Report No: 134321-DJ Public Disclosure Authorized Economic Transformation in Djibouti SYSTEMATIC COUNTRY DIAGNOSTIC October 2018 Public Disclosure Authorized The purpose of this Systematic Country Diagnostic (SCD) is to identify the most critical development constraints facing Djibouti and how to make growth more inclusive and sustainable while promoting shared prosperity. The findings and recommendations of the SCD are based on analytical work carried out by a World Bank Group team with expertise in macroeconomics and poverty analytics, human capital development and labor markets, infrastructure and private sector development, governance and climate change. The team also undertook consultations with the Government of Djibouti and representatives from civil society, private sector stakeholders and the donor community. The SCD provides analysis and recommendations for policies that the Government might pursue to reduce barriers to inclusive and sustainable growth and achieve its vision of becoming a modern economy and Public Disclosure Authorized regional hub for trade and logistics, which can create jobs and raise living standards for Djiboutians. Public Disclosure Authorized Government Fiscal Year: January 1 – December 31 Currency Equivalents: Exchange Rate Effective as of May 19, 2018 Currency Unit = Djiboutian Franc (DJF) US$1 = 177.72 DJF Weights and Measures: Metric System ABBREVIATIONS AND ACRONYMS AFC Africa Finance Corporation ES Enterprise Survey Afreximbank African Export-Import Bank FCV Fragility, Conflict and Violence AKI Key Indicators FDI Foreign Domestic Investment CBN Cost of Basic Needs FRUD Front for the Restoration of Unity and CCD Chamber of Commerce of Djibouti Democracy CCECC China Civil Engineering Construction FZ Free Zone Corporation GDP Gross Domestic Product COMESA Common Market for Eastern and GFDRR Global Facility for Disaster Reduction and Southern Africa Recovery CPEC Caisse Populaire d’Épargne et de Crédit GNI Gross National Income CPI Consumer Price Index HDI Human Development Index CPIA Country Policy and Institutional HIS Health Information System Assessment ICT Information and Communication CRS Constant Return to Scale Technology CRVS Civil Registration and Vital Statistics IDA International Development Association CS Censuses and Surveys IGAD Intergovernmental Authority on CSOs Civil Society Organizations Development DCC Djibouti Chamber of Commerce ILO International Labor Organization DCT Doraleh Container Terminal IMF International Monetary Fund DeMPA Debt Management and Performance kWh Kilowatt Assessment LMI Lower Middle Income DFiD Department for International MDAs Ministries, Departments, and Agencies Development MEFI Ministry of Economy and Finance in DFZ Djibouti Free Zone Charge of Industry DISED Direction de la Statistiques et des MENA Middle East and North Africa Etudes Démographiques MICs middle-income countries DJF Djiboutian Franc MOH Ministry of Health DPW Dubai Port World MSC Methodology, Standards and DT Djibouti Telecom Classifications EBA External Balance Assessment NDC Nationally Determined Contribution ECHACP European Commission for ND-GAIN Notre Dame Global Adaptation Index Humanitarian Aid and Civil Protection O&M Operation and Maintenance EDAM Enquête Djiboutienne Auprès des ODA Official Development Aid Ménages ONEAD Office National de l'Eau et de EDD Enérgie de Djibouti l'Assainissement de Djibouti EDESIC Enquête Djiboutienne sur l’emploi, le PAID Port Autonome International de Djibouti secteur informel et la consommation PAPFAM Pan Arab Project for Family Health des ménages PPP Public-Private Partnership i RER Real Exchange Rate SMART Standardized Monitoring and Assessment of Relief and Transitions survey ii Contents Abbreviations and acronyms .................................................................................................................................. i Team members and acknowledgments ............................................................................................................... vii Executive summary ............................................................................................................................................. viii 1. Djibouti’s Development Experience and the Case for Economic Transformation ........................................... 1 1.1 The current pattern of robust but debt-financed growth, with high poverty and unemployment, is unsustainable ............................................................................................................................................................ 2 1.2 Looking ahead, what will it take to transform the economy towards inclusive growth? ............................ 4 1.2.1 Opportunities and challenges .................................................................................................................. 4 1.2.2 Identifying binding constraints to economic transformation .................................................................. 6 2. Transforming the Environment for Business and Investment: Constraints and Reform Areas ....................... 7 2.1 Preserving macroeconomic stability: Recent development, constraints, and what needs to be done ....... 7 2.1.1 Public debt as a risk to macro stability and sustainable growth in Djibouti ............................................ 7 2.1.2 Fiscal Policy .............................................................................................................................................. 9 2.1.3 External performance ............................................................................................................................ 10 2.1.4 Real exchange rate overvaluation represents a threat to macro stability ............................................. 13 2.1.5 What needs to be done? ........................................................................................................................ 13 2.2 Create conditions for a productive and dynamic private sector: Current situation, constraints, and what needs to be done ..................................................................................................................................................... 14 2.2.1 Business regulations, input costs, and competition ............................................................................... 14 2.2.2 Firms’ access to finance ......................................................................................................................... 22 2.2.3 Djibouti’s connectivity potential for diversification towards more productive exports ......................... 23 2.3 Reforms for ensuring macroeconomic stability and improving the environment for business and investment .............................................................................................................................................................. 23 3. Transforming Human Capital by Investing in Nutrition, Learning and Skills: Constraints and Reform Areas 26 3.1 Tackling Childhood Stunting .............................................................................................................................. 28 3.1.1 Current situation .................................................................................................................................... 28 3.1.2 What constrains child growth in Djibouti? ............................................................................................. 29 3.1.3 What needs to be done to tackle stunting? ........................................................................................... 32 3.2 Expanding Schooling, Learning, and Skills ......................................................................................................... 34 3.2.1 Current situation .................................................................................................................................... 34 3.2.2 What is constraining schooling, learning and skills acquisition in Djibouti? .......................................... 35 3.2.3 What needs to be done? ........................................................................................................................ 38 3.3 Reforms for transforming human capital .......................................................................................................... 39 4. Transforming Governance for Effective Public Service Delivery: Constraints and Reform Areas .................. 40 4.1 Current situation ........................................................................................................................................ 40 4.2 Improving public administration capacity, effectiveness, accountability, and transparency: What are the constraints? ............................................................................................................................................................. 41 4.3 What needs to be done? Reforms for strengthening governance effectiveness....................................... 43 5. Summary of Policy Actions and Priorities .................................................................................................... 44 iii Annex 1. Brief History of Djibouti .................................................................................................................. 49 Annex 2. Growth and labor market paradox .................................................................................................. 49 A2.1 The empirical framework of measuring growth in TFP .............................................................................