How Kenya reclaimed East Africa’s largest economy title as Ethiopia’s Birr devaluation shrunk GDP

Kenya has reclaimed its spot as East Africa's largest economy after Ethiopia's currency devaluation decreased the dollar value of its gross domestic product (GDP). According to International Monetary Fund (IMF) data, Kenya's GDP grew by 13.7 percent to $135.92 billion in 2025, outpacing Ethiopia's $126.35 billion. This shift caused Kenya to rank seventh among Africa's top economies, while Ethiopia dropped to eighth.

However, this change in ranking does not reflect a faster growth rate for Kenya compared to Ethiopia. Exchange rates significantly impacted their dollar-denominated economic positions. Ethiopia had held the regional lead for five years, reaching $210 billion in GDP in 2024. But, a market-determined exchange-rate system, introduced in July 2024, weakened the birr by over a third against the US dollar, reducing Ethiopia's international economic valuation.

Ethiopia's economy still grew by 9.2 percent in real terms in 2025, while Kenya's only expanded by 4.6 percent. Kenyan chief economic adviser, Charlie Robertson, explained that the decline in Ethiopia's GDP was primarily due to its currency depreciation. When a currency weakens, the dollar value of domestic goods and services decreases, even if the economy continues to grow.

The Kenyan shilling's strengthening also helped boost the dollar value of its economy. Nonetheless, these rankings do not guarantee better living standards, increased job opportunities, or faster economic growth. Economic gains depend on factors like productivity, employment, inflation, and how the gains are distributed. Ethiopia's exchange-rate reforms could open opportunities for Kenyan businesses in the neighboring market by easing restrictions on international payments.

Companies could benefit from better access to foreign currency, affecting cross-border transactions. Kenya Airways had faced difficulties accessing Ksh1.5 billion held in Ethiopia due to foreign-exchange restrictions. However, currency volatility poses risks for businesses operating in Ethiopia, like increased import costs and reduced profits when converted to Kenyan shillings.

Kenya and Ethiopia are competitors for investment in industries like aviation, textiles, apparel, and leather manufacturing. Despite the decline in Ethiopia's dollar-denominated GDP, the country still offers a substantial market for investors. Kenya, on the other hand, maintains a significant role in regional finance, services, and trade.

The IMF predicts that Kenya will maintain its lead and surpass Angola in 2028 to become Africa's sixth-largest economy. Kenya's challenge is to translate its economic size into stronger productivity, sustainable employment, and improved household welfare. Ethiopia must ensure that foreign-exchange reforms help improve access to dollars and support investment.

Ultimately, Kenya's rise in East Africa's economic rankings is due to both the recovery of the shilling and Ethiopia's birr devaluation. The true test for both countries will be whether growth leads to better living standards and sustainable prosperity.