This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 DJIBOUTI 000103 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EFIN EAID PGOV DJ
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT - DJIBOUTI 
 
¶1. Summary: Lacking natural resources, Djibouti's economy is 
service-based, with the country's seaport and a railroad 
linking it to Addis Ababa accounting for the bulk of 
economic activity.  Almost all food and many other goods are 
imported from Ethiopia, the Gulf, or France.  The services 
and commercial sectors account for 85 percent of GNP. 
Telecommunications are reliable, but expensive. Obstacles to 
foreign investment include bureaucratic apathy, corruption, 
labor cost and a very slow judiciary system. End Summary 
 
Openness to Foreign Investment 
------------------------------ 
¶2. The government of Djibouti recognizes the crucial need of 
foreign investment for the economic development of the 
country.  Djibouti's assets include a strategic geographic 
location, an open trade regime, a stable currency, 
substantial tax breaks and other incentives.  Potential 
areas of investment include Djibouti's port, tourism, 
manufacturing and telecom sectors.  President Ismail Omar 
Guelleh has placed privatization, economic reform, and 
increased foreign investment as top priorities for his 
government.  The president has pledged to seek the help of 
the international private sector to develop the country's 
infrastructure. 
 
¶3.   Djibouti has no major laws that would discourage 
incoming foreign investment.  In principle there is no 
screening of investment or other discriminatory mechanisms. 
Certain sectors, most notably public utilities, are state 
owned and are not currently open to investors.  IMF 
requested privatization as a condition for structural 
adjustment, which led to contracts with Dubai Port 
International, for the management of the Port of Djibouti 
(in 2000) and Djibouti International Airport (in 2002). 
Djibouti Telecom was also handed over to private management 
to prepare it for an eventual privatization, and although it 
is not yet privatized, the Railway Company, has already 
identified several potential investors.  Finally, in April 
2004, the Government of Djibouti conceded its fishing port 
to a private firm, Djibouti Maritime Management Investment 
(DMMI). 
 
¶4.  Created in 2001, the National Investment Promotion 
Agency (NIPA) promotes investment, facilitates investment 
operations and works to modernize the country's regulatory 
framework.  The NIPA has been mandated the task of 
encouraging and facilitating foreign investment by assisting 
with all administrative procedures.  Its ultimate goal is to 
serve as a one stop shopping center for investors who 
currently have to deal with several ministries located at 
various sites in a process with no inter-agency 
coordination.  The NIPA identifies tourism and manufacturing 
as priority sectors for investment. 
 
¶5. In 2004, the Ministry of Finances reduced taxes on some 
products to encourage business sector growth.  Automobile 
spare parts and recording or image producing electronic 
devices are subject to 8 percent taxes (instead of 33 
percent) while taxes on electical, plumbing or sanitary 
material decreased to 20 percent fom 33 percent.  Heavy 
construction engines and raw cloth are now liable to 8 
percent taxes, instead of the previous 20 percent.  These 
tax reforms are meant to promote growth of the construction 
sector, transportation and textile industry. 
 
¶6. The most important direct foreign investment in Djibouti 
remains the project of the Port of Doraleh, which is 
estimated at a worth of US$400 million upon completion. 
Located 8 kms east of the current seaport, the Doraleh 
Project is intended for third generation container ships and 
includes an oil terminal, a container terminal and an 
industrial and commercial free zone financed by Emirates 
National Oil Company (ENOC) and Dubai Port International 
(DPI).  The first phase of the project, the oil terminal, is 
already nearing completion.  It consists of jetty for 
tankers and several storage tanks of around 50,000 cubic 
meters capacity each. A Brazilian company is involved in the 
construction of the Berth and an Italian company is 
constructing the storage tanks. 
 
¶7. Djibouti belongs to a number of regional integration 
groups and actively promotes the seven-member Inter- 
governmental Authority on Development (IGAD). It is also 
part of the Common Market for Eastern and Southern Africa 
(COMESA), which groups 19 countries into a common market of 
more than 300 million.  Djibouti is an eligible member of 
the African Growth and Opportunity Act (AGOA), which grants 
advantageous access to the United States market.  In 
addition, Djibouti is among the 34 African least developed 
countries that have the option of entering the European 
Union Generalized System of Preferences and is a member of 
the World Trade Organization (WTO). 
 
Conversion and Transfer Policies 
-------------------------------- 
¶8. Djibouti has no foreign-exchange restrictions. There are 
no limitations on converting or transferring funds, or on 
the inflow and outflow of cash.  The Djibouti franc, which 
has been pegged to the U.S. dollar since 1949, is stable. 
The fixed exchange rate is 177.71 Djibouti francs to the 
dollar. 
 
Expropriation and Compensation 
------------------------------ 
¶9. Djibouti Investment Code stipulates "no partial or total, 
temporary or permanent expropriation will take place without 
equitable compensation for the damages suffered". The 
Embassy is not aware of any recent act of expropriation or 
compensation related to foreign companies.  Given the 
government policy of promoting private investment, none are 
expected either. 
 
Dispute Settlement 
------------------ 
¶10. Djibouti's legal system is based on French law.  It 
consists of three different levels:  1) the First Court 
("Premire Instance") where a single judge rules; 2) the 
Appeals Court ("Cour d'Appel") presided over by three 
judges; 3) the Supreme Court (Cour Suprme ) mandated to 
review the proper application of the law in a given trial. 
The Supreme Court reopens the trial if irregularities are 
discovered.  The system is complex and far from transparent. 
Government interference in the court system is common. 
Djibouti has written commercial and bankruptcy laws, but 
they are not applied consistently. Foreign companies in 
Djibouti complained about lengthy and biased court 
deliberations.  Judgments by foreign courts are in principle 
accepted by Djiboutian courts.  According to the Ministry of 
Justice, Djibouti is a member of the International Center 
for the Settlement of Investment Disputes because any 
international agreement signed by France before Djibouti 
gained independence in 1977 is automatically binding in 
n 
Djibouti.   The Chamber of Commerce of Djibouti is planning 
to set up a Regional Mediation Center, which is designed to 
settle commercial disputes in a timely and transparent 
manner. 
 
Performance Requirements/Incentives 
----------------------------------- 
¶11. Performance requirements are not a pre-condition for 
establishing, maintaining, or expanding foreign direct 
investments. Incentives do, however, increase with the size 
of the investment and the number of jobs created.  Tax 
benefits and incentives fall under two categories detailed 
in the investment code.  Investments greater than $280,000 
that creates a number of permanent jobs are entitled to 
exemption from license and registration fees, property 
taxes, taxes on industrial and commercial profits, and taxes 
on the profits of corporate entities.  Imported raw 
materials used in manufacturing are exempted from the 
internal consumption tax.  These exemptions apply for up to 
a maximum of ten years after production commences. 
Investment matters fall under the jurisdiction of the 
national investment board, which approves all investments. 
 
¶13.  Djibouti offers significant incentives to private- 
sector individuals and corporate investors.  The Djiboutian 
investment code guarantees investors the right to freely 
import all goods, equipment, products, or material necessary 
for their investments; display products and services; 
determine and run marketing policy and production; choose 
customers and suppliers; and set prices.  Foreign investors 
are also free to determine their own hiring and firing 
policy as long as it remains within the structure of the 
labor code.  A new Labor Code is being finalized to replace 
the current document, which dates from the French colonial 
era of 1952. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
¶13. Djiboutian laws guarantee the rights for foreign and 
domestic private entities to establish, own business 
enterprises and engage in all forms of remunerative 
activity.  Legally established private sector companies have 
the same access to markets, land ownership, credit, and 
other business facilities, as do public enterprises. 
Although restrictions on private enterprises are minimal, 
competitive equality in regard to public enterprises, namely 
public utilities, remains limited. 
 
Protection of Property Rights 
----------------------------- 
¶14. Most of the selling of pirated trademarks occurs in the 
informal market, which represents an important part of the 
trade in Djibouti. A large share of trade with other 
countries is also done informally. Djibouti's legal system 
inherited from the French officially protects the 
acquisition and disposition of all property rights and 
safeguards intellectual property, patents, copyrights, 
trademarks, trade secrets, etc. In addition, Djibouti 
ratified World Intellectual Property Organization (WIPO) 
convention, Paris convention on the protection of industrial 
rights, and Bern convention on the protection of literature 
and art works.  In reality, however, protection of property 
rights is not enforced. 
 
Transparency of the Regulatory System 
------------------------------------- 
¶15. Although the government makes efforts to adopt a 
transparent policy to foster free enterprise, bureaucratic 
obstacles and delays are often a problem. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
¶16. Two large French commercial banks, Indosuez Bank (BIS) 
and Bank for Commerce and Industry (BCI), dominate the 
banking system.  They account for most deposits but their 
exposure to the economy is limited to mostly short-term 
(trade) financing and lending.  Credit is allocated on 
market terms and foreign companies do not face 
discrimination in obtaining it.  However, generally only 
well-established businesses obtain bank credit, as the cost 
of credit is high. Both banks offer only a limited array of 
financial instruments: letters of credit, money transfer, 
and short and long-term loans. 
 
Political Violence 
-------------------------------- 
¶17. Despite past human rights violations and political 
imprisonments, no significant political violence was 
reported during 2004, nor was any political opposition 
figure arrested or detained.  The government seems still 
reluctant to welcome human rights groups and continue to 
monitor independent unions who are often seen as part of 
political opposition. One instance of significant police 
abuse, which resulted in death of a mentally ill Djiboutian, 
was reported in 2004.  A legal investigation was launched 
into the incident but no notable changes resulted. 
 
Corruption 
---------- 
¶18. Corruption in Djibouti remains a constant encumbrance to 
investment and business development.  While the government 
officially encourages foreign investment, pressure from 
government officials to become "partners" with the investor 
(with no or minimal contribution) and approaching the 
investor for sub-contracts is common.  Foreign businesses 
complain that establishing an enterprise requires numerous 
bribes.   Also, many business owners chose to bribe Customs 
Officers to evade taxes.  In so doing, they encourage 
corruption.  Corruption poses a major problem in the Court 
system and results in extreme mistrust by foreign investors. 
 
¶19. While laws against corruption exist, they are rarely 
enforced.  Prosecution and punishment for corruption is 
rare.  Consequently, most people prefer to deal with 
corruption issues on their own rather than involving the 
bureaucratic legal system.  The Chamber of Accounts and 
Fiscal Discipline (CAFD), and the State General Inspection 
have been established to address corruption.   The CAFD has 
the authority to verify and audit all public establishments 
for transparency and accountability and take necessary legal 
sanctions.  The State General Inspection, another government 
institution, is designed to complement the work of the CAFD 
by ensuring that human and material resources in the public 
sector are properly utilized. 
 
Bilateral Investment Agreements 
------------------------------- 
¶20. Djibouti has several bilateral investment agreements, 
most notably with Ethiopia and Yemen but also with Egypt, 
Malaysia and recently with India.  Other treaties include: 
the Partnership Agreement between the Members of the 
African, Caribbean and Pacific Group of States (ACP); 
the Agreement for the Promotion, Protection and Guarantee of 
Investment Among Member States of the Organization of 
Islamic Conference; Articles of Agreement of the Islamic 
Corporation for the Insurance of Investment and Export 
Credit; and the Unified Agreement for the Investment of Arab 
Capital in the Arab States. 
 
OPIC and other Investment Insurance Programs 
-------------------------------------------- 
¶21. Djibouti is eligible for Overseas Private Investment 
Corporation (OPIC) programs.  OPIC offers up to US$400 
million in combined financial and political risk insurance 
to eligible U.S. investors. 
 
Labor 
----- 
¶22. A Law passed in 2000 makes the school compulsory 
until the age of sixteen. Gross enrollment rates have risen 
from approximately 38 percent in 1998 to approximately 53 
percent in 2003.  Vocational or professional training 
facilities are few, which results in the major problem of 
lack skilled labor.  Employers have also commented that 
production is low and that it is difficult to find educated 
and experienced workers.  The government remains the main 
employer but American and French military forces in Djibouti 
also engage an important number of local workers.  By law, 
all the employers have the obligation to provide social 
security to their employees.  The "Caisse National des 
Retraites" handles the social security of government workers 
with long-term contracts, and the "Organisme de Protection 
Sociale" deal with the private sector and government 
employees with short-term contracts.  Due to the high cost 
of living, wage levels in Djibouti are among the highest in 
the region. 
 
¶23. The Labor Code allows for employees to form labor 
unions.  It also provides guidelines on wages, overtime pay, 
annual leave, sick leave, work schedules and holidays.  A 
new Labor Code was recently completed and is in the process 
of being approved by the Parliament; however it is widely 
contested by the labor unions, which feel that this document 
gives more rights to employers at the expenses of workers. 
Two large labor unions exist in Djibouti but the Djiboutian 
Workers Union (UDT) is the most viable and is recognized by 
the international organizations.  The Government, which has 
the mandate to act as a mediator between the unions and the 
employers, regularly interferes with the internal affairs of 
labor unions. 
 
Foreign Trade Zones/Free Ports 
------------------------------ 
¶23. In 1995 the entire country of Djibouti was designated a 
free-export processing zone. Any company working exclusively 
for export in the industrial sector is eligible for the 
status of Export Processing Company (EPC).  In addition, 
local investors recently developed a free zone with a 
capacity of up to 100 companies.  This small free zone is 
designed to be a small-scale experiment before establishing 
the sizable Doraleh industrial and commercial free zone is 
opened.  The Doraleh free zone will cover 600,000 meters 
squared in the first phase.  The Airport, managed by DPI is 
also planning to establish a free zone within its premises 
to complement Doraleh Free zone. 
 
Foreign Direct Investment Statistics (in US$ million) 
--------------------------------------------- -------- 
¶24.  The major Foreign Direct Investment (FDI) stays the 
project of Doraleh, which is reflected in a peak increase in 
FDI as indicated in the following statistics obtained from 
the Central bank. 
 
2000:  3.3 
2001: 3.4 
2002: 5 
2003: 21.4