Djibouti is a small country both in terms of geographical size and population, with an economy that depends on the provision of port services for goods in transit to and from Ethiopia. The only other links between the coast and Ethiopia pass through Eritrea. However, since the start of the border dispute and the subsequent war between Ethiopia and Eritrea that took place from 1988 to 2000, Ethiopia has not been inclined to use the Eritrean routes. Thus Ethiopian use of Djibouti's port facilities has expanded.
The structure of the economy has not changed much since Djibouti achieved independence from France in 1977. The economy is mostly based on services, and this sector accounted for 75 percent of gross domestic product (GDP)
Uncertainty over the size of the population makes estimates for per capita gross national product (GNP) rather tentative, but using the exchange rate conversion the figure is approximated at US$750. The United Nations (UN) provides a figure using purchasing power parity conversion (which makes allowances for the low price of some basic commodities in Djibouti) of $1,300 in per capita GDP in 2000. Both of these estimates place Djibouti in the low-income category of nations.
After modest growth enjoyed during Djibouti's first decade of independence, poor planning and reduced foreign assistance led to GDP growth that averaged only 1 percent per year from 1989 to 1991. Growth became negative following the outbreak of civil war (1991-94), which was instigated by dissidents from the minority Afar group. Informal sector activities, which evade both tax and customs, flourished in the mid-1990s, resulting in the apparent 5.5 percent per year decrease in the GDP from 1991 to 1994 as reported by the UN Development Program . Since 1992 the port has registered a fall in the number of imports for domestic use, leading to the closure of many outlets. The reduced use of the French garrison since 1999 will also decrease growth, though the increased provision of services for the transit trade with Ethiopia due to its war with Eritrea is expected to provide some compensation.
In the 1980s attempts to improve infrastructure and reduce structural problems in the economy had little impact. A program for the decentralization of the economy, the development of free trade zones , and agricultural and livestock programs all depended on foreign aid, which was terminated in 1991 following the outbreak of the civil conflict. In 1992 the depth of the crisis led to the suspension of government investment which resulted in the crumbling of infrastructure, most notably of electric power.
Djibouti has had a stable government since independence under the ruling People's Progress Assembly (RPP), namely the presidencies of Hassan Gouled and his successor Ismael Gouleh. Nonetheless, government policy since 1991 has consisted of a series of short-term responses to both external donor pressure (particularly from France) and internal demands (especially during the civil war). The government controls the major sectors of the economy— the port facilities, railway, and utilities—but there are currently plans for privatization of these enterprises.
In the period from 1991 to 1994, the civil war upset an already limited tax base, and budget controls disappeared as income dwindled. Expenditures rose, causing major deficits—although the extent was hidden by irregular accounting—and the government built up debts in salary arrears with private creditors.
In 1996 proposed budget cuts caused a general strike and civil unrest, which led to a policy reversal. A more comprehensive package was then drafted in 1996 with the International Monetary Fund (IMF), World Bank, and French help. This culminated in an IMF US$6.2 million standby credit, which started in April 1996, and the resumption of limited French budget assistance. A donor conference in 1997 secured limited funds for reforms, especially for the demobilization of the army after the civil war, which had been the single biggest cause of the budget deficit in recent years.
In the period from 1999 to 2000, the government launched plans for the privatization of all the major utilities (including water, electricity, post, railway, telecommunications, and port facilities). The government also hopes to attract private capital in free-trade zone projects.