Djibouti has a market-based, free-enterprise economy. Its economy is dependent upon its strategic position at the narrow straits at the southern entrance to the Red Sea. The French military base in Djibouti is the country's largest single source of economic and commercial activity. The remainder of the money economy is service oriented and centered upon the free port of Djibouti, the railway terminus there, the airport, and government administration. The free port features a deep-water container terminal; France has committed substantial funds to its continuing modernization. There is also an active construction industry.
There is little arable farm land in Djibouti, and the country is subject to periods of severe drought. As a consequence, Djibouti produces only 3% of its food needs. Over half of the population derives its income from livestock: goats, sheep, and camels. A fishing industry has emerged, and the Islamic Development Bank helped finance a canning factory.
Since 1990, recession, civil war, and a high population growth rate have combined to reduce per capita consumption by 35%. The unemployment rate exceeds 50% (some estimates place it at over 70%). The border conflict between Ethiopia and Eritrea disturbed the normal commerce in which Djibouti allowed Ethiopia the use of its port and conducted regular trade relations. As a consequence, average annual growth of GDP between 1988 and 1998 was -3.1%, and the economy was at zero growth in 2001.
Due to the fact that Djibouti has few exploitable natural resources and little industry, it is heavily dependent upon foreign aid to finance development projects and support its balance of payments. Its has fallen behind on its debt payments in recent years and has had difficulty meeting the reform requirements set by foreign aid donors. Ethiopia has developed other trade routes, limiting Djibouti's port activity.