How the Ethiopia, Somaliland Port Deal Could Devastate Djibouti’s Economy

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However, Djibouti’s economic dominance in the region is now under threat due to a recent port deal between Ethiopia and Somaliland. This deal entails Ethiopia gaining access to the port of Berbera in Somaliland, which is strategically located on the southern coast of the Gulf of Aden. This move has the potential to devastate Djibouti’s economy and significantly reduce its role as a major hub for trade in the region.

The port of Berbera offers several advantages over Djibouti in terms of cost and efficiency. It is closer to Ethiopia, which means shorter transit times and lower transportation costs. Additionally, the port of Berbera is equipped with modern facilities and infrastructure, making it an attractive alternative for Ethiopia’s import and export needs.

Furthermore, the port deal between Ethiopia and Somaliland is not an isolated incident. It is part of a broader effort by Ethiopia to diversify its options for trade and reduce its dependence on a single port. In recent years, Ethiopia has also entered into port agreements with Sudan and Kenya, further challenging Djibouti’s monopoly in the region.

The potential consequences for Djibouti are significant. The country heavily relies on revenue generated through its port services, including handling fees, storage fees, and transit fees. With Ethiopia diverting a substantial portion of its trade to the port of Berbera, Djibouti stands to lose a significant source of income.

Moreover, the port deal threatens to undermine Djibouti’s status as a regional logistics hub. Currently, Djibouti serves as a gateway for goods destined for landlocked countries in East Africa, including Ethiopia, South Sudan, and Uganda. If Ethiopia reduces its reliance on Djibouti and shifts its trade through the port of Berbera, other landlocked countries may follow suit, further diminishing Djibouti’s importance as a trade hub.

The repercussions of this port deal extend beyond Djibouti’s economy. The country has also invested heavily in its infrastructure and industrial zones to support its role as a logistics hub. These investments may now prove to be less lucrative, with reduced trade volumes passing through Djibouti. This could lead to unemployment and economic instability in the country.

The consequences of the Ethiopia-Somaliland port deal on Djibouti’s economy may also have geopolitical implications. Djibouti’s strategic location has attracted significant foreign military presence, with several global powers maintaining military bases in the country. Any economic downturn in Djibouti could potentially weaken its relationship with these countries, impacting its geopolitical significance in the region.

Djibouti is not taking these developments lightly. The country has announced plans to expand its port and industrial capacity, including the construction of a new port at Tadjourah. The hope is that by increasing its infrastructure and offering competitive services, Djibouti can retain its role as a major trade and logistics hub.

In an unequivocal show of economic progress, Djibouti has experienced substantial growth under its current strategy. This observation is substantiated by the World Bank data which indicates that the annual GDP per capita catapulted from a mere half to approximately $3136 between 2010 and 2022. Additionally, forging connections with Ethiopia for water and electricity supplies has provisioned consistent access to these essential utilities for a growing populace in Djibouti. In terms of foreign direct investment proportionate to GDP, there’s been a remarkable upsurge — jumping from an early-2000s figure of 0.6% to around 5-6% during 2015 through 2022.

Hence it is not surprising that any indication of Ethiopia seeking another enduring transit and logistics ally within this region might trigger apprehension within Djibouti structures. During January’s onset, Ethiopian Prime Minister Abiy Ahmed along with Somaliland leader Muse Bihi Abdi made public their Memorandum of Understanding (MoU). This agreement will facilitate Ethiopia’s use of Somalian shores for trade operations as well as security implications.

How the Ethiopia, Somaliland Port Deal Could Devastate Djibouti's Economy
An aerial view of Djibouti sea port.
Image: EPA/Mazen Mahdi

Accordingly, under this pact, Ethiopia gets green light for utilizing Berbera port located at Somaliland coast commercially; besides securing a lease spanning five decades on approximately thirteen miles stretch across the coast adjoining Gulf of Aden at Somaliland . The purpose being establishment of a naval base here. Reciprocally, Ethiopia will prioritize diplomatic recognition proceedings favoring Somaliland –an outcome intensely pursued by this quasi state ever since it declared independence unilaterally from Somalia back in 1991 albeit without success till date.

Boasting a vast populace exceeding 123 million, Ethiopia lost its maritime pathway following Eritrea’s declaration of independence from the nation’s capital, Addis Ababa, in 1993. The Eritrean port of Assab served as Ethiopia’s maritime access point for several years until conflict erupted between the two countries in 1998. Consequently, Ethiopian authorities initiated exploring Djibouti for conducting their country’s seaborne commerce with global markets.

The growing fascination harbored by Addis Ababa for novel trading pathways—particularly Berbera port—comes as no surprise. Indeed, Ethiopia had previously negotiated a deal to secure privileged rates and bolster trade via Berbera in 2016 when it was plagued by an acute drought that necessitated ramping up cereal imports—a plan foiled due to congestion at the Djibouti port. Later on, in 2018, Addis Ababa escalated its investment strategy by obtaining a significant 19% stakeholder at Berbera port—though this move was limited somewhat due to subpar transport links and Somaliland’ lack of international endorsement preventing any major escalation in Ethiopian trade through said facility.

Nonetheless, the latest agreement—which predicts substantial infrastructure investment within Berbera courtesy of Addis Ababa—emphatically signals heightened commitment towards utilizing this particular harbor for facilitating Ethiopia’s import-export trades.

The recent announcement has sparked a rapid response across the region, most notably from Somalia. Given its view of Somaliland as an integral part of its sovereign land, Somalia’s concern is to be expected. In a formal interview with Al Jazeera, Somali President Hassan Sheikh Mahmud cautioned Ethiopia against proceeding with the proposed agreement and hinted at potential collaborative military intervention between Egypt and Somalia to forestall it.

Cairo has voiced support for Somalia’s territorial integrity amid enduring contention with Addis Ababa over the Grand Ethiopian Renaissance Dam construction and prospective impact on Nile water flow into Egypt. Similarly, Turkey – owing to its military base in Somalia – has publicly endorsed Mogadishu.

On Djibouti’s side, the presumptive agreement between Ethiopia and Somaliland could signify a critical blow to their economic standing due to longstanding strategic investment in regional port services.

The United Arab Emirates, which maintains close rapport with Somaliland while also establishing itself at Berbera Port via state-owned operator DP World, embraces progressing negotiations. It continues escalating both its military stance and commercial footprint around Gulf of Aden trade passageways and Red Sea corridor; meanwhile weaving progressively closer ties with Ethiopia.

Should this agreement proceed, its profound geopolitical implications cannot be underestimated. It holds the potential to ignite a fresh conflict between Ethiopia and Somalia, with the latter unlikely to tolerate Ethiopian military presence on its perceived sovereign land. Although there have been reported instances of cooperating Somali forces aiding the Ethiopian government in its confrontation with Tigray, a historically tumultuous relationship laced with border disputes is also significant. Indeed, these two countries waged war over Ethiopia’s Ogaden region in the late 20th century. A contemporary iteration of such conflicts could feasibly involve multiple regional armies.

The wide-ranging criticism that immediately followed their announcement underscores how unsettled this agreement truly is — stemming from stakeholders including European Union representatives, officials from the United States and even Arab League members like Somalia itself.

In terms of Djibouti specifically; acquiring an economic setback of such magnitude as a result would irreparably harm its strategic positioning within port services across the Horn of Africa. Despite beneficent elements within their overall economic trajectory courtesy of this strategy thus far; substantial obstacles still loom large for Djibouti – President Ismail Omar Guelleh (in office since 1999) has predicated national advancement upon the theory that accruing foreign investment in local transport services will stimulate domestic companies expansion triggering subsequent growth through diverse sectors operating domestically.

The realization of economic stabilization within Djibouti remains a slow process. Current statistics reveal an unemployment rate exceeding 27 percent, with approximately 23 percent of the population living in conditions identified as extremities of poverty, as projected by the World Bank.

How the Ethiopia, Somaliland Port Deal Could Devastate Djibouti's Economy
The Port of Berbera in Somaliland. (AFP)

Simultaneously, substantial investments in infrastructure have resulted in significant public debt. Deeply rooted within its strategic positioning as Ethiopia’s conduit to international markets lies Djibouti’s vision for financial growth and stability. However, this approach appears precarious given that the country’s public debt to GDP ratio was registered at 65% in 2022, according to figures from The Central Bank Of Djibouti. Furthermore, an analysis made by the International Monetary Fund (IMF) in 2021 deemed Djibouti’s levels of national debt unsustainable.

A sizable chunk of this liability is accredited to China following their staggering investment outlay totaling $14 billion between fiscal years 2012 -2020 invested into loan facilities and infrastructure ventures. A considerable amount went into financing capital-intensive projects such as railway transportation links and power grid connections branching off towards Ethiopia; however the return on these has been slower than anticipated.

The potential ramifications on Djibouti’s economy due to transport activity transit moving over to Berbera are not yet fully understood but could be critical threats exacerbating already prevalent economic instabilities further weakening loan repayment capabilities if trade flow through its port experiences a considerable reduction.

Ibrahim Jalal, a respected non-resident scholar at the Middle East Institute, has suggested that any impact from this prospective deal is unlikely to be immediate. He stated in a recent discussion, “The actual implementation of the agreement will require time and caution should it go forward. During this transitional period,” Jalal continued, “Djibouti possesses the opportunity to mitigate potential losses by strategically enhancing alliances with other countries within the Horn of Africa region.”

Moreover, transitioning to a diversified base of trade partners would also necessitate well-thought-out regional infrastructure investments and be subjected to passage of time. Despite Djibouti’s current economic reliance on providing transport services for Ethiopia, the proposed agreement serves as an important reminder; irrespective of its finalization or lack thereof, diversification remains an unequivocal necessity for Djibouti’s path towards economic stability.

However, reclaiming its economic dominance will not be an easy task for Djibouti. It will require substantial investments, as well as efforts to improve the efficiency and competitiveness of its ports and logistics services. Additionally, Djibouti will need to strengthen its relationships with other countries in the region, offering incentives for businesses to choose Djibouti as their preferred trade route.

Esther Jazmine
Esther Jasmine is a highly esteemed East African correspondent for Who Owns Africa, who has demonstrated an unwavering commitment to providing valuable information and insightful analysis. Her coverage of the dynamic realms of business, politics, governance, and current affairs is truly exceptional. Esther's passion for uncovering the truth is evident in her unique perspective and her ability to analyze and dissect current affairs with great skill. She possesses a deep understanding of the complexities and nuances of the political and business landscapes of East Africa.

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