Ethiopia opens Sh371bn gap on Kenya’s economy

Ethiopia has opened a Sh371.8 billion ($3.61 billion) gap on Kenya’s economy fuelled by a decade of double-digit GDP growth, cementing its position as Eastern Africa’s emerging power house.

The International Monetary Fund’s (IMF) latest data indicates that Ethiopia’s annual economic output, also known as the gross domestic product (GDP), hit $72.52 billion (Sh7.4 trillion) last year from $64.68 billion in 2015 and is expected to touch $78.3 billion this year.

Kenya, which lost the Eastern Africa economic leader position to Ethiopia in 2015, recorded a GDP of Sh7 trillion ($68.91 billion) last year compared to $63.62 billion in 2015 and is expected to touch $75 billion this year.

Ethiopia’s strong performance exceeded projections for last year by about $3 billion, the IMF economic outlook 2017 report shows.

The Horn of Africa nation has now effectively firmed its grip as the region’s economic giant, but trails Kenya in terms of per capita income — which measures average wealth of citizens.

READ: Ethiopia ahead of Kenya in capital race

Ethiopia’s growth is largely fuelled by public-led spending on infrastructure and a robust domestic demand, the IMF report says.

While acknowledging Ethiopia’s headline growth figures, chief executive of the Institute of Economic Affairs Kwame Owino said that Addis, which is starting from a relatively low development base, is playing catch-up to make up for years of under-investment.

It remains to be seen whether Ethiopia will sustain the growth momentum, Mr Owino said.

“With a population twice Kenya’s, Ethiopia’s larger economy is expected just by looking at the labour force and huge domestic market that have served to attract investors,” he said.

The IMF report shows Tanzania is the region’s third-largest economy with a GDP size of $47.1 billion last year, while Uganda posted an output of $26.1 billion.

Ethiopia, whose population is 91.1 million, or about twice Kenya’s, may boast a bigger economy but Kenya’s population is nearly twice as rich on average terms.

Ethiopia’s GDP per capita stood at $795.2 (Sh81,905) last year and is projected to rise to $845.9 (Sh87,127) this year compared to Kenya’s $1,516.3 (Sh156,178) last year, which is expected to hit $1,607.1 (Sh165,531) this year.

This effectively means Ethiopia, despite being larger, is categorised as a low-income economy (GDP per capita of less than $1,045) while Kenya is in the lower middle-income group (between $1,045 and $4,125).

In 2015, Kenya officially lost the bragging rights as the region’s largest economy as a result of Ethiopia’s breakneck speed in modernising its roads, railway and power plants.

Kenya’s GDP was nearly twice Ethiopia’s 10 years ago at $25.8 billion in 2006 compared to the latter’s $15.2 billion in the same year.

It has taken only a decade for the Horn of Africa nation to race past Nairobi following a robust growth that averaged 10.8 per cent since 2005.

“Ethiopia’s autocracy system, somehow modelled on China’s, means the government has unfettered power to channel resources in sectors that promise growth. But this has its shortcomings as witnessed in recent unrests,” said Anzetse Were, a development economist.

Ethiopia has styled itself as an emerging industrial hub, offering manufacturers, mostly Chinese firms, cheaper electricity at Sh6.9 (6.7 US cents) per kilowatt hour (kWh), half Kenya’s industrial tariff of Sh14.22 (13.8 US cents).

Its public debt to GDP, the driver of the investments, stood at the same level as Kenya’s at 49 per cent last year and is expected to grow to 51.8 per cent this year, lower than Kenya’s 52.1 per cent, the IMF says.

Ethiopia’s ongoing projects include the $5 billion (Sh515 billion) Grand Renaissance Dam with a generation capacity of 6,000 megawatts.

The country last year 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.

In 2015, Ethiopia launched a 32-kilometre light rail project in the capital city, the first metro service in sub-Saharan Africa at a cost of $475 million (Sh48.9 billion).

While Kenya has also raised its public investments in recent years, including roads and the nearly completed Sh327 billion standard gauge railway, it trails Ethiopia.A February report by consulting group Deloitte showed that Ethiopia’s expenditure on infrastructure projects stands at 39 per cent of GDP, above the global ideal level of 30 per cent while Kenya’s is 21.5 per cent.

The IMF report shows that South Africa continued with its slide in GDP size from a peak of $416 billion in 2011 to $294.1 billion last year, to emerge second in Africa behind Nigeria’s $405.9 billion in 2016.

Analysts reckon that another edge Kenya has over its northern neighbour is that Nairobi runs a comparatively more open economy, unlike Ethiopia which has closed most sectors like banking to foreign investors and the state rations of foreign currency.

A UN African Economic Outlook report released on Monday tipped Ethiopia to be the biggest recipient of private equity ($4.4 billion) this year in the region, beating Kenya ($1.3 billion), thanks to its favourable industrial policy.