VZCZCXRO5665
RR RUEHROV
DE RUEHDJ #0089/01 0310618
ZNR UUUUU ZZH
R 310618Z JAN 08
FM AMEMBASSY DJIBOUTI
TO RUEHC/SECSTATE WASHDC 8984
INFO RUCNIAD/IGAD COLLECTIVE
RHPIGXW/CJTF HOA
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPCIM/CIMS NTDB WASHDC

UNCLAS SECTION 01 OF 06 DJIBOUTI 000089 
 
SIPDIS 
 
STATE FOR AF/E, AF/EPS, EB/IFD/OIA 
LONDON, PARIS FOR AFRICA WATCHER 
CJTF-HOA FOR POLAD 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ETRD ECON EFIN ELAB PGOV
USTR, OPIC, KTDB, DJ 
SUBJECT: DJIBOUTI: 2008 INVESTMENT CLIMATE STATEMENT 
 
REF: STATE 158802 
 
¶1. SUMMARY: Foreign direct investment in Djibouti in 2007 is five 
times as large as it was in 2003.  Djibouti's economy is 
service-based, with the country's seaport accounting for the bulk of 
economic activity.  Almost all food and many other goods are 
imported from Ethiopia, the Arabian Gulf, or France.  The services 
and commercial sectors account for more than 80 percent of GNP. 
Dubai World Group, Djibouti's main private investor, is active in 
various sectors including the port, tourism, customs and aviation. 
Djibouti is also experiencing a surge in the establishment of 
foreign commercial banks, predominantly from the Middle East, 
attracted by opportunities that could result from Dubai-based 
investments in Djibouti.  Telecommunications are reliable, but 
expensive.  Djibouti offers significant incentives to private-sector 
individuals and corporate investors, but obstacles to foreign 
investment include a small domestic market, and high labor and 
energy costs.  END SUMMARY. 
 
------------------------------ 
Openness to Foreign Investment 
------------------------------ 
 
¶2. The Government of Djibouti (GODJ) recognizes the crucial need for 
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: the Doraleh fuel pier was dedicated in February 
2006, and the construction of Doraleh container terminal started in 
November 2006, to be followed by a new free zone and supporting 
desalinization and power plants; 
-- tourism: a large resort hotel complex managed by the Kempinski 
Hotel Group opened in October 2006; 
-- manufacturing and fishing 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 does not have 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.  Dubai World Group currently manages the Port of 
Djibouti (since 2000), Djibouti International Airport (since 2002), 
and Djibouti Customs (since 2005).  Istithmar World Aviation (IWA), 
a Dubai World company, is partnering with Daallo Airlines and the 
GODJ to restart the defunct Djibouti national air carrier in 2008. 
 
 
¶4. The Ethiopia-Djibouti Railway Company cancelled the management 
contract signed with the South African company COMAZAR in 2006 
because of COMAZAR's inability to provide solid financial 
guarantees.  Al-Ghanem Group from Kuwait is expected to take over 
the private management contract. 
 
¶5. In April 2004, the GODJ also conceded its fishing port to a 
private firm, Djibouti Maritime Management Investment (DMMI).  In 
2006, DMMI contracted a French firm, Oceanic Development, for the 
fishing port management.  The GODJ is currently building a fish 
laboratory and a fish processing factory, which are expected to 
become operational in 2008. 
 
¶6. Created in 2001, the National Investment 
Promotion Agency (NIPA) promotes private-sector investment, 
facilitates investment operations, and works to modernize the 
country's regulatory framework.  The NIPA has been mandated to 
encourage and facilitate foreign investment by assisting with all 
administrative procedures.  Its ultimate goal is to serve as a 
one-stop shopping center for investors.  NIPA identifies fishing, 
banking, insurance, tourism, and manufacturing as priority sectors 
for investment. 
 
¶7. In 2004, the Ministry of Finance reduced taxes on some products 
to encourage business sector growth.  Automobile spare parts and 
recording or image producing electronic devices are subject to 8 per 
cent taxes (instead of 33 per cent), while taxes on electrical, 
plumbing, or sanitary material decreased from 33 to 20 per cent. 
Heavy construction engines and raw cloth are now subject to 8 per 
cent tax, instead of the previous 20 per cent.  These tax reforms 
are meant to promote growth of the construction sector, 
transportation, and textile industry. 
 
 
DJIBOUTI 00000089  002 OF 006 
 
 
¶8. The most important direct foreign investment in Djibouti is the 
Port of Doraleh, located just west of the current seaport.  The 
Doraleh Project will include when finished an oil terminal, a 
container terminal, and an industrial and commercial free zone 
financed by Emirates National Oil Company (ENOC) and Dubai Ports 
World (DPWorld).  The first phase of the project, a modern oil 
terminal, was completed in August 2005 and dedicated in February 
¶2006. The new duty free zone is now operational and,in November 
2006, President Guelleh laid the cornerstone of the new Container 
Terminal of Doraleh Port.  That 340 million dollar project is 
expected to be completed by mid-2009 and, when finished, that deep 
draft port will handle sixth generation container ships and serve as 
both the principle port for Ethiopian commerce and a transshipment 
hub. 
 
¶9. 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 USD 300 million.  Djibouti successfully 
hosted the COMESA Summit in November 2006.  Djibouti is eligible to 
benefit from the African Growth and Opportunity Act (AGOA), and is 
also a member of the World Trade Organization (WTO).  In addition, 
Djibouti is among the 34 African least developed countries that have 
the option of entering the European Union Generalized System of 
Preferences. 
 
-------------------------------- 
Conversion and Transfer Policies 
-------------------------------- 
 
¶10. 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 
------------------------------ 
 
¶11. Djibouti's 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.  In December 2007, 
Djibouti and France signed a bilateral agreement on the promotion 
and protection of investment in each other's country, which, inter 
alia, extends legal protections to French investments in Djibouti. 
 
------------------ 
Dispute Settlement 
------------------ 
 
¶12. Djibouti's legal system is based on French law, and consists of 
three courts:  a Court of First Instance, presided over by a single 
judge; a Court of Appeals, with three judges; and the Supreme Court. 
 The Government has increased funding for the judiciary and 
recognized the need to increase the transparency and efficiency of 
the judicial process.  International lawyers practicing in Djibouti 
have reported effective application of maritime and other commercial 
laws, but some foreign companies operating here complained, in the 
past, that court deliberations were biased or delayed. 
 
¶13. 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 Djibouti.  The Chamber of Commerce of Djibouti is 
planning to set up a Regional Mediation Center, designed to settle 
commercial disputes in a timely and transparent manner. 
 
----------------------------------- 
Performance Requirements/Incentives 
----------------------------------- 
 
¶14. 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 USD 280,000 that create a number of permanent jobs may be 
 
DJIBOUTI 00000089  003 OF 006 
 
 
exempted 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. 
 
¶15. Djibouti offers significant incentives to private-sector 
individuals and corporate investors.  One U.S. firm that recently 
established a branch in the Free Zone hailed the speed and 
efficiency of the process.  Establishing a local company outside the 
Free Zone is, reportedly, significantly more time consuming.  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. 
 
¶16. The new Labor Code, which is not yet implemented, is expected to 
provide more confidence to potential investors.  It contains the 
latest international recommendations and conventions on issues such 
as the worst forms of child labor, minimum age of working, 
protection for maternity, and measures against work place 
discrimination. 
 
-------------------------------------------- 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
¶17. Djiboutian laws guarantee rights for foreign and domestic 
private entities to establish and own business enterprises, and to 
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 
----------------------------- 
 
¶18. There are sales of pirated trademarked products, especially in 
the informal market.  A large share of trade with several 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 the World Intellectual Property Organization (WIPO) 
convention, the Paris Convention on the Protection of Industrial 
Rights, and the Bern Convention on the Protection of Literature and 
Art Works.  In July 2006, Djibouti passed a law (Law 154) enforcing 
the protection of copyrights.  In 2006, Djibouti drafted a law on 
the protection of other intellectual property rights in close 
collaboration with the WIPO.  This draft is currently under review 
by the Council of Ministers.  So far, however, protection of 
intellectual property rights has not been strictly enforced. 
 
------------------------------------- 
Transparency of the Regulatory System 
------------------------------------- 
 
¶19. Djibouti's Port, Free Zone, Airport, and customs service are now 
managed by Dubai Ports World.  With port and related activities 
accounting for much of the countries formal economy, the effect on 
the whole economy has been substantial.  Port and customs revenues 
have increased significantly and shippers note striking improvement 
in transparency and efficiency of those operations.  There are 
ongoing efforts to foster similar transparency in the rest of the 
economy, but bureaucratic obstacles and delays are often a problem. 
 
--------------------------------------- 
Efficient Capital Markets and Portfolio 
Investment 
--------------------------------------- 
 
¶20. Two large French commercial banks, Indosuez Bank (BIS) and Bank 
for Commerce and Industry (BCI), dominated the banking system for 
years, but now face competition from several new international 
banks.  The French banks still account for most deposits.  In the 
 
DJIBOUTI 00000089  004 OF 006 
 
 
past, their exposure to the economy has been limited mostly to 
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 have 
offered only a limited array of financial instruments: letters of 
credit, money transfer, and short and long-term loans. 
 
¶21. Two new banks opened in 2006: the International Commercial Bank, 
a Malaysian firm recently listed in London, and the Saba Islamic 
Bank of Yemen.  A third new bank, the "Bank of Deposits and Credits 
of Djibouti", a bank backed by Swiss capital, was inaugurated in 
December 2007.  The Central Bank has approved the establishment of 
two additional banks, which are expected to start in 2008.  In 
addition, other foreign banks have voiced interest in opening 
outlets in Djibouti.  Propelled by increased competition and new 
loan products, including Djibouti's first long-term home mortgages, 
there has been a 20 per cent rise in the volume of loans made in 
¶2007. 
 
------------------ 
Political Violence 
------------------ 
 
¶22. In 2007, there were no reports of political violence, but 
several protests over electricity shortages and water shortages led 
to confrontations between police and protesters.  There were no 
deaths or reports of serious injuries as the result of such 
protests.  There were claims of official impunity, arbitrary arrest 
and detention, and interference with privacy rights.  Enforcement of 
libel laws had a chilling effect on press freedom, and there were 
restrictions on freedom of assembly and association.  Despite legal 
guarantees, there were also restrictions on union activities and 
leaders. 
 
---------- 
Corruption 
---------- 
 
¶23. Corruption exists in Djibouti and sometimes becomes an obstacle 
to investment and business development.  Recent major foreign 
investors have reported that they have operated free of government 
interference or corruption and the GODJ has pledged to protect as 
well as welcome new direct investment.  However, there have been 
reports in the past of government officials applying pressure on 
smaller investors to become their "partners" or to obtain 
sub-contracts. Despite a substantial improvement in Customs 
transparency under Dubai World's management, there are still reports 
of business owners attempting to bribe officials to evade import 
taxes.  There are also allegations that corruption in the judicial 
system continues to fuel uncertainty and mistrust among some local 
and foreign investors.  Two magistrates were dismissed this year as 
the result of an investigation into judicial misconduct. 
 
¶24. However, prosecution and punishment for corruption has been 
rare.  The Chamber of Accounts and Fiscal Discipline (CAFD) has the 
authority to verify and audit all public establishments for 
transparency and accountability and implement necessary legal 
sanctions.  The CAFD has reported on cases of lack of transparency 
and accountability in governmental agencies. 
 
¶25. The State General Inspection (SGI), another government 
institution, complements the work of the CAFD by ensuring that human 
and material resources in the public sector are properly utilized. 
In its first report published in 2007, the 
SGI highlighted the necessity for a strategy to improve 
accountability and quality management, and urged strict enforcement 
of existing anti-corruption rules and regulations. 
 
------------------------------- 
Bilateral Investment Agreements 
------------------------------- 
 
¶26. Djibouti has several bilateral investment agreements.  In 2007, 
it concluded a mutual investment treaty with France and also has 
accords with Ethiopia and Yemen, as well as Egypt, Malaysia, and 
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. 
 
 
DJIBOUTI 00000089  005 OF 006 
 
 
-------------------------------------------- 
OPIC and other Investment Insurance Programs 
-------------------------------------------- 
 
¶27. Djibouti is eligible for Overseas Private Investment Corporation 
(OPIC) programs.  OPIC offers up to USD 400 million in combined 
financial and political risk insurance to eligible U.S. investors. 
Also, Djibouti joined the Multilateral Investment Guarantee Agency 
(MIGA) in January 2007.  MIGA has issued its first guarantees to 
Djibouti for the port of Doraleh. 
 
----- 
Labor 
----- 
 
¶28. A 2000 law makes attending school compulsory until the age of 
sixteen.  Gross enrollment rates have risen from approximately 38 
per cent in 1998 to approximately 66 per cent in 2007. The scarcity 
of vocational or professional training facilities has restricted the 
creation of a pool of skilled labor.  The GODJ and the Port of 
Djibouti remain the nation's main employers, although there is 
growing private sector employment as well as jobs created by French 
and American military forces present in Djibouti. 
 
¶29. By law, all employers are obligated to provide social security 
to their employees.  The "Caisse National des Retraites" handles the 
social security of government workers with long-term contracts 
(fonctionnaires), and the "Organisme de Protection Sociale" deals 
with the private sector and government employees with short-term 
contracts (conventionnes).  In 2007, these two agencies merged to 
form the "Conseil National de Securite Sociale".  Wages in Djibouti 
are relatively high, compared to other countries in the region. 
This reflects influence from historically high French pay scales, 
paid before independence in 1977, and the high cost of living. One 
factor affecting employee performance and income is that the 
majority of Djiboutian men spend a significant percentage of their 
income on khat, a drug legal in the region.  Increasingly, employers 
are forbidding their workers to use khat, but its use remains the 
norm in most sectors of the economy. 
 
¶30. 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 approved 
by the Parliament in December 2005; however it is widely criticized 
by labor unions, who have asserted that it gives more rights to 
employers at the expense of workers.  Two large labor unions exist 
in Djibouti, but only the Djiboutian Workers Union (UDT) is 
recognized by international organizations.  The GODJ, 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 
------------------------------ 
 
¶31. 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 designation as an 
Export Processing Company (EPC).  The 17-hectare Djibouti Free Zone 
(DFZ) has been operational since 2004.  It has the capacity to house 
up to 100 companies.  In 2007, use of the Djibouti Free Zone 
approached full capacity.  An expanded free zone is planned as part 
of the Doraleh project. 
 
¶32. Djibouti's international airport, managed by DP World, is also 
planning to establish a free zone within its premises to complement 
the Doraleh Free zone.  In addition, Dubai Customs World signed an 
agreement with Djibouti in July 2007 to establish and an automobile 
and heavy equipment free zone to meet the increasing demand for 
transport-related services in Djibouti.  Using leased space, that 
vehicle zone is now in operation. 
 
------------------------------------ 
Foreign Direct Investment Statistics 
------------------------------------ 
 
¶33.  The main source of Foreign Direct Investment (FDI) remains the 
Port of Doraleh project.  Other FDIs include the construction of a 
five-star international hotel, funded by Dubai, which opened in 
November 2006. 
 
¶34. The following data on annual FDI, from Djibouti's Central Bank, 
shows that FDI in 2007 was five times the amount in 2003 (USD 
million): 
 
DJIBOUTI 00000089  006 OF 006 
 
 
 
2003: 38.54 
2004: 22.54 
2005: 59.04 
2006: 163.60 
2007: 193.00 
 
SYMINGTON