That said, the impact will not be immediate, according to Ibrahim Jalal, a nonresident scholar at the Middle East Institute. “If the deal does go through, implementation will be gradual and tentative,” Jalal said in an interview. In the meantime, he added, Djibouti can try to offset any potential losses by expanding its partnerships with other countries in the Horn of Africa.

Diversification of its trade customers would also take time and depend on regional investments in infrastructure. But given its current economic dependence on transport services to Ethiopia, the deal should serve as a wake-up call for Djibouti that diversification is the only way forward, regardless of whether or not it goes through.

Francisco Serrano is a journalist, writer and analyst. His work has appeared in Foreign Policy, Al-Monitor, Weapons of Reason, The Outpost, Foreign Affairs and other outlets. His latest book, “As Ruínas da Década,” about the Middle East in the decade after the 2011 popular revolts, was published in 2022.

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