Debt on the increase in Djibouti

IMF and World Bank say Djibouti at high risk of not being able to pay its debts, but it is not heavily indebted.

The East African country of Djibouti is experiencing a large increase in debt following drought and high global commodity prices. The drought in the Horn of Africa has increased water scarcity, cut food production and increased refugees from neighbouring Somalia. Along with high global prices for vital imports, these have all increased the relative cost of imports compared to exports. Some but not all of this gap has been filled by grants, leaving some extra borrowing. Djibouti’s trade deficit increased from 6 per cent of GDP in 2010 to 12 per cent in 2011.

The government’s external debt has already increased significantly over the last decade from 40 per cent of GDP in 2001 to 70 per cent in 2009, and now stands at $700 million.  This year, the IMF predicts the government will spend 14 per cent of revenues on foreign debt payments. Since 2001, over 70 per cent of lending to the country has been from multilateral institutions such as the IMF, World Bank and African Development Bank.

In May the IMF agreed to lend a further $10 million to help the country meet its debt and import payments. As part of the loan programme the Djibouti government has agreed to:
•    Reform diesel fuel subsidies
•    Freeze any hiring in the public sector, except for health and education
•    Freeze public sector pay, except for the lowest salary band. Inflation is 4% this year.

Djibouti has not been considered eligible for the Heavily Indebted Poor Countries (HIPC) initiative, which allows countries to have some debts cancelled in return for following IMF and World Bank economic policy conditions. It is ‘poor enough’, but was not considered ‘indebted enough’ when judgements were made in the mid-2000s. Despite this, the IMF and World Bank now classify the country as at high risk of not being able to pay its debts. The HIPC scheme has effectively now been closed to new entrants.

In 2008, the five western countries  owed debt by Djibouti did restructure repayments, but this only applied to $75 million of debt, and primarily pushed payments into the future.  Annual income per person in the country is £750. A quarter of the population are undernourished.