Economic activity in Djibouti is basically dependent on trade and the services sector, accounting for almost two-thirds of the GDP. The objective of the government is to further strengthen the role of Djibouti as a center for foreign trade, based upon the country's strategic position, its port and airport, free zone facilities and the modern telecommunication system. Such strategy is to reduce the country's dependence on foreign assistance, diversifying the economy and creating new job opportunities. Private investment in small and medium-sized enterprises is encouraged and a greater role is given to the private sector through privatization programmes related to several industrial projects.

Macroeconomic performance improved in 2003 although no progress was made in advancing structural reforms to improve Djibouti's competitiveness. Real GDP growth in this service-oriented economy accelerated to 3,5% in 2003 from about 3% on average in 2002-20 , owing to higher consumption and investment . Nevertheless, with population growth standing at about 2% a year, economic growth has remained inadequate over the past years for achieving poverty reduction and reducing high unemployment. GDP growth was expected to remain slightly above population growth in 2004.
The authorities expect that structural reforms could be implemented by the end of 2005. A new labour code has been recently approved and the computerization of direct tax administration is moving forward. A World Bank mission took place this year to discuss plans to restructure the power and water sectors and the government is prioritizing an ambitious list of public investment projects.
These reforms are essential to consolidate the improvement of the country's attractiveness for investment following the recent creation of a free zone. The private sector is also concerned with the investment bias that has been created under the new Free -Zone Law. In the financial sector, progress has been made in putting in place an appropriate regulatory framework for micro finance and the authorities expect a revised banking law and central bank charter to be approved before the end of the year.

Economic prospects
The modernization of the port of Djibouti with its transshipment services offers the most promising area of development . Djibouti is a major transshipment center for several neighbouring African countries and it used to rank high among the world refueling centers . The Port of Djibouti offers regular shipping lines with three continents and is the sole natural shipment center for such a large country as Ethiopia. Trading activities will however depend on the general economic outlook in the region.
The airport of Djibouti is another major trump card, capable of handling the largest aircraft and equipped with all the facilities necessary for cargo exchange with a vast hinterland.  The country's telecommunications system is considered to be one of the best performing in the region and the country is linked to all the modern information highways.
Creater importance has been given to the development of the industrial sector and the government is trying to promote the role of the private sector. Ownership of public projects has been handed over to private entrepreneurs and privatization of more projects is planned in the near future.
Given the liberal economic system, prospects seem promising in the field of offshore banking too. The rapid development of the banking sector is due to the stability of the country, a strong currency, a favourable climate for private initiative and freedom to transact business.
The government adopted a foreign investment policy which is much more liberal than in many other developing countries. Many incentives are being offered to encourage investment in the food processing sector, in offshore and deep-sea fishing and fish processing, in the mining sector, in energy research and many others. The best scope for private investment is in general engineering, repair and maintenance activities and repacking of certain imported goods.
The agricultural sector represents less than 3% of GDP and nearly 90% of the land surface is volcanic desert. Owing to the unproductive land, Djibouti is capable of producing only some 3% of its food requirements. Yet, the livestock population is of utmost importance as more than half of the population depends on livestock operations for food, trading and clothing.
The development of free trade zones was another important topic of the government policies in the past few years. The government encouraged the creation of industrial activities in the free trade zone of the port as well as the storage capacity needed to attract goods and supplies from the neighbouring countries. Advantages for the country include job creation, the inflow of foreign currency, technology transfers and the narrowing of the balance of trade deficit.
An important tool to reinforce the role of Djibouti in the future is the creation of new commercial free zones at the port and the airport.

These zones form a most attractive platform for foreign companies from Europe, the Far East and even North America in order to serve the nearby free zones of Dubai and Mauritius. Private investment is to play a major role in these developments.
A major feature is the membership of Djibouti in the trade and aid agreement signed by the ACP states with the European Union. The country is furthermore a member of the Preferential Trade Area for East and Southern Africa which aims at promoting trade through cooperation between 16 African states.
In the nearby future, Djibouti is thus to confirm its role as a major center for regional trade and inter-regional exchange. The government's efforts to develop the infrastructure related to transport and telecommunication have a major role in a country which is remarkably well taking advantage of its geographic position.

Basic Economic and Financial Indicators, 2001-2004

Sources.: Djibouti authorities and International Monetary Fund