In recent years, a noticeable shift has taken place in the East African apparel industry. Several Ethiopian textile and garment manufacturers have begun moving their operations to Kenya, seeking better business prospects, a more conducive environment, and expansion opportunities. This shift has raised important questions about the changing dynamics of the region’s manufacturing landscape. Here’s why Ethiopian apparel manufacturers are choosing Kenya over their home country and the implications of this trend.

1. Unfavourable Business Environment in Ethiopia
Ethiopia was once a shining star in Africa’s garment manufacturing sector. With its government-backed industrial parks, cheap labor, and preferential trade agreements like the African Growth and Opportunity Act (AGOA), Ethiopia attracted many international and regional apparel manufacturers. However, in recent years, several factors have led to a deterioration in the business environment for manufacturers.

 Political Instability and Civil War: Since November 2020, Ethiopia has been embroiled in a violent conflict in its northern Tigray region, which has caused widespread instability, disrupted supply chains, and created a highly uncertain operating environment for businesses. The civil war has resulted in significant loss of life, displacement of over 2 million people, and massive destruction of infrastructure.
This instability has created an atmosphere of unpredictability, making it increasingly difficult for manufacturers to operate or expand in Ethiopia. As a result, several companies have relocated to neighboring countries like Kenya, where the business climate is seen as more stable.

 Infrastructure Challenges: Despite efforts to build modern industrial parks, Ethiopia’s infrastructure still faces major issues. Power shortages, poor roads, and inadequate transport systems have made it increasingly difficult to ensure smooth operations. For example, in 2022, Ethiopia’s electricity supply was reportedly unreliable, with frequent power cuts affecting industries across the country. In contrast, Kenya has significantly improved its infrastructure, especially with the Standard Gauge Railway (SGR) linking Nairobi to Mombasa, which has improved logistics and reduced transportation costs.

 Currency Devaluation and Inflation: Ethiopia has faced significant challenges with inflation and devaluation of its birr currency. The value of the birr has dropped by over 20% against the U.S. dollar since 2021, increasing production costs for manufacturers. This economic pressure has pushed many businesses to seek more stable environments. Additionally, in 2023, Ethiopia’s inflation rate surged to over 30%, further squeezing profit margins for manufacturers who rely on affordable raw materials and stable wages.

2. Economic Losses in Ethiopia Due to Apparel Factory Closures
As Ethiopian manufacturers struggle with these challenges, many have opted to close down factories or relocate operations to neighboring Kenya. The economic loss to Ethiopia from these closures is significant:

 Factory Closures and Job Losses: According to estimates from the Ethiopian Textile and Garment Manufacturers Association (ETGMA), as of 2022, more than 50% of the country’s textile factories were either temporarily shut down or significantly scaled back operations due to the combined effects of the civil war, inflation, and power shortages. This has led to the loss of tens of thousands of jobs in
the garment sector. Many workers, particularly in the industrial parks of Hawassa and Addis Ababa, have been laid off, further exacerbating unemployment rates in the country.

 Revenue Losses: Ethiopia’s garment industry was projected to generate over $1 billion in export revenue in 2022. However, due to factory closures, the sector saw a 25% decline in export revenues. This translated to a loss of approximately $250 million in export income that would have otherwise contributed to the country' economic growth and foreign exchange reserves. A large portion of this loss is
attributed to the halt in garment exports to key markets like the United States and the European Union, which benefit from Ethiopia’s trade privileges under AGOA.

 Impact on GDP Growth: Ethiopia's economy has been growing steadily over the past decade, with an annual GDP growth rate averaging 8-10% between 2010 and 2019. However, the civil war and related disruptions have led to a significant slowdown in economic activity. In 2022, Ethiopia's GDP growth dropped to just 2.3%, a sharp decline from the pre-conflict growth rates. The textile and garment sector, once a key contributor to Ethiopia’s non-agricultural GDP, has been severely impacted by factory shutdowns, leading to a direct loss of potential output in manufacturing. For context, the GDP of Ethiopia was estimated at $111 billion in 2022. The apparel and textiles industry, which contributes about 3-5% of the country's GDP, was expected to contribute roughly $3.3 billion in 2022. However, with the sector shrinking, the economy lost at least $700 million from this source alone, further hindering recovery prospects.

3. Kenya’s Stronger Business Environment and Incentives

Kenya, with its relative political stability and business-friendly policies, has become an attractive destination for Ethiopian apparel manufacturers seeking a more favorable operating environment. Several factors contribute to Kenya’s rising appeal:

 Improved Infrastructure: Kenya has invested heavily in its infrastructure, especially in transport and logistics. The Standard Gauge Railway (SGR), which connects Nairobi to the port city of Mombasa has helped reduce shipping costs and improve supply chain efficiency. Kenya’s airports, roads, and ports are also among the best in East Africa, ensuring that manufacturers can move goods both domestically and
internationally with ease.

 Stable Political Climate: In contrast to Ethiopia, Kenya has experienced relatively more political stability in recent years, especially after the 2007-2008 post-election violence. While Kenya has faced political challenges in the past, the general stability since the 2010 constitution has given foreign investors and manufacturers a higher degree of confidence in doing business there.

 Tax Incentives and Duty-Free Trade: Kenya offers attractive incentives to manufacturers, such as tax breaks, access to the Common Market for Eastern and Southern Africa (COMESA), and preferential access to the European market under the EAC-EU Economic Partnership Agreement. Apparel manufacturers benefit from duty-free exports to these regions, which is crucial in an industry that depends
on external markets. For instance, Kenya's duty-free exports to the European Union (EU) under the EAC-EU Economic Partnership Agreement have increased by more than 10% annually since the agreement was signed.

 Access to Skilled Labor: Kenya boasts a relatively large pool of skilled labor, particularly in textile manufacturing. This is partly due to the country’s strong tradition of garment production and its ability to provide a skilled workforce at competitive wages compared to Ethiopia’s rising labor costs. The Kenyan government’s emphasis on vocational training programs has further enhanced the availability of
skilled workers.

4. Trade Benefits: Economic Data and Regional Access
Kenya’s strategic position in East Africa provides a significant advantage in terms of trade benefits. Here’s how Kenya compares to Ethiopia in terms of trade-related benefits:

 COMESA Free Trade Area: Kenya, as a member of the Common Market for Eastern and Southern Africa (COMESA), enjoys duty-free access to a market of more than 500 million people across 21 countries in Africa. This enables Kenyan manufacturers to export goods to a wide range of countries without facing high tariffs, while Ethiopia, although a member of COMESA, faces logistical challenges and internal market disruptions that can limit its competitive edge.

 Export Growth: Kenya’s exports have grown steadily over the last decade, with apparel exports to the United States rising by more than 50% since 2015, largely due to trade agreements like the African Growth and Opportunity Act (AGOA), which offers duty-free access to the U.S. market. By contrast, Ethiopia has struggled with the devaluation of its currency and internal conflicts, which have hindered its
export performance.

 EAC-EU Economic Partnership Agreement: Kenya’s preferential access to the EU market through the East African Community (EAC) – EU Economic Partnership Agreement (EPA) allows it to export apparel and textiles duty-free to European countries. In fact, exports under the EAC-EU EPA have grown by 12% annually, making Kenya one of the leading suppliers of garments to European markets.

 Trade Volumes: Kenya’s total trade volume has increased by over 20% in the last five years, aided by its status as a regional trade hub. In 2022, Kenya’s total exports were valued at $6.5 billion, with textiles and apparel contributing approximately $600 million to that total. Ethiopia’s export figures, by contrast, have been hampered by economic instability and political challenges, with total exports stagnating or declining over the same period.

5. The Role of the African Continental Free Trade Area (AfCFTA)
The African Continental Free Trade Area (AfCFTA), which came into effect in 2021, is expected to enhance intra-Africa trade by eliminating tariffs on most goods and services. Ethiopia’s manufacturing sector has yet to fully benefit from the AfCFTA due to internal bottlenecks, whereas Kenya is better positioned to take advantage of this new agreement. As African markets open up, Kenya’s efficient trade infrastructure and favorable regulatory environment make it an increasingly attractive base for manufacturing businesses.

6. Diversification of Investment
The decision to move to Kenya is not solely about the challenges faced in Ethiopia. Many Ethiopian manufacturers see it as an opportunity to diversify their operations and tap into new markets. Kenya’s position as a regional economic powerhouse.