Djibouti is capitalizing on its strategic location on one of the world’s busiest trade routes to build Africa’s largest free trade zone area. The Horn of Africa nation controls the Bab el-Mandeb (“Gate of Tears” in Arabic) which is a crucial chokepoint at the entrance to the Red Sea and the Suez Canal from the Indian Ocean.
The Bab el-Mandeb is the world’s fourth most frequented maritime route used by some 30,000 ships every year. Also, after the Ethiopia–Eritrea war, Djibouti has become a gateway for 90% of Ethiopia’s imports, a trading volume that accounts for 90% of Djibouti’s port traffic.
In 2018, lowly-populated Djibouti launched the first phase of the project comprising a 240-hectare (593-acre) site. The year before, it had unveiled three new ports and a railway linking it to landlocked Ethiopia, as part of its bid to become a global trade and logistics hub.
The $3.5-billion China-backed initiative will span 4,800 hectares when completed and it will become the biggest free trade zone area on the continent. “The volume of goods traveling to East Africa keeps increasing. Every time a product arrives in the continent without being transformed it is a missed opportunity for Africa,” said Aboubaker Omar Hadi, chairman of the Ports and Free Zones Authority.
“(Djibouti) aims to become a gateway not only to Ethiopia but to South Sudan, Somalia and the Great Lakes region,” he added. “This new free zone will be the country’s first employment reservoir, with more than 15,000 direct and indirect jobs created.”
The project is part of China’s “One Belt, One Road” initiative to expand trade routes and a series of infrastructure across 60 countries. It is being constructed by China’s largest public port operator, Dalian Port Corporation Limited.
The operations of the port will be a jointly run by the Djibouti Ports and Free Zone Authority and three Chinese companies: China Merchants Holdings, Dalian Port Authority and big data company IZP.
According to Reuters, the agreement calls for the zone to handle $7 billion in trade within two years. Besides, Djibouti will create a unified customs system with China, establish a transit trade center and set up a currency clearing system.
At least 21 countries have signed on to operate in the zone which offers tax-free incentives to investors. Port activities in Djibouti account for about 70% of Djibouti’s GDP.
Aside from the port expansion, the tiny East Africa nation is home to both Chinese and US military bases. The UK, France, Japan and Saudi Arabia also have military installations there. Land lease for military installations is also a major source of revenue for the Djiboutian government.
Washington pays $63 million annually for a 10-year lease of the area while China pays $20 million a year, in addition to other investments.