Kenya is set to be replaced as the third-largest economy in sub-Saharan Africa by Angola and Ethiopia, weakening the East African country’s power to tap investors enticed with a population that has more cash to spend.
Faster GDP growth in Angola and Ethiopia will see Kenya relegated to number five in sub-Saharan Africa’s economic rankings, according to projections by the International Monetary Fund (IMF) that show Nigeria as the largest economy on the continent.
A return to growth linked to higher oil prices saw Angola overtake Kenya last year, according to the IMF, after the nation—which is the continent’s second-largest oil producer after Nigeria—ended years of recession.
Ethiopia is this year set to replace Kenya from position four on the back of easing armed conflict in the nation and the continuation of the ambitious economic reform drive aimed at opening up one of Africa’s fastest-growing but most closed economies.
The IMF expects the economies of Ethiopia and Angola this year to expand by 13.5 percent and 8.6 percent respectively on dollar terms.
However, Kenya is projected to record a slower growth of 2.4 percent in the review period as the country grapples with the aftershocks of the Covid-19 pandemic, drought, election jitters and disruption of global supply chains by the Russia-Ukraine war.
Sub-Saharan Africa accounts for 46 of the continent’s 54 countries, excluding giants like Morocco and Egypt.
The relegation of Kenya to position five will weaken its hand in the race for foreign direct investment (FDI), which is critical in easing the growing youth unemployment on the continent.
So far, South Africa and Ethiopia have fared better than Kenya in attracting foreign investments eyeing a population that has more cash to spend.
The IMF projects Kenya’s GDP to hit $117.6 billion this year, behind Nigeria ($574 billion), South Africa ($422 billion), Angola ($135 billion) and Ethiopia ($126.2 billion).
From mobile phones, cars, food, and clothes to financial services and entertainment, multinational companies are homing in on lucrative new markets as millions of Africans aspire to claw their way out of still widespread poverty.
African countries that promise to expand middle-class buyers with swelling disposable incomes are in a pole position to attract foreign investments.
Oil-rich Angola will reclaim its third position, which it lost to Kenya in 2020 following years of contraction due to a slump in oil prices.
Angola is the continent’s second-largest oil producer after Nigeria, according to OPEC, while Kimberley Process data ranks it as the world’s seventh-biggest producer of rough diamonds.
After five years of recession, Angola’s GDP increased 0.7 percent in 2021, according to the World Bank.
Long dominated by state-owned companies, a legacy of its socialist past, Angola has also embarked on ambitious privatisation programmes but progress has been slow.
Wahoro Ndoho, an economist and past director-general of Public Debt Management for the Treasury, noted that Ethiopia has been on an upward trajectory owing to its aggressive industrialisation and Chinese-like State capitalism where the government cherry-picks sectors and projects to be prioritised.
“But also it (Ethiopia) has a huge population. It was always going to overtake us because of its huge population base,” said Mr Ndoho.
Until the civil war broke out in November 2020, Ethiopia — Africa’s second-most populous country with over 115 million people — had been regarded by development economists as a success story.
Its economy, driven by investment in agriculture, industry and infrastructure, grew on average 7.0 percent annually per capita in the 15 years to 2019, according to World Bank data -- one of the fastest rates in the world.
Ethiopia’s Prime Minister Abiy Ahmed, who took office in 2018, launched an ambitious reforms drive aimed at opening up one of Africa’s most closed economies.
It has started the process of privatising its telecoms, banking and sugar sectors. Fighting erupted in Ethiopia’s northern Tigray region in November 2020, hitting state economic programmes and deterring foreign investors.
A ceasefire reached in November has raised hopes that Ethiopia’s economic momentum can be restored.
The country is among Africa’s top recipients of foreign investments, becoming a magnet for manufacturers ahead of Kenya.
While Kenya has struggled to retain and attract multinational manufacturers, it has recently become a magnet for technology firms and financial service companies seeking a hub for a larger share of the African market.
Global tech giants, including Microsoft, Alphabet Inc and Facebook, have been increasing investment in Kenya in recent years to take advantage of growing economies with rising access rates to the Internet by a youthful population.
But industrialists, especially multinationals, are constantly on the hunt for bargain production locations much like they do tax havens, a trend that has seen Kenya lose firms like Schneider Electric, Colgate Palmolive and Reckitt Benckiser.
The IMF rankings, however, have been disputed in some quarters.
Mark Bohlund, a Senior Credit Research Analyst at REDD Intelligence, an online information platform that provides intelligence and data on emerging market corporates, noted that the projections are likely to be incorrect.
“Yes, the IMF forecasts are showing that both Angola and Ethiopia are going to be larger than Kenya in 2023 in nominal USD terms. However, these projects are likely to be incorrect as they are based on unrealistic FX estimates and forecasts for both Angola and Ethiopia,” said Bohlund in an email.
According to Bohlund, the Angolan 2023 nominal GDP projection is based on a forecast of Angolan Kwanza (AOA)452/USD which is where the currency traded in October when the World Economic Outlook forecasts were released.
“But it is now trading at AOA504/USD which leaves the Angolan economy just slightly larger than Kenyan in 2023, ceteris paribus (all factors constant),” said Bohlund.
“The Ethiopian forecast is based on an assumption of ETH 65/USD, which is weaker than the official exchange rate but far stronger than the black-market rate which I believe currently is around ETH95-100/USD.”