Kenya unease grows as Ethiopia becomes region’s largest economy

It is official: Kenya is not the largest economy on this side of the Sahara. That coveted trophy goes to Ethiopia.

Addis Ababa’s double-digit growth has seen Ethiopia speed past Kenya, leaving Nairobi at a precarious second position in economic ranking in Eastern Africa.

And with a resurgent Tanzania breathing noisily behind Kenya’s neck, analysts think it is just a matter of time before Dar es Salaam deposes Nairobi from the second place summing up Kenya’s economic coup de tat.

According to the IMF’s latest report, Ethiopia’s economy has overtaken Kenya’s with Ethiopia’s gross domestic product (GDP)- or the total value of goods and services produced annually- hitting Sh7.4 trillion in 2016 compared to Kenya’s Sh7 trillion in the same year.

And there is no respite for Kenya as Tanzania, which according to the World Bank has “maintained relatively stable, high growth” of between six and seven per cent over the last decade, seems to have cast its eyes on toppling Kenya as the East African Community kingpin.

Indeed, according to the World Bank’s Global Economic Prospects 2017, Ethiopia, Tanzania and Rwanda are expected to post higher GDP growth rates than Kenya. In fact, Ethiopia’s and Tanzania’s growth rates will be the first and second highest respectively in Sub-Saharan Africa in the next three years.

Corruption and wastage

Tanzania’s GDP has more than doubled in the last 10 years growing from $21.5 billion (Sh2.22 trillion) in 2006 to a high of $48.2 billion in 2014. It dropped slightly to Sh4.6 trillion in 2016.

Economics lecturer and former Permanent Secretary in President Mwai Kibaki’s Government, Gerrishon Ikiara, says he is not amused by these developments. He notes that Ethiopia has “always been a strong economy in the region” while Tanzania is re-awakening after a dark period in which the resource-rich East African economy was devastated by the late President Julius Nyerere’s socialist policies.

Observers note that underpinning the strong growth in these countries- including another fast-growing member of the EAC, Rwanda- is their relatively strong governance structures. Most of these countries have a zero-tolerance towards corruption and wastage that have become endemic in Kenya. Of the nine Eastern Africa countries, only Uganda ranks above Kenya in Transparency International’s corruption perceptions index.

“Ethiopia is a country we need to watch, it is on the rise,” says Dr Samuel Nyandemo, a development economist and lecturer at the University of Nairobi. Besides having a larger population of about 100 million people and a landmass of 1,104,300 square kilometers, the Horn of African country has also enjoyed a stable political environment for an extended period.

“The institutional framework in place in Ethiopia has made mobilisation of resources and put it into good use,” says Nyandemo. This stability has seen Ethiopia’s real estate flourish, the manufacturing industry reboot and its transport sector modernised. Ethiopia’s match to the pinnacle has been aided, in large part, by the massive infrastructural projects funded by China.

A recent article in China Daily quoted a senior Ethiopian official saying that Chinese firms have invested a whopping $4 billion (Sh4.1 trillion) in Ethiopia in the last two decades, thus deepening political and economic relationship of the two countries.

Ethiopia’s huge population has been a source of cheap labour, an attractive incentive for many manufacturing firms eager to set base in the region but wary of the high cost of production in most African countries.

A 2015 report by management firm McKinsey found that around 2013 “a number of European companies—among them, H&M, Primark, and Tesco—began sourcing some of their garments from Ethiopia.” Although Kenya’s textile and apparel sector was similarly attractive, Ethiopia beat Kenya as a sourcing destination. It featured among top-ten sourcing destinations in the next five years among a number of chief purchasing officers (CFOs) interviewed by McKinsey.

Only Bangladesh, Vietnam, India, Mynmar, Turkey and China were more lucrative than Ethiopia to these respondents. The survey showed that while Ethiopia had cost advantages, Kenya boasted of “higher production efficiency.” But the cost advantage seems to have won it over for Ethiopia, with 28 out of 40 CFOs saying they plan to start sourcing from Ethiopia, compared to 13 who said they would like to do the same in Kenya.

“Ethiopia’s wages for garment workers are among the lowest globally, at below $60 (Sh6,201) per month, and work-permit costs for foreign workers are less than one-tenth those in neighboring Kenya,” read the article written by Achim Berg, Saskia Hedrich.

“Additionally, Ethiopia has low electricity prices. The country has a strong supply of hydroelectric power, and while the power grid is not the most reliable, the Ethiopian government is building a separate grid for new industrial zones currently under development,” added the article.

On the other hand, manufacturers and buyers lamented that comparatively high labour costs were a challenge of doing business in Kenya. Monthly wages for garment workers was estimated at around $120 (Sh12,403) to $150 (Sh15,504) range.

“Energy costs are also high, and because the power supply is spotty, factories often have to rely on generators. In Africa, power from generators works out to be four times as expensive as power from the grid,” read article, East Africa: The next hub for Apparel Sourcing?

Indeed, Ethiopia’s growth has mirrored that of its main benefactor- China. Like China, Ethiopia has adopted a centrally planned economy in which the State has maintained an iron-grip on all of the country’s economic development agenda even as it suppresses any countervailing individual and political interest.

Ikiara says this is the main reason the country has developed very fast. This is unlike in Kenya with its liberal constitution that grants citizens unfettered individual rights but which, unfortunately, tend to be “abused.” “Ethiopia has been able to manage its politics,” says ikiara. He regrets the fact that in Kenya “everything is contested” with projects being delayed or shelved as result.

A good example is the new railways recently built in Kenya and Ethiopia by Chinese contractors. Addis Ababa-Djibouti Railway is a 752 kilometre standard gauge railway (SGR) that is fully electrified. Kenya’s new railway from Mombasa to Nairobi is also standard gauge (1,435mm) and covers an area of 472 kilometres. However, questions have been asked as to why an electrified Ethiopian line that is 350km longer than Kenya’s cost about $3.4 billion compared to $3.2 billion for Kenya’s diesel-powered.

Official explanation has been that this was due to high terrain which called for many bridges and tunnels and a high cost of land compensation, as land in Kenya is owned by individuals rather than by the State. Land compensation not only took a tidy some of the Sh327 billion used to build the infrastructure, it also delayed the project with some individuals running to Court whenever they felt slighted.

The debacle that is the land compensation in Kenya has in recent times cost the country a number of key projects. While it is not very clear why Uganda snubbed Kenya for Tanzania for its oil pipeline, a few Ugandan officials were reported saying that expensive land acquisition was one of the reasons Kampala re-routed its pipeline to Dares Salaam.

Regional powerhouse

Last year, receiver managers of Kinangop Wind farm decided to pull the plug on the Sh15 billion mega-power project which was expected to wire an additional 15,000 homes to the national grid, citing a land compensation stalemate between the contractor and locals in Kinangop, Nyandarua County.

Interestingly, Ethiopia’s model has also been assumed by Tanzania, a country that can as well be described as sleeping giant with its vast resources. Ikiara says that if Tanzania could have been well managed right from independence, they could have been far ahead of Kenya.

But the country has, slowly but surely, embarked on a process of reclaiming its place in the region’s economic pecking order, especially following the election of Dr John Pombe Maghufuli, a no non-sense head of State who does not tolerate complacency and criticism in equal measure.

Maghufuli’s goal, it seems, is to topple Nairobi as East Africa’s regional hub and regional powerhouse. Dares Salaam wants to achieve this by, first of all, keeping Kenya at arm’s length and frustrating the successful integration of the EAC, according to Ikiara.

Maghufuli who has come under attack for muzzling dissenting voices, has moved with speed to seal all loopholes of pilferage even as he decimates all vestiges of Ujamaa, a socialist system initiated by Tanzania’s founding father Mwalimu Julius Nyerere, and which is roundly blamed for under developing Tanzania.

As pangs of hunger bit following a debilitating drought that ravaged the whole of Horn of Africa, Maghufuli is said to have lectured Tanzanians against expecting the Government to feed them, proclaiming that the Government “did not have farms.”

The result has been, while Kenya’s drought situation has driven inflation to a five-year high of 11.5 per cent, in Tanzania inflation still remains within the Government’s target. And it looks like Kenya is losing the battle for the control of the East African region to Tanzania.

Dr Nyandemo notes that Tanzania’s Southern Corridor, rather than Kenya’s Northern Corridor, is fast turning into a favorite for the landlocked countries of Uganda, Burundi, Rwanda. And even as Kenya embarks on building a 32 Berth port at Lamu under the Lamu Port-South Sudan-Ethiopia-Transport (LAPSSET), Tanzania has also inked a deal with the Chinese that will see Dar es Salaam develop one at Bagamoyo which is expected to handle about 20 million containers. It has been billed as East Africa’s race for the biggest port.

“Most tourists are flocking to Tanzania helped by the terrorists attacks in Kenya and the relaxation of Visa-entry rules,” noted Nyandemo, adding that the cost of visiting tourist sites has also gone down. And all these efforts have started paying off. EAC volumes of trade- both service and manufacturing- seem to be favoring Tanzania more, according to Nyandemo.

“This is seen by total value of transactions. Indeed while Rwanda is leading service sector, it is followed closely by Tanzania. The service sector is boosted by tourists and Southern corridor,” explained Nyandemo.

Tanzania also recently launched the construction of its own standard gauge railway, an electric-driven unlike Kenya’s that is diesel-driven, as it keeps up the pressure on Kenya. “I will not be surprised if the coming five years, Tanzania is also ahead of Kenya,” says Ikiara.

But there is hope for Kenya, which, according to Ikiara, is also doing “fairly well.” With the SGR, Nyandemo feels that Kenya might redeem itself and not be deposed by Tanzania. “With the SGR in place, and if we minimize the bureaucracy at the point of entry, we will catch up,” said Nyandemo.

But even as Ethiopia basks in the glory of being ahead of Kenya, its citizens are currently suffering internet black-out after the Government shutdown the services as students sat for exams.