Analyses & Studies
Article | Economic Letter: East Africa and the Indian Ocean - December 2025
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Economic and Financial Situation in the IOEA: resilient growth amid persistent macroeconomic vulnerabilities
The French Treasury (Direction générale du Trésor), under the French Ministry of Economy and Finance, publishes Economic Letters through its regional services to provide in-depth analysis of key economic sectors and trade dynamics in partner countries.
This edition reviews the economic and financial situation across East Africa and the Indian Ocean (IOEA), which continues to display broadly resilient growth despite a constrained international environment, though marked by sharp disparities and persistent macroeconomic vulnerabilities. Growth is underpinned by improved agricultural output, buoyant services and continued infrastructure investment, with East African economies (Kenya, Uganda, Rwanda, Tanzania) generally sustaining rates above 5%, while more fragile or landlocked countries such as Burundi and South Sudan face slower, uncertain recoveries. In the Horn of Africa, Djibouti benefits from its role as a regional logistics hub amid ongoing Red Sea shipping disruptions, while Ethiopia shows robust momentum; Indian Ocean economies (Comoros, Madagascar, Mauritius, Seychelles) post more moderate near-term prospects, reliant on tourism, financial services and external transfers, and exposed to climate shocks and financing constraints.
Inflation has broadly eased across the region on the back of lower food and energy prices and, in some cases, early monetary tightening — now under control in Kenya, Uganda, Rwanda and Tanzania, but still elevated in Burundi and South Sudan, where deep monetary imbalances persist. Financial sectors remain well-capitalised and liquid but limited in depth, with insufficient private-sector intermediation and growing exposure to sovereign risk, particularly where domestic financing needs are rising.
Public finances represent the region's principal vulnerability: budget deficits remain high, driven by weak revenue mobilisation, sustained investment spending and rapidly rising debt service. Public debt is on an upward trajectory across most of the region — Tanzania and Somalia retain sustainable near-term debt levels, while Kenya, Djibouti, South Sudan and Eritrea face high risk of, or actual, debt distress. A rising share of costlier domestic debt in several countries is crowding out private-sector financing, compounded by reduced multilateral donor engagement and disbursement delays tied to fiscal consolidation and governance requirements.
Overall, the Letter highlights that external positions, while showing some cyclical improvement, remain fragile: current account deficits stay elevated on heavy import dependence, partially offset by higher coffee and gold prices (Ethiopia, Uganda, Tanzania), lower oil prices, and stabilising diaspora remittances (notably in the Comoros, South Sudan and Somalia). Foreign exchange reserves have generally been rebuilt in the region's larger economies but remain low in more fragile states, leaving persistent currency-market pressures as a key obstacle to macroeconomic stabilisation.
