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Kenya is poised to overtake Ethiopia as East Africa’s largest economy in 2025, driven by steady growth and Ethiopia’s recent currency devaluation, according to the International Monetary Fund (IMF).
The economic rivalry between these two regional powerhouses has intensified in recent years, with both nations vying for foreign investment and dominance in agriculture, manufacturing, and services.
Recent reports highlight Kenya’s projected GDP of $132 billion in 2025, surpassing Ethiopia’s estimated $117 billion, a shift attributed to Ethiopia’s birr devaluation and Kenya’s resilient economic fundamentals.
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Kenya’s Economic Resilience
Kenya, long regarded as East Africa’s financial and technological hub, has sustained real GDP growth averaging over 5% in the past decade.
In 2023, the economy grew by 5.2%, up from 4.8% in 2022, fueled by a rebound in agriculture and robust service sectors, which accounted for 69% of growth. Household consumption, contributing 70% to demand, underscores Kenya’s growing middle class and entrepreneurial spirit.
The country’s diverse economy, bolstered by Nairobi’s thriving fintech ecosystem—led by mobile money pioneer M-Pesa—and a renewable energy sector where geothermal power constitutes 45% of the energy mix, positions Kenya as a leader in innovation and sustainability.
Despite challenges, including public debt exceeding 70% of GDP and inflation at 7.7% in 2023, Kenya’s outlook remains positive.
The IMF projects GDP growth of 5.4% in 2024 and 5.6% in 2025, supported by declining inflation (forecasted at 5.5% in 2025) and fiscal consolidation efforts aiming to reduce the fiscal deficit to 5.0% of GDP by 2025.
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However, risks such as global financing constraints, climate shocks, and political instability in the region could hinder progress.
Kenya’s focus on climate-resilient agriculture and infrastructure development, including the Ethiopia-Kenya electricity interconnector, aims to mitigate these vulnerabilities.
Ethiopia’s Rapid Growth and Recent Setbacks
Ethiopia, Africa’s second-most populous nation with 126.5 million people, has been a standout performer, achieving average real GDP growth of nearly 10% annually from 2004 to 2018.
In 2022/23, the economy grew by 7.2%, driven by government-led infrastructure investments and progress in agriculture and services.
Coffee, a critical export, supports over 15 million livelihoods, though oilseeds have recently surpassed it in export value.
Ethiopia’s ambitious Home-Grown Economic Reform Agenda seeks to transition to a private-sector-driven model, with recent reforms including a market-determined exchange rate and monetary policy modernisation.
However, the July 2024 devaluation of the Ethiopian birr by over 55% has reshaped the economic landscape.
While unlocking $3.4 billion from the IMF and $16.6 billion from the World Bank, the devaluation inflated import costs, exacerbating inflationary pressures in a country already grappling with conflict and climate challenges.
Ethiopia’s GDP, previously estimated at $156.1 billion in 2023, is now projected to fall to $117 billion in 2025 due to the currency’s reduced value. Despite a projected growth rate of 6%, outpacing Kenya’s, the devaluation has temporarily ceded Ethiopia’s lead.
Ethiopia faces significant hurdles, including a per capita gross national income of $1,020, one of the lowest in the region, and reliance on food aid for 15 million people.
The Tigray conflict’s aftermath, with reconstruction costs estimated at $20 billion, and structural weaknesses in its state-led growth model add to macroeconomic vulnerabilities.
Yet, Ethiopia’s large population and ongoing reforms make it a magnet for foreign investment, particularly from China, in manufacturing and infrastructure like the Grand Ethiopian Renaissance Dam.
Comparative Dynamics and Regional Implications
The competition between Kenya and Ethiopia hinges on their ability to attract foreign direct investment (FDI) and diversify their economies.
Kenya’s edge lies in its diversified economy, with strong service and technology sectors, and a more stable governance structure despite corruption challenges.
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Ethiopia, with nearly double Kenya’s population, leverages its low-cost labour and vast market to attract manufacturers, though political instability and regulatory barriers pose risks.
Both nations are major producers of coffee, tea, and horticultural products, but Kenya’s advanced value-addition in textiles and fintech gives it a slight advantage.
In 2023, Ethiopia briefly overtook Kenya as East Africa’s largest economy, with a GDP of $156.1 billion compared to Kenya’s $118.1 billion, driven by rapid growth and state-led industrialisation.
However, the birr’s devaluation has reversed this trend, with posts on X reflecting mixed sentiments—some noting Ethiopia’s faster growth rate (6% vs. Kenya’s <5%) and predicting a future rebound.
Kenya’s projected ascent in 2025 reinforces its role as East Africa’s economic anchor, but Ethiopia’s reforms and demographic advantage suggest the race remains far from over.
Analysts emphasise that both nations must address structural challenges—Kenya’s debt and Ethiopia’s fragility—to sustain inclusive growth.
As the IMF warns of global trade tensions impacting growth, regional cooperation, such as the Ethiopia-Kenya power interconnector, could unlock shared prosperity.
For now, Kenya’s diverse and resilient economy positions it to lead, but Ethiopia’s potential remains a force to watch.