Kenya Poised to Surpass Ethiopia as East Africa’s Largest Economy in 2025











April 23, 2025 | Africa Economics Desk

Kenya is on track to overtake Ethiopia as East Africa’s largest economy this year, according to projections from the International Monetary Fund (IMF). The shift, driven largely by divergent monetary policies and currency dynamics, marks a turning point in the economic landscape of the region.

GDP Projections Signal a Changing Guard

The IMF’s latest World Economic Outlook estimates Kenya’s gross domestic product (GDP) will rise to $132 billion in 2025. Ethiopia, once the region’s fastest-growing economy, is expected to post a GDP of $117 billion. This economic reversal reflects not only macroeconomic shifts but also a rebalancing of growth strategies between the two nations.

Ethiopia’s Currency Devaluation and Economic Restructuring

For decades, Ethiopia maintained strict controls on its national currency, the birr. In July 2024, however, the government implemented a sweeping liberalization of its exchange rate regime. This decision led to a sharp depreciation of the birr by more than 55% against the US dollar. The move, while painful in the short term, was a necessary precondition for securing major international financing.

As a result of the devaluation and broader economic reforms, Ethiopia secured a $3.4 billion loan package from the IMF and an additional $16.6 billion from the World Bank. The country is also now engaged in negotiations to restructure roughly half of its $28.9 billion in external debt, a process critical to restoring fiscal stability and investor confidence.

Kenya’s Currency Strength and Capital Inflows

In contrast, the Kenyan shilling emerged in 2024 as the best-performing currency globally, appreciating by around 21%. This surge was supported by several factors, including the successful issuance of a $1.5 billion Eurobond in February 2025, which significantly bolstered the country’s foreign exchange reserves.

Kenya also benefited from increased diaspora remittances and stronger export receipts, with its Treasury noting that these inflows played a crucial role in stabilizing the economy during a challenging global environment.

Political and Fiscal Hurdles

Despite its economic progress, Kenya continues to face internal challenges. A controversial tax reform package aimed at reducing the budget deficit triggered widespread protests in 2024, resulting in the deaths of at least 60 people. The unrest forced the government to abandon parts of the reform plan, complicating its fiscal targets under a four-year, $3.6 billion IMF program.

Due to missed milestones and public backlash, Kenya exited the IMF program ahead of schedule, foregoing approximately $850 million in funding. Talks are ongoing to establish a revised support arrangement.

Regional Growth Forecasts and Global Headwinds

Both economies are navigating a turbulent global environment. Ongoing trade tensions, including tariff hikes by major economies like the United States, have dampened global demand and impacted developing markets. In response, the IMF has downgraded its global growth forecast for 2025 from 3.3% to 2.8%, citing widespread downside risks.

Regionally, Sub-Saharan Africa is projected to grow by just 3.8% this year — the slowest pace since the 2020 pandemic. Within this broader context, the IMF has trimmed Kenya’s expected growth from 5.0% to 4.8%, while marginally increasing Ethiopia’s from 6.5% to 6.6%.

Broader Implications for East Africa

The shift in economic rankings between Kenya and Ethiopia underscores the importance of currency policy, fiscal discipline, and political stability in shaping national economies. Kenya’s near-term economic strength is a product of global integration and financial market access, while Ethiopia’s strategy represents a painful but necessary transformation toward liberalization and long-term debt sustainability.

As both countries navigate these transitions, their paths will influence not only domestic development but also the trajectory of East African economic integration and influence on the continent.