Five things that could make or break East African economies in 2025
A combo picture showing US Republican candidate, former President Donald Trump and Democrat rival Vice President Kamala Harris. The outcome of the US election in November could impact EAC economies.
The East African Community's (EAC) aggregate economy is expected to grow by 3.76 percent next year to $302.86 billion, according to the International Monetary Fund's (IMF) latest World Economic Outlook.
This year, the IMF expects the size of EAC’s GDP, excluding Somalia, to expand to $291.89 billion.
The EAC countries reviewed by the IMF are Kenya, South Sudan, DR Congo, Tanzania, Rwanda, Uganda and Burundi.
The IMF forecast for sub-Saharan Africa in 2025 was revised upwards by 0.1 percentage point for 2025.
In 2024, the region’s GDP is projected to increase from an estimated 3.6 percent in 2023 to 4.2 percent in 2025, “as the adverse impacts of prior weather shocks abate and supply constraints gradually ease.”
But the projections for sub-Saharan Africa and the EAC are not without risks. Several risks are likely to disrupt EAC economies next year, including a surge in oil prices, higher interest rates, extreme weather, geopolitical tensions and the outcome of the US elections.
US elections
The upcoming US elections are also likely to have impact on the region’s economic performance in 2025.
The Republican candidate, Donald Trump, has promised to increase the tariffs on goods that the US imports. He has also promised to end the Africa Growth and Opportunity Act (Agoa), which gives African countries preferential access to US markets, when it expires in March 2025. Kamala Harris has offered to renew it.
These markets are, of course, conditional on the human rights and governance records of beneficiaries, but they have helped sustain production lines such as Kenya’s export processing zones (EPZs).
The region has had mixed fortunes with Agoa. Uganda, South Sudan, Somalia and Burundi are the four EAC countries that have been locked out of Agoa.
Ending Agoa, without providing an immediate alternative could create uncertainty for these production lines and the jobs that depend on them.
Trump also wants to raise tariffs on imports, mainly targeting China, although it is unclear whether he could use the same whip across the board. China is a major market for commodities exported from the East African region, mostly agricultural products such as coffee and tea. How will it respond if whipped in Washington?
The US is currently negotiating an Economic Partnership Agreement (EPA) with Kenya. Trump is likely to upend those talks because Joe Biden also stopped Trump’s version of negotiations with Kenya when he took power. Nairobi will be hoping that the next US President, between Donald Trump and Vice President Kamala Harris, will continue with the negotiations.
Drought and extreme weather
Agriculture is the mainstay of most economies in the region, with most of the farmers relying on rains to grow crops and rear the livestock. But, due to the impact of climate change, production has been impacted.
Depressed harvests would lead to higher food prices, as food takes up huge space in the shopping basket for most households in the region. Higher consumer prices could trigger social and political tensions in the region.
In the outlook, the IMF reckons that extreme heat and prolonged droughts amid record high temperatures worldwide will impact harvests, adding to pressures on food prices and food security.
“Low-income countries are likely to be disproportionately affected, since food and energy costs take up a large part of household expenditures there,” the IMF says.
Oil prices
As the demand for oil picked up when economies reopened at the end of the Covid-19 crisis, prices started going up. The situation was aggravated by the war in Ukraine, which further pushed up prices.
“Fears of a broader regional escalation of tensions in the Middle East have added a volatile risk premium to oil prices, though no major supply disruptions have occurred so far,” the IMF says.
“A rise in Red Sea maritime attacks has dislocated seaborne oil flows, decreasing traffic through the Suez Canal by almost two-thirds and largely rerouting it around the Cape of Good Hope, though tanker rates for both products and crude oil have dropped back to pre-conflict prices.”
But the Fund reckons that there is some hope.
“Upside price risks from an escalation of the Middle East conflict or a prolonged extension of OPEC+ cuts are outweighed by risks of weaker oil demand in China and the United States—which collectively account for almost 40 percent of global demand—as well as in Japan and other advanced economies, and a rise in OPEC+ production to regain market share.”
Federal Reserve rates
The US Federal Reserve's interest rate policy could significantly impact the region’s economic growth in 2025 through capital flows, currency exchange rates, commodity prices, and increased global financial volatility.
When the Fed raises interest rates, it becomes more attractive for investors to hold US Treasury bonds rather than invest in riskier emerging markets like Africa. This can lead to decreased capital flows to Africa, limiting investment, consumption, and economic growth.
Conversely, cutting interest rates, as the US Federal Reserve is currently doing, makes emerging market bonds more attractive to investors. This can increase capital inflows to Africa, boosting investment, consumption, and economic growth.
The IMF also noted that the intensification of regional conflicts, especially given the wider conflict in the Middle East or the war in Ukraine, could further disrupt trade, leading to sustained increases in food, energy, and other commodity prices.
But the EAC countries are also dealing with another conflict in their backyard—the raging civil unrest in Sudan. Such tensions not only hinder cooperation and collaboration among EAC member States, making it difficult to implement regional integration initiatives, but are also likely to undermine regional stability, making it difficult for countries to focus on economic development. This can then create a negative environment for business and investment.
The war in Sudan is already causing a humanitarian crisis that is spilling over into neighbouring countries in the form of refugees. Such a crisis places a significant economic burden on the affected countries, diverting resources from economic development and creating social and economic challenges.
