Ethiopia has lost East Africa’s largest economy title for 2025, falling $24 billion behind Kenya, which has reclaimed the region’s top economic powerhouse for the first time in five years, in the International Monetary Fund (IMF)’s latest world economic outlook.
The reason advanced by global economic analysts is, mainly due to the depreciation of the Ethiopian birr, which reduced the dollar value of its economy amid renewed security challenges in the Tigray region, as 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.
Additionally, development analysts say the Tigray conflict has slurred Ethiopia’s investment climate
Ethiopian Prime Minister Abiy Ahmed has been unable to manage Ethiopia’s Tigray crisis since assuming office in 2018.
The Tigray crisis is a violent political and military struggle for power and regional control in northern Ethiopia between the Ethiopian federal government and the Tigray People’s Liberation Front (TPLF), which has recently reignited into a full-scale resumption of fighting
The TPLF dominated Ethiopian national politics for nearly three decades until Prime Minister Abiy Ahmed came to power in 2018 and sidelined the party through major government reforms and the creation of the Prosperity Party. Tensions peaked in late 2020 when Tigray held unauthorized regional elections, leading to an outbreak of civil war in November 2020. Although a peace deal (the Pretoria Agreement) formally paused the 2020–2022 civil war, internal power struggles, disputed territories, and leadership rifts within the TPLF and interim administration caused the conflict to reignite in early and mid-2026.
• The multi-year conflict has caused an estimated over 800,000 deaths (including civil war casualties), mass internal displacement affecting millions, and widespread refugee flows into neighboring countries. 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.
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 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 shift marks a significant reversal in East Africa’s economic rankings, with Kenya reclaiming its position as the region’s largest economy after roughly five years.
The gap is projected to widen to $24 billion in 2026, strengthening Kenya’s standing 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.
Currency movements largely explain the reversal in rankings rather than a substantial difference in the countries’ underlying economic growth.
However, Ethiopia still has a larger economy than Kenya when measured by purchasing power parity (PPP), which accounts for differences in local prices. Kenya’s lead is based on nominal GDP measured in US dollars.
Tigray conflict adds to Ethiopia’s investment challenges. While currency depreciation has reshaped the economic rankings, Ethiopia also faces renewed security challenges that could affect its investment prospects. Fresh fighting between federal forces and the Tigrayan rebels has raised concerns about the country’s stability and economic recovery.
On October 16, Prime Minister Abiy Ahmed announced a caretaker administration for Tigray after government-aligned forces regained control of the regional capital, Mekelle.
These 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.
Meanwhile, 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.
Though still enmeshed in the unresolved Tigray crisis, Ethiopia however, 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 IMF projections also place Kenya seventh among Africa’s largest economies, behind South Africa, Egypt, Nigeria, Algeria, Morocco and Angola.
