Ethiopia has surrendered its position as East Africa’s largest economy after Kenya overtook it in 2025, marking the first time in five years that the title has shifted. The International Monetary Fund’s latest economic outlook reveals Ethiopia’s gross domestic product now totals $126.35 billion, down from Kenya’s $135.92 billion. By 2026, the gap between the two nations is expected to expand to $24 billion, with Kenya’s economy projected to reach $151.15 billion compared to Ethiopia’s $127.15 billion.
The economic reversal stems largely from Ethiopia’s currency depreciation. In July 2024, the country adopted a more flexible exchange rate system under an IMF-backed financing program worth $3.4 billion, allowing the birr to weaken against the dollar. While Ethiopia’s real economic growth remains strong—compared to Kenya’s 4.6%—the dollar value of its output has declined sharply. Kenya’s stable shilling has preserved its economic standing in nominal terms.
Tigray’s War Fuels Ethiopia’s Economic Decline
Beyond currency fluctuations, Ethiopia’s ongoing conflict in Tigray has further weakened its economic prospects. Renewed fighting between federal forces and the Tigray People’s Liberation Front (TPLF) has disrupted stability, despite a 2022 peace agreement that briefly halted hostilities. Prime Minister Abiy Ahmed, who assumed office in 2018, has faced persistent challenges in resolving the crisis. The conflict has resulted in over 800,000 deaths, displaced millions, and triggered famine conditions across the region.
In October 2026, Ahmed announced the formation of a caretaker administration for Tigray following the federal government’s recapture of the regional capital, Mekelle. This move has raised questions about the durability of the peace agreement, while tensions with neighboring Eritrea have added to regional instability. Reports from the World Health Organisation (WHO) document widespread sexual violence, systemic infrastructure destruction, targeted blockades on food and medicine, and acute famine conditions across Tigray and neighboring Amhara and Afar regions.
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The conflict’s resurgence follows a period of relative calm after the 2020–2022 war, which began when Tigray held unauthorized elections. Internal power struggles within the TPLF and territorial disputes contributed to the renewed violence, eroding investor confidence. Ethiopia’s real GDP growth remains robust, but security risks and currency pressures have weakened its position in East Africa’s economic rankings.
Kenya’s Stability and Industrial Ambitions
Kenya, in contrast, has leveraged its stability to attract investment. The country’s well-developed financial, technology, and logistics sectors have established it as a regional commercial center. A proposed $16 billion oil refinery in Lamu, backed by Nigerian billionaire Aliko Dangote, could further strengthen its industrial and energy leadership. However, Kenya’s high public debt and borrowing costs may constrain its long-term growth potential.
The IMF’s projections highlight the divergent economic trajectories of the two nations. Ethiopia’s real GDP growth outpaces Kenya’s 4.6%, but currency depreciation and security concerns have reduced its nominal economic standing. Ethiopia’s economy, valued at $210 billion in 2024, dropped to $126.35 billion in dollar terms after the birr’s exchange rate adjustment. Kenya, meanwhile, has maintained a stable shilling, preserving its GDP value at $135.92 billion.
The TPLF’s internal divisions have complicated Ethiopia’s stabilization efforts in Tigray. Since 2018, the group had dominated national politics for nearly three decades before Abiy Ahmed’s reforms sidelined it through the creation of the Prosperity Party. The 2020 regional elections in Tigray, held without federal approval, sparked the initial conflict, which escalated into full-scale war by November 2020. The 2022 Pretoria Agreement temporarily halted hostilities, but disputes over territory and leadership fractures within the TPLF and interim administration led to renewed violence in early and mid-2026. Federal forces have exploited these divisions to regain control of key areas, including Mekelle.
