Ethiopia to overtake Kenya as Eastern Africa’s top economy

Ethiopia’s economy is expected to overtake Kenya’s this year, buoyed by massive government spending on infrastructure that has kept the Horn of Africa nation in the list of the world’s fastest economies in the past 10 years.

The International Monetary Fund’s (IMF) latest statistical estimates indicate that Ethiopia’s gross domestic product (GDP) is forecast to grow from $61.62 billion in 2015 to $69.21 billion this year, narrowly beating Kenya’s output which is expected to rise from $63.39 billion to $69.17 billion over the same period.

“Ethiopia has experienced double-digit economic growth, averaging 10.8 per cent since 2005, which has mainly been underpinned by public-sector-led development,” the African Development Bank, the OECD Development Centre and the United Nations Development Programme say in the latest African Economic Outlook report.

Kenya’s GDP of $14.1 billion in 2000 was 71.6 per cent larger than Ethiopia’s $8.23 billion in the same year but the Horn of Africa nation has closed the economic gap in the last five years of robust growth.
The IMF’s GDP estimates are based on current market prices using exchange rates prevailing between July 22 and August 19.
Having established its economic lead ahead of Kenya, Ethiopia is forecast to maintain its position as Eastern Africa’s largest economy over the medium term — a position that is also expectved to improve its standing as an investment destination.

Ethiopia’s rise as a regional economic powerhouse has mostly been fuelled by mega public sector investment similar to the Chinese model that has enabled the Asian nation to become the world’s second-largest economy in two decades.

Ethiopia’s investment, as a percentage of GDP, rose sharply from 20.2 per cent in 2000 to 39.2 per cent last year and is expected to hit a new high of 39.2 per cent of the domestic output this year.

While Kenya has also raised its public investments, including on big infrastructure projects, it remains significantly below that of Ethiopia.
Kenya’s investment as a percentage of GDP rose from 18 per cent in 2000 to hit a high of 22.4 per cent in 2014 before receding to 21.2 per cent last year and is projected to rise to 22.5 per cent this year.

Public investments

Ethiopia’s economy is expected to grow further riding on the state-led investment in infrastructure, according to the African Economic Outlook report.

“Public investments are expected to continue driving growth in the short and medium term with huge investments in infrastructure and the development of industrial parks, prioritised to ease bottlenecks to structural transformation, which will still have to take shape with industry playing a significant role in the economy,” the report says.

Ethiopia’s ongoing projects include the $5 billion Grand Renaissance Dam with a generation capacity of 6,000 megawatts, which is expected to earn the country $1 billion annually from electricity sales, including exports.

The Horn of Africa nation recently commissioned a railway linking its capital Addis Ababa to the Red Sea port city of Djibouti, fast-tracking the movement of goods and people across its vast territory.
The railway line is important for land-locked Ethiopia, which uses the port of Djibouti to trade with Europe, Asia and parts of Africa.
Besides, Ethiopia last year also launched a light rail project in Addis Ababa, the first metro service in sub-Saharan Africa.

The Horn of Africa nation’s GDP is set to overtake Kenya’s despite a debilitating drought that has left millions in need of aid this year – and stirred mixed feelings about its development model.

Besides massive government spending, which stimulates economic growth in the Keynesian fashion, Ethiopia has other factors working in its favour in terms of its ability to attract foreign investment.
With a population of nearly 100 million people, Ethiopia offers a large internal market for consumer goods manufacturers and the Addis government has in recent years firmed that up with investor-friendly policies that have attracted manufacturers and established a strong industrial base for the economy.

Though Kenya’s ego may be bruised by its impending toppling from the top perch, it can take pride in the fact that it is the richer economy compared to Ethiopia.

Ethiopia’s GDP per capita stood at $686.5 (Sh69,345) last year and is projected to rise to $758.9 (Sh76,648) this year compared to Kenya’s which stood at $1,434.3 (Sh144,864) in 2015 and is expected to hit $1,521.8 (Sh153,701) this year.

Besides a richer consumer base, Kenya has a relatively more developed financial sector and human resource and is improving its standing as a regional transport and communications hub with access to the sea.

Kenya is also viewed as relatively democratic compared to Ethiopia which remains under authoritarian rule often marked by crackdowns on the press and its own citizens such as the Oromo.

More importantly, Kenya runs a comparatively more open economy, unlike Ethiopia which has closed most sectors of its economy to foreign investors.

The IMF’s GDP forecasts are based on several assumptions such as that established policies of national authorities will be maintained and that the average price of oil will be $42.96 a barrel in 2016 and $50.64 a barrel in 2017 and will remain unchanged in real terms over the medium term.

“The estimates and projections are based on statistical information available through September 16, 2016,” the IMF said.

While Kenya faces the prospects of being overtaken by Ethiopia in absolute economic size, it is expected to maintain a huge lead ahead of other neighbouring countries in the region, including Uganda and Tanzania.