NAIROBI, KENYA – FEBRUARY 23: General view over the city park towards the Nairobi skyline on February 23, 2016 in Nairobi, Kenya. Situated in East Africa with a coastline on the Indian Ocean Kenya encompasses savannah, lakelands, the dramatic Great Rift Valley, mountain highlands and abundant wildlife such as lions, elephants and rhinos. From Nairobi, the capital, safaris visit the Maasai Mara reserve, known for its annual wildebeest migrations, and Amboseli National Park, offering views of Tanzania’s 5,895m Mt. Kilimanjaro. Kenya gained its independence from British colonial rule in 1963 after an insurrection led by Jomo Kenyatta. (Photo by Ian Forsyth/Getty Images)

East Africa’s economy is surging, with annual GDP growth heading in the right direction. In 2019 the region’s economy grew at about 5%. In spite of the Covid-19 pandemic, the region is forecast to grow 3% in 2021 and move back up to 5% by 2022.

Despite economic imbalances across East Africa, Djibouti, Ethiopia, Kenya, Seychelles, Tanzania and Uganda are making promising progress. Eritrea, Somalia and South Sudan, however, very much remain trapped in poverty and conflict.

Which economies are prospering in East Africa

As one of the fastest-growing economies in Africa, Ethiopia's GDP has been increasing for the past ten years, reaching $108bn in 2020, up 12% on 2019. This accounted for 4.6% of Africa’s total GDP, an increase from 3.9% in 2019. Growth continued in 2020 despite the Covid-19 pandemic thanks to developments in the construction and services sectors. In 2019 the IMF approved a programme of almost $3bn to support the Ethiopian government’s Homegrown Economic Reform Programme, aimed at addressing macroeconomic imbalances to aid with economic growth. The country’s focus is to become more private sector led.

See also:
An investor's guide to North Africa
An investor's guide to West Africa

Ethiopia’s population has been increasing 2–3% year on year for more than 20 years, one of the drivers of increasing inflation in the country. By 2019 inflation reached 15.8%, having fallen below 10% between 2013 and 2016, with food inflation rife. The Ethiopian Economics Association State of Ethiopian Economy 2020/21 report states: "In a country where one-quarter of the population lives under the poverty line, double-digit inflation puts significant strain on the livelihood of people, particularly on wage earners and the retired section of the population whose income can rarely cope with inflation rates. High inflation also raises the real exchange rate, reducing the competitiveness of exports." In an attempt to combat this, in 2021 the Ethiopian central bank introduced measures aimed at curbing illegal foreign exchange trading and reducing local currency supply.

The country is keen to maintain its progressive momentum, highlighted by the signing of a peace deal with Eritrea in July 2018, ending a war over disputed territories. While on paper this deal moves both countries in the right direction, a lot of work still needs to be done by both countries to open up borders and trade avenues.

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Uganda's GDP has also been increasing, reaching $37.4bn in 2020, and its share of African GDP has also been growing. Inflation, however, has been volatile in the country in part due to fluctuating global commodity prices, with agriculture and food accounting for the majority of exports.

The country has ambition, and its Uganda Vision 2040 strategy aims to transform Ugandan society "from a peasant to a modern and prosperous country within 30 years", with its oil reserves likely to play a major role in this transformation.

The World Bank noted that "lower oil prices are beneficial to Uganda’s trade balance and real growth outcomes, and they also mean increasing risks to investment plans in the Ugandan oil sector, which was expected to start producing and exporting by 2024/25". However, despite a lack of financing, in 2021 Total signed an agreement with Uganda and Tanzania for a long-awaited $3.5bn pipeline to export Ugandan crude oil to international markets. If the project goes ahead, Uganda’s economy will reap the benefits.

The 2020 African Economic Outlook report stated that Tanzania was among the world's ten fastest-growing economies. Its GDP has been growing at a rate of about 6% over the past five years. Inflation has also been falling, down to 3.3% in 2020 thanks to a stabilisation in food prices. In 2020 the country reached lower-middle-income status. Tanzania’s Development Vision 2025 aims to propel the country further to a middle-income country by 2025, using peace, stability and security of citizens as the foundations.

South Sudan, a relatively new country, having gained independence from Sudan in 2011, is heavily reliant on oil to fuel its economic growth. Corruption in the sector is rife, however. A drop in oil prices and increase in food insecurity saw inflation rates in South Sudan reach a new high of 380% in 2016. The country is plagued by economic stagnation and political instability. In 2021 the IMF agreed to give the government an economic stabilisation loan of $174.2m to aid in combating poverty in the country. Elections in South Sudan have been postponed until 2023 to allow time for reforms to be initiated and completed following the signing of a peace agreement in the country in 2018. Little has been achieved to date.

Djibouti’s GDP has been growing year on year since 1997 thanks to its position as a transportation hub in East Africa. About 30% of the world’s shipping passes through the neighbouring strait of Bab el-Mandeb on the way to the Suez Canal. Growth looks set to continue as trade continues to pick up globally.

Somalia has been plagued by economic and political instability following the ongoing civil war the country has faced for the past 30 or so years. GDP per capita in Somalia is the lowest in East Africa at only $309.42 in 2020. Despite its poverty, population rates have been increasing at one of the highest rates in East Africa (2.87% in 2020). The country, so rife with corruption that it tends to deal in US dollars because of counterfeit local currency, is, however, trying to make progress. A new national payments system has been established to aid in transparency and boost trade and investment.

Seychelles, one of the smallest countries in the world, is heavily reliant on tourism. Largely due to its low population it has a comparatively high level of GDP per capita, $11,425 in 2020, the highest in East Africa. The country’s GDP of $1.12bn, however, only contributed 0.05% of Africa’s total GDP in 2020. Covid-19 has had a severe impact on the country due to the way in which it hit the tourism industry. In 2021, Minister for Foreign Affairs and Tourism Sylvestre Radegonde told the Qatar Economic Forum: “It has been a massive challenge [coping with the Covid-19 pandemic], the economy depends still on tourism. We are looking now at diversifying the economy, moving into other sectors such as fisheries.”

African economies are set to benefit from the African Continental Free Trade Area agreement, which will create the largest free trade area in the world by the number of countries participating. Of the 55 African Union states, only Eritrea has not signed up to be part of pact.

Kenya leads the way for FDI in East Africa

Kenya is the leader when it comes to foreign direct investment (FDI) in East Africa. The number of recorded FDI projects in the country peaked in 2015 at 96. In 2016, however, there was a 58% decline to 40 projects following terror attacks by Al-Shabab militants. Since then, the number of FDI projects in Kenya has been rising again, and in 2019 FDI came close to 2015 levels, attracting 95 FDI projects, around 9% of the total in Africa. The value of FDI projects in Kenya in 2019 reached $3.86bn, an all-time high. To maintain this drive, in 2019 Kenya launched an investment policy that laid out plans to increase its level of public and private investment to at least 32% of GDP by 2030. In 2019 the total project value of FDI was worth about 4% of Kenya’s GDP.

The number of FDI projects in Ethiopia has fluctuated over the years. In 2019 it ranked second for the number of FDI projects in East Africa, with 32 FDI projects recorded. The country views FDI as a driver for its economy and in 2020 a new law was introduced to assist the country in attracting foreign investment. The law states that all sectors are open to FDI, subject to restrictions, and while there are some sectors reserved for joint investment (for example, freight forwarding or shipping) or only for domestic investors (for example, banking and insurance), the change has been broadly welcomed. To help with the country's FDI attractiveness, in 2021 the Ethiopian Investment Commission, in collaboration with the Partnership for Investment and Growth in Africa project, launched its web-based FDI tracking tool.

FDI into Tanzania peaked in 2011/12 with 44 and 39 projects recorded, respectively. The country has failed to reach these levels since. The appointment of John Pombe Magufuli as president in 2015 led to tougher demands on companies, including higher tax bills, but change looks imminent. In late 2020, the government separated its investment portfolio from trade and industry as part of measures to attract investment. Current president Samia Suluhu Hassan is aiming to continue the traction built by Magufuli, with plans to review investment laws, and he has vowed to remove bureaucracy delaying investments, including issuance of work permits and licences. According to the World Bank, Tanzania’s FDI as a percentage of GDP is below the lower-income country averages, making attracting FDI crucial for the country's development.

Djibouti has traditionally struggled to attract foreign investors; however, in 2018 the country opened the first phase of the Djibouti International Free Trade Zone. Part of China's Belt and Road Initiative, the $3.5bn project spans an area of 4,800 hectares (ha). The $370m, 240ha initial phase comprises four industrial clusters: trade and logistics, export processing, business and financial support services, and manufacturing and duty-free merchandise retail.

FDI into Uganda has fluctuated in recent years, although the number of FDI projects reached an 11-year high in 2019 with 29 attracted. In the same year the country amended its Investment Code Act 1991 to encourage inward investment. It removed restrictions on foreign investment in animal and crop production, as well as monetary thresholds for an investor to qualify for incentives.

Between 2015 and 2020 South Sudan only attracted one FDI project (in 2016). At its peak in 2013, the country attracted 18 FDI projects; however, following its split from Sudan in 2011 and its reliance on oil, combined with a weak private sector, the country is struggling to appeal to investors.

Which countries fair better for doing business in East Africa?

Seychelles is the least corrupt country in East Africa based on Transparency International's Corruption Perception Index, with a score of 66 in 2020. The whole population has access to electricity and internet adoption is comparatively high, with rates set to increase. Intelvision, with support from the International Finance Corporation, is to lease a new cable being built by Vodafone Carrier Services to complement its existing system. This will result in lower connectivity costs for telecoms operators and an increase in competition for fixed broadband and mobile data services.

Almost 70% of Kenya’s population has access to electricity, well above the East African average of 50%. Internet adoption, however, is relatively lower. Affordability and access to the internet remain key barriers to investment in the country, especially in rural areas. Kenya’s mobile sector is heavily taxed. In 2018 the tax contribution of the mobile sector was 2.2 times the size of Kenya’s economy. The country hopes to achieve universal broadband coverage by 2030, but a review of taxes is required to ensure affordability.

It only takes 13 days to start a business in South Sudan, the shortest time in East Africa, although the country experiences near-daily electricity shortages. The African Development Bank has committed to a series of energy upgrades to improve livelihoods and build resilience in South Sudan. The first is a $38m upgraded power distribution system in the capital city Juba, which suffers from regular blackouts. Fixed broadband subscriptions in South Sudan are low, as is the number of people using the internet. In addition, the country ranks as the worst in East Africa alongside Somalia in the Corruption Perception Index, with a score of 12.

Internet adoption in Eritrea is virtually non-existent. The country is one of the most highly censored in the world, ranking alongside the likes of North Korea. In 2019 it finished top in a report by CPJ for the most censored countries. Journalists in Eritrea are still frequently imprisoned, following the ban on all independent media in the country in 2001. Social media is extremely difficult to access and faces regular shutdowns, and few expect a freer society to emerge.

Liveability levels in East Africa

Seychelles is one of the most developed countries for human capital in East Africa. In 2018 a five-year policy and strategy on human resources development was launched to support its sustainable development strategy. In the same year, the World Bank Human Capital Index ranked Seychelles top in the region and the wider African continent for developing human capital. The country ranked 43rd out of 157 countries assessed.

Ethiopia, Kenya, Tanzania and Uganda fair similarly across a number of liveability measures, including unemployment rates, with Uganda making the most significant progress, dropping from a rate of 3.61% in 2010 to 1.72% in 2019. In 2020 the World Bank approved a $150m project to enable greater access to higher-quality secondary education in Uganda, which is set to benefit about 2.5 million students.

Somalia’s measure of human capital and quality of life falls short across all metrics. Somalia has the highest unemployment rate in East Africa, having remained at 12–13% since 1991. The country offers few prospects for those of working age, leading many young people to move into a life of piracy or illegal work. In 2012 the estimated cost of piracy to the global economy was more than $6bn. Poverty is widespread in Somalia, with just over half (52.4% in 2017) of the population having access to basic drinking water, and little progression has been made to combat deprivation.

Which East African countries are going green?

East Africa is heavily reliant on fossil fuels; however, there is an abundance of renewable energy resources that the region is hoping to tap to relieve energy poverty in the region.

Kenya has been transitioning to clean energy and is one of the most energy-diverse countries in the region. Energy demands have been increasing as Kenya’s economy and population grows. The country’s president. Uhuru Kenyatta, has stated that 90% of its total electricity supply comes from clean energy, having set a target to be 100% renewable by 2020.

Kenya has further committed to lowering greenhouse gas emissions by 32% by the year 2030, alongside its target to move fully to renewable energy by 2050. The country is keen to develop its geothermal energy sector, with only 10% of reserves currently tapped into.

In 2016 the largest solar power plant in East Africa started operations in Soroti, Uganda. The 10MW facility is made up 32,680 photovoltaic panels, and will generate clean, low-carbon, sustainable electricity for 40,000 homes, schools and businesses. In addition to this, Uganda's $1.7bn Karuma Hydropower Plant is set to make power more affordable in the country by reducing tariffs by 17.5%.

Ethiopia has the advantage of the River Nile running through the country, making it reliant on hydropower. However, the threat of drought always hangs heavy over the country, and its $40bn road map to build 71 power projects over the next ten years signals it intentions to go green and become an exporter of energy. The projects include 16 hydropower plants, 24 wind farms, 17 steam farms, and 14 solar plants.

East Africa's big economic hitters – Ethiopia, Kenya, Tanzania and Uganda – tend to dominate the region's FDI picture, but it will be interesting to monitor how Seychelles diversifies its tourism-heavy economy as it recovers from the Covid-19 travel disruption, while the likes of Somalia, South Sudan and Eritrea still have a lot of recovering to do from the conflicts that have scarred the countries.

Investment Monitor's investor guides split Africa into five regions to assess their attractiveness for FDI: