Kenya has reclaimed its position as East Africa's largest economy after five years, overtaking Ethiopia as the depreciation of the Ethiopian birr reduces the dollar value of its economy amid renewed security challenges in the Tigray region.
- Kenya has overtaken Ethiopia as East Africa's largest economy, mainly due to the depreciation of the Ethiopian birr.
- Kenya's GDP is projected at $135.92 billion in 2025, ahead of Ethiopia's $126.35 billion, with the gap expected to widen to $24 billion in 2026.
- Renewed insecurity in Ethiopia's Tigray region and concerns over the 2022 peace agreement could further deter foreign investment and harm economic stability.
- While Ethiopia maintains stronger real GDP growth rates than Kenya, currency movements and investor preferences have shifted economic leadership in the region back to Kenya.
According to the International Monetary Fund’s (IMF) October 2026 World Economic Outlook, Kenya’s gross domestic product (GDP) stood at $135.92 billion in 2025, surpassing Ethiopia’s $126.35 billion by $9.57 billion.
The gap is projected to widen to $24 billion in 2026, as Kenya strengthens its position as a regional commercial hub while Ethiopia faces currency pressures and renewed security concerns that could undermine investor confidence.
Kenya reclaims East Africa's economic lead
Ethiopia's economy, valued at $210 billion in 2024, fell to $126.35 billion in dollar terms in 2025 following major currency reforms.
In July 2024, the country introduced a more market-determined exchange-rate system under an IMF-supported $3.4 billion financing programme, allowing the birr to depreciate against the US dollar.
Consequently, Ethiopia's economic output lost substantial value when converted into dollars, despite continued growth in domestic production.
Kenya, meanwhile, benefited from a relatively stable shilling, which helped preserve the dollar value of its economy.
The currency movements largely explain the reversal in rankings, rather than a significant difference in the countries' underlying economic performance.
Tigray conflict adds to Ethiopia's investment challenges
Beyond currency pressures, Ethiopia faces renewed insecurity following fresh fighting between federal forces and Tigrayan rebels.
On October 16, Prime Minister Abiy Ahmed announced a caretaker administration for Tigray after government-aligned forces regained control of the regional capital, Mekelle.
The developments have raised concerns about the durability of the 2022 peace agreement, while tensions with neighbouring Eritrea have heightened fears of wider regional instability.
The insecurity could discourage foreign investment, disrupt trade and increase operating costs, particularly for companies planning long-term infrastructure and manufacturing projects.
The IMF has also identified domestic security risks as a potential threat to Ethiopia's economic outlook.
Against this backdrop, Kenya could attract investors seeking alternative regional business locations, supported by Nairobi's established financial services, technology and logistics sectors.
The country's investment ambitions are reflected in Nigerian billionaire Aliko Dangote's proposed $16 billion oil refinery in Lamu, a project that could strengthen Kenya's position as an industrial and energy hub if completed.
However, Kenya continues to face economic challenges, including high public debt, borrowing costs and pressure on government finances.
Ethiopia maintains stronger economic growth despite losing top position
Despite falling behind Kenya in nominal GDP, Ethiopia continues to record stronger underlying economic growth.
IMF estimates show Ethiopia's economy expanded by 9.2% in real terms in 2025, compared with Kenya's 4.6%, demonstrating that the change in rankings largely reflects exchange-rate movements rather than faster growth in Kenyan production.
Looking ahead, the IMF projects Kenya's GDP will reach $151.15 billion in 2026, compared with Ethiopia's $127.15 billion, widening the gap between the two economies to $24 billion.
The projections also place Kenya seventh among Africa's largest economies, behind South Africa, Egypt, Nigeria, Algeria, Morocco and Angola.