services include public administration, electricity, water, financial services to the expatriate community, commerce, communications and transport services.

**_Merchandise exports of local origin are insignificant, and the country relies almost entirely on imported food and consumer goods_** . Merchandise exports produced in Djibouti are limited, consisting mainly of live animals and skins. About 80 percent of good exports are actually reexports that go through Djibouti’s port. Djibouti’s main sources of foreign exchange earnings are official grants, military aid, receipts from services to the expatriate community, and port revenues from re-exporting goods to foreign military personnel and neighboring countries. Good imports represented over 55 percent of GDP in 2004.

# **2.2. Fiscal Structure and the Real Exchange Rate**

**_Djibouti fiscal structure suggests potential fiscal savings from a currency devaluation._** Revenues are largely denominated in foreign currency while expenditures are largely denominated in domestic currency **_._** Djibouti’s government revenue relies heavily on import taxes (around 30.3 percent of total revenue in 2004), foreign aid grants (19.2 percent of revenue) and military revenue (17.8 percent of revenues), all of which are denominated in foreign currency. On the other hand, the wage bill and transfers make up over 50 percent of total expenditure, and these expenditures are denominated in domestic currency terms.

**_Real fiscal revenues move in tandem with the real exchange rate._** During the last two decades the Djibouti real effective exchange rate has experienced a strong appreciation that has been reversed in the last few years. Figure 1 shows the movement of the real (CPI based) effective exchange rate index, real fiscal revenue index and real government expenditure index between 1980 and 2004. All values are shown with 1996 as the base year and deflated with the GDP deflator except for the REER. For comparative purposes, the REER is redefined such that a falling level should be taken as an appreciation while a rising trend indicates depreciation. The REER has appreciated by 61 percent between 1980 and 2001, though a turning point appears to have taken place in 2002 where the REER started to depreciate.

_Source: Authors’ calculations based on WEO 2004._

# **2.3. Labor Market**

**_The non-tradable sector is labor intensive._** Household survey data indicates that 80 percent of the employed labor force is concentrated in public administration, tourism and commerce and other general services that serve domestic demand.

<!-- Start of picture text --> 220<br>Figure 1. Djibouti: Real Exchange Rate Index, Real Fiscal Revenue Index<br>200 and Real Expenditure Index. (1996=100) REER<br>180<br>Real Fiscal Revenue<br>160 Index<br>Real Expenditure<br>140 Index<br>120<br>100<br>80<br>60<br>1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004<br><!-- End of picture text -->

**_High nominal wages in the public sector drive up labor costs in the economy._** The average public sector wage in Djibouti is 9 to 10 times the country’s income per capita and 5 to 10 times the average public sector wage in Ethiopia and Yemen. Because the public sector wages are used as a benchmark for private sector wages, they drive up labor costs, deterring firm expansion and job creation.

**_The official unemployment rate is high, at about 56 percent in 2002._** Youth employment is also a serious matter, where almost 90 percent of Djiboutians between 15 and 20 years old are

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