Kenya’s Rise: Factors Behind Overtaking Ethiopia in 2025

By Darius Spearman (africanelements)

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Big changes are happening in East Africa’s economic landscape. Projections indicate that Kenya is on track to become the region’s largest economy by 2025, surpassing Ethiopia. This shift isn’t sudden; it stems from different choices and pressures facing each nation. The International Monetary Fund (IMF) forecasts this pivotal moment, highlighting how currency values, government money policies, and outside forces are shaping their futures differently.

Think of Gross Domestic Product, or GDP, as a country’s economic report card. It measures the total value of everything produced within its borders over a specific time (Investopedia). It helps us understand the health of an economy and compare nations (Worldometers). Therefore, when the IMF projects Kenya’s GDP reaching around $132 billion while Ethiopia’s contracts to about $117 billion, it signals a major change in regional economic power (East African Herald; Business Insider Africa).

Shifting Tides: Kenya Ethiopia GDP 2025 Forecast

The IMF’s forecast points to a significant turning point. Kenya’s economy is expected to grow, reaching between $131.673 billion and $132 billion in 2025. Conversely, Ethiopia’s GDP, measured in US dollars, is predicted to shrink, landing between $117.457 billion and $117.46 billion. This marks Kenya’s potential return to the top spot in East Africa, a position Ethiopia has held recently. This change reflects more than just numbers; it suggests diverging economic health and prospects for millions of people in the region.

Understanding why this is happening requires examining each country’s specific situation closely. Kenya benefits from a strengthening currency and robust income from its citizens working abroad. Ethiopia, however, faces the harsh consequences of a major currency devaluation, which is being demanded as part of the international loan conditions. Consequently, these internal and external factors are driving the projected shift in the regional economic hierarchy (Business Daily Africa; Africanews).

Currency Swings: Kenya Shilling Performance vs Ethiopia Devaluation

Currency movements play a huge role in this story. Kenya’s shilling had a remarkable run in 2024, appreciating by 21% against the dollar. This made it the world’s best-performing currency during that period (Business Daily Africa; Africanews). Currency appreciation means the shilling buys more dollars, automatically boosting the country’s GDP when measured in dollar terms. It also makes imports cheaper, potentially helping to control inflation (tutor2u).

Ethiopia faces the opposite situation. As part of the conditions for receiving billions in loans from the IMF ($3.4 billion) and World Bank ($16.6 billion), Ethiopia agreed to a massive devaluation of its currency, the birr. The birr lost over 55% of its value in 2024 (East African Herald; Business Insider Africa). Devaluation aims to make exports cheaper and more attractive, but it drastically reduces the country’s GDP when calculated in dollars (Investopedia). Subsequently, this currency shock is a primary driver behind Ethiopia’s projected drop in the economic rankings.

Ethiopia’s Hurdles: Navigating Reform and Inflation

Ethiopia’s economic path is complicated by tough reforms and existing pressures. The currency devaluation, while unlocking crucial international loans needed to manage its $28.9 billion external debt, comes at a high domestic cost (Business Insider Africa). Making imports more expensive fuels inflation, which was already high (around 20%), straining household budgets (Daily Sabah). This economic pain exacerbates challenges stemming from recent civil conflict and climate disruptions, such as droughts, which have already affected agriculture and stability (East African Herald).

The IMF-mandated reforms go beyond currency changes. They include “fiscal consolidation” (controlling government spending) and structural adjustments, such as privatizing state-owned companies (IMF). The goal is to stabilize the economy and shift towards private sector-led growth. Specifically, the IMF requires Ethiopia to move towards a market-determined exchange rate, aiming to close the gap between the official and parallel (black market) rates to below 10% (IMF). Nonetheless, implementing these reforms while managing social impacts and existing vulnerabilities presents a major balancing act for the Ethiopian government.

Kenya’s Resilience: Drivers of the IMF Kenya Economy Boost

Kenya’s economic story presents a contrast. While facing its fiscal challenges, the country demonstrates resilience. A key factor is the significant inflow of money from Kenyans living and working abroad, known as remittances. These hit a record $4.94 billion in 2024, providing crucial foreign currency that supports the shilling’s value and helps stabilize the economy (Africanews). Remittances directly boost foreign exchange reserves; studies suggest a 1% rise in remittances relative to GDP can increase reserves by nearly 1% (USC Economet Reviews).

Kenya also successfully tapped international capital markets. In February 2025, it sold a $1.5 billion Eurobond—debt issued in a foreign currency (like US dollars) to international investors (Business Daily Africa). While Eurobonds add to national debt and carry risks related to global interest rates (Investopedia), this sale bolstered Kenya’s foreign exchange reserves at a critical time, contrasting sharply with Ethiopia’s struggles with foreign currency shortages. Additionally, despite domestic turmoil, such as the 2024 protests against a controversial finance bill, which resulted in an estimated $600 million in investor losses, Kenya’s underlying macroeconomic stability appears less shaken (African Leadership Magazine).

A Widening Gap: GDP Per Capita and Social Impacts

The shifting GDP figures also reveal stark differences in economic well-being when population size is considered. GDP per capita, calculated by dividing GDP by population, provides a rough measure of average income. In 2025, Kenya’s GDP per capita is projected to rise to $2,467. Ethiopia’s, however, is expected to fall significantly from $1,320.16 to $ 1,066.60 due to currency devaluation and population size (Africa View Facts). This widening gap highlights the differing economic realities experienced by average citizens in the two nations.

Economic policies inevitably impact social equity. In Kenya, the government pursued austerity measures, including planned cuts to development spending (8.5%) and controversial tax hikes in the 2024 Finance Bill (Vellum; BNP Paribas). These measures, aimed at fiscal consolidation, sparked widespread protests because they were perceived as disproportionately burdening low-income groups, who were already struggling with living costs. Ethiopia’s high inflation (20%) and potential subsidy cuts linked to reforms also squeeze households, particularly the poor, potentially worsening food insecurity (Daily Sabah). Ultimately, these economic shifts and policy choices have real consequences for poverty and access to essential services.

Broader Context: East Africa’s Largest Economy Amid Global Winds

Neither Kenya nor Ethiopia exists in isolation. Both nations must navigate a challenging global economic environment. The IMF has lowered its global growth forecast for 2025 to 2.8%, citing uncertainties like potential US tariffs and broader trade tensions (Business Daily Africa). These global headwinds can impact export demand, foreign investment, and access to capital for countries across the continent.

Even with its relative strength, Kenya’s growth projection for 2025 has been slightly revised downwards by the IMF to 4.8%, 0.2% lower than previous estimates (Africa View Facts). Ethiopia faces steeper declines due to its internal challenges. However, Kenya’s more diversified economy and relative stability may position it better to withstand external shocks compared to Ethiopia, which remains vulnerable to commodity price fluctuations and reliant on foreign aid and loans. Regionally, Kenya’s economic leadership could potentially strengthen the East African Community (EAC) by fostering collaborative projects, though Ethiopia’s struggles highlight the risks associated with heavy debt and rigid economic policies (African Leadership Magazine; East African Herald).

In conclusion, Kenya’s projected rise to become East Africa’s largest economy in 2025 is a story of contrasting fortunes shaped by currency dynamics, policy choices, and resilience. While Kenya leverages a strong shilling, robust remittances, and access to capital, Ethiopia grapples with the consequences of devaluation, high debt, and internal instability. This shift represents a significant turning point for the region, potentially positioning Kenya as a key driver of integration, while underscoring the complex challenges Ethiopia must overcome to regain its economic footing.

ABOUT THE AUTHOR

Darius Spearman is a professor of Black Studies at San Diego City College, where he has been teaching since 2007. He is the author of several books, including Between The Color Lines: A History of African Americans on the California Frontier Through 1890. You can visit Darius online at africanelements.org.