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Thursday, September 28, 2023

How Kenya is losing its place in the regional economic pecking order


The sectors that propelled Kenya to the top of the economic table have either stagnated or lost their lustre for investors

For decades, Kenya has been the leading country in East Africa. The economy has been attracting investors and international organizations to her shores, making her the favourite destination in Eastern Africa. Many have come to see the country as the key economic and commercial hub of East Africa. For instance, the United Nations Office at Nairobi (UNON) is the UN’s headquarters in Africa and one of the four main UN secretariat duty stations. This shows how important Kenya’s position is to the rest of the world in East Africa and Africa.

With about 80% of East African regional trade passing through Kenya’s Mombasa Port, the country’s dominance in the region is expected to continue. However, for how long, this remains to be seen. Kenya’s economy has been deteriorating even long before it was affected by the pandemic, geopolitical tensions, and the ongoing demonstrations. Furthermore, Kenyans have been facing a high cost of living in addition to additional taxes following the first budget by President Ruto’s administration. Her neighbours have not let the country’s deteriorating position go to waste, as they have taken the opportunity to continue developing and attracting investors that would have previously chosen Kenya.

Ethiopia and Rwanda have been among the fastest-growing economies in Africa and the World. According to the International Monetary Fund (IMF), these two countries recorded some of the fastest expansions in the world—an average of over 7.5% per year over the past two decades. As a result, the rest of the world has taken note. Following a genocide in 1994, Rwanda was in shambles when President Kagame took office in 2000. Since his administration took office, the country has been considered one of the few success stories in terms of economic improvement all over the world.

Over 20 years since President Kagame took over, Rwanda has been one of the best economies in the world, not only through numbers such as high economic growth but also among its people who have seen economic development, unlike the situation in Kenya. According to Donald Kemunto, an economist, Rwanda has been one of the success stories in Africa. “Rwanda’s economic growth over the last 20 years has been remarkable,” he said.

The rise of Rwanda has been thanks to the government’s focus on attracting foreign investment and creating a business-friendly environment. It has also focused on increasing investment in infrastructure and promoting education and skills development. Thanks to the administration’s efforts, Rwanda is among the best places to do business in Africa, closing in on leaders Mauritius and South Africa. With a young population, the country has focused on ensuring they have the skills to compete with the world, especially when it comes to technology. Many consider Rwanda one of Africa’s leading in information communication and technology.

“Improved governance, infrastructure, and business environment are key drivers of growth in Rwanda. The country has been successful in attracting foreign investment. This has resulted in the country reducing its poverty rate from 77% in 2001 to 55% in 2017,” said Donald Kemunto. As a result of its growth, many international organizations and conferences have headed to the country instead of Kenya, leading to the latter losing investments in the billions. For instance, according to the 2019 Africa International Conference and Conventions Association (ICCA) country rankings, Rwanda led the East African region with 32 African meetings and conferences, while Kenya was second with 27. Rwanda is on track to become a regional hub for MICE (Meetings, Incentives, Conferences, and Exhibitions/Events), with the country earning Sh8.88 billion ($62.4 million) in 2022 from hosting 104 events compared to Sh1.78 billion ($12.5 million) in 2021.

Ethiopia has also seen success in recent years. Since the early 200s, the country has embarked on economic reforms to increase its growth. And even though the country has faced a number of challenges, such as political instability and climate change, especially drought, it continues to keep its economic growth at a high level. The service sector in the country has seen much improvement.

With the government investing heavily in infrastructure projects such as roads and airports, efficiency has improved. For instance, the investment in air transport infrastructure has led to the improvement of a number of airports, such as Addis Ababa’s Bole International Airport, which was expanded recently and is one of the busiest in Africa. Some of the investment has also gone towards Ethiopian Airlines, the national carrier of Ethiopia. Not only has the airline increased its fleet, but it has also increased the routes it flies. As a result, it is among the leading airports in Africa.

The country’s train transport is also one of the best; it includes a 752.7km electrified rail that connects Ethiopia to Djibouti. This has allowed the ease in transportation of people’s cargo as well, ensuring businesses have their products in good time for the market. On the other hand, the country has also invested much in power generation and distribution in recent years. Since the launch of the Grand Ethiopian Renaissance Dam (GERD) project in 2011, access to electricity in the country has improved. With only 90% of the project complete as of April 2023, the country has increased its power capacity, which is expected to double on completion, making it the largest hydropower project in Africa. In addition, the country has invested in a number of renewable energy projects as well as rural electrification program. These projects have seen blackouts reduce, one of the major challenges the manufacturing sector faced.

“The country’s emphasis on infrastructure in terms of roads, transport as well as electricity, have been crucial in keeping economic growth at an all-time high among other African countries.,” Kemunto said. According to Vincent Mutua, economics Professor, Ethiopia has gone all out on infrastructure and delivering service to its people. And as the saying goes, the country will flourish if the people are happy.

On the side of the industrial sector, Ethiopia has seen rapid growth that has translated into increased foreign investment. For instance, after years of its state-owned bank dominating the banking sector, the country, through its national bank, announced plans to open up the banking sector to foreign competition. As a result, Safaricom entered the country after it was awarded a mobile money service licence, the first to be awarded to foreign companies to offer mobile money services. This is expected to bring health competition in the sector.

Furthermore, Ethiopia’s Prime Minister Abiy Ahmed also committed to privatize the telecommunications sector. The country has also received much investment from countries such as China, Turkey, and the US towards agriculture/horticulture, agricultural processing, textiles, leather, and leather products. Coffee continues to be the leading foreign exchange earner for the country, followed by other commodities such as gold, livestock, and horticulture products.

The manufacturing sector has also witnessed much growth thanks to policies and incentives by the government. For example, establishing industrial parks and special economic zones has attracted companies from various sectors, including textiles, pharmaceuticals, and agro-processing. This has increased employment and exports. These positive changes have led to the prediction that Ethiopia, Africa’s second-largest population, will surpass Kenya to be the third-largest economy in Sub-Saharan Africa this year. According to the IMF, Ethiopia’s GDP 2023 will stand at Sh22.21 trillion ($156.08 billion) compared to Kenya’s Sh16.81 trillion ($118.13 billion). As a result, Ethiopia will become Eastern Africa’s largest economy.

With Tanzania also coming up in terms of economic improvement, Kenya’s dominance in Eastern Africa is at great risk. However, some still believe that Kenya is leagues ahead. For example, Aly-Khan Satchu, a Kenyan economist, believes that the growth in Ethiopia is artificial and unsustainable. “The country’s growth figures have been inflated by government borrowing,” he said. Despite their economic growth, Kenya still has a higher GDP per capita. According to country-economy, a country database, as of 2022, Kenya had a GDP per capita of Sh304,393 ($2,140) while Ethiopia’s is Sh176,946.76 ($1,244) and Rwanda’s Sh140,675.36 ($989). Also, Ethiopia is currently facing internal conflict as the region of Amhara faces a war between government forces and the regional militia, who were recently working together. This has resulted in the loss of many lives, and it has affected the economy as well. 

Kenya still holds a strategic position among its neighbours; thus, its dominance may not end soon, even with Ethiopia projected to surpass GDP this year. However, even with this in mind, Kenya can’t allow ignoring her neighbours. It’s time to tackle the challenges it’s facing and promote economic growth, or it will never sit on the throne again.

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