The balance of economic power is shifting east in sub-Saharan Africa. By 2040, East Africa is projected to account for 29% of the region’s GDP – up from 21% in 2022 and just 14% in 2000. Its rise has been partly driven by improving bilateral links with China, which has been a key source of foreign direct investment in infrastructure and non-service sectors.
Between 2022-2040, East Africa is predicted to record faster economic growth than sub-Saharan Africa at large and other Asian economies that are experiencing rapid industrialisation. However, like in other parts of sub-Saharan Africa, the region will still need to grapple with major challenges, including widespread poverty and political instability.
FDI from China has helped fuel growth, especially in non-service sectors
Foreign direct investment (FDI) has played a key role in facilitating economic growth as it has been a source of capital for infrastructure. For example, in 2022, Ethiopia received USD3.7 billion in foreign direct investment inflows – the highest ever on record. Improving Sino-African relations in recent years has led to China laying claim to an increasing share of investment across the region as part of its Belt and Road initiative. It has invested heavily in infrastructure megaprojects across East Africa, such as the construction of the Standard Gauge Railway and the Karimenu II Dam Water Supply Project in Kenya.
Non-service sectors have particularly excelled in East Africa over the recent past. Across the region’s major economies, namely Uganda, Ethiopia, Tanzania and Kenya, real gross value added (gross value added or GVA is another measure of GDP that excludes intermediate consumption) in construction, agriculture and manufacturing grew by 89%, 68% and 42%, respectively compared with 34% growth in services over 2015-2022.
For instance, the agricultural sector has benefited from more productive methods of farming, such as mechanised machinery to support agri-business. Over 2015-2022, average labour productivity in agriculture across Uganda, Ethiopia, Tanzania and Kenya collectively grew by 39% in real terms – more than twice the average productivity between 2015 and 2022, helping to support growing export demand.
East Africa is on course to be the fastest-growing economic region globally
East Africa is predicted to be the fastest-growing economic region globally over the next two decades. Over the forecast period (2022-2040), East Africa is anticipated to deliver a GDP CAGR of 6.1% in real terms, outstripping other rapidly-growing emerging and developing markets in Southeast Asia, Latin America and Africa.
FDI inflows in much-needed infrastructure megaprojects will drive the region’s economic development as it will be a key source of productivity growth. The delivery of sound economic policies will also advance growth such as the embrace of digitalisation and e-commerce, investment in renewables and the introduction of business-friendly tax policies. Furthermore, the African Continental Free Trade Area (AfCFTA) will help to deepen economic integration and intra-regional trade.
East Africa still has major challenges to overcome
While growth prospects for East Africa are encouraging, the region still has several hurdles and obstacles to overcome. Like in many parts of the continent, poverty, income inequality, weak macroeconomics, political stability, climate change and skills shortage are rife and weigh down on the region’s economic potential. For example, in 2022, East Africa’s major economies - Kenya, Uganda, Tanzania and Ethiopia - saw more than a quarter of the population still living below the international poverty line of USD3.10 a day.
East Africa’s potential to succeed is immense due to its large and fast-growing population and improving business environment. While challenges will linger in the future, there is also a need to focus on developing self-sufficient and sustainable economic policies. This will help prevent disastrous boom-bust cycles that have generally characterised numerous African countries, underpinned by economic policy mismanagement.
Learn more about the economic state of sub-Saharan Africa in our report, Sub-Saharan Africa: A Rising Economic Frontier?