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Djibouti Opens Chinese-Backed Free Trade Zone

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Mohamed Siad Doualeh / Twitter

By MarEx 2018-07-12 16:58:16

Djibouti has opened the first phase of an ambitious project to build an 18-square-mile, $3.5 billion free trade zone, the largest development of its kind in Africa. On July 5, its government celebrated the launch of an initial $370 million complex of commercial and industrial facilities, which President Ismail Omar Guelleh described as a "zone of hope" for Djiboutian job-seekers. The free zone offers foreign investors and businesses the opportunity to set up operations without paying property tax, income tax, dividend tax or VAT, according to the Djibouti Ports & Free Zones Authority. 

However, the initiative has also raised concerns about Djibouti's legal liability and debt burden: global port operator DP World says that the project violates its exclusive (and recently terminated) contract to develop Djibouti's port, and financial analysts say that the construction costs will make the nation overly dependent upon Chinese financing.

In a statement issued Thursday, DP World warned that for legal purposes, its concession for Djibouti's Doraleh Container Terminal (DCT) remains in force, despite the Djiboutian government's unilateral takeover of the facility earlier this year. DP World described the opening of the free trade zone as "another clear example by the Djiboutian Government of violating its contractual obligations and the rights of foreign investors," and it threatened to take legal action - including claims for damages against third-party operators. DP World has already initiated an arbitration proceeding against Djibouti over the seizure of DCT. 

Debt and leverage

The new free trade zone is backed by China Merchants Group, Dalian Port Authority and the investment firm IZP Technologies. According to an analysis from the Center for Global Development, Djibouti has already accumulated government debt equal to about 85 percent of its GDP, almost all of it lent by Chinese entities. The debt could give China leverage to demand additional concessions, like rights for port operations or an increased forward-deployed military presence. Djibouti has already signed a lease with China for a naval base near the port of Doraleh, just a few miles away from the American base at Camp Lemmonier.

In particular, financial analysts point to Sri Lanka as a cautionary example of the risks of China's "Belt and Road" mega-investments in developing nations. The government of Sri Lanka incurred significant debts to Chinese backers for the construction of a port, airport and highway at Hambantota, a quiet village on the south end of the island. In late 2016, it signed over the port's operations on a 99-year lease to China Merchants Port Holdings for $1.1 billion, giving China a fully-developed commercial seaport near the Indian coastline. India has expressed concern that the port could be used for strategic purposes by China's navy, but Sri Lanka has promised to retain control over any military port calls.