East Africa's Economy Is Growing 6.7%, but Its Budget and External Deficits Are Widening

The African Development Bank has raised East Africa's 2026 economic growth forecast to 6.7%, the highest among Africa's five regions, while simultaneously revising its projected fiscal deficit upwards to 4.4% of GDP and its current account deficit to 3.8%. The figures expose the financing pressures accompanying economic expansion, as governments pursue infrastructure and industrial investment while facing higher import bills, debt servicing obligations and limited fiscal resources. National evidence from Kenya, Tanzania, Uganda, Rwanda and Ethiopia shows that the region's economies are growing under substantially different financial conditions. East Africa is expected to remain Africa's fastest-growing region in 2026, with economic output projected to expand by 6.7%, but the latest African Development Bank assessment indicates that governments and economies across the region are facing greater financing pressures than previously anticipated. The bank has raised its projected regional fiscal deficit from 4.2% to 4.4% of GDP and increased its current account deficit forecast from 3.4% to 3.8%, even as stronger performance in Ethiopia, Rwanda and other economies has lifted the regional growth outlook substantially above the continental average. The findings, published in the AfDB's Africa's Macroeconomic Performance and Outlook, November 2026 Update, highlight a divergence between East Africa's expanding economic output and its financing requirements. Across Africa, the bank now projects the fiscal deficit to narrow to 4.3% of GDP in 2026, while the continental current account deficit is expected to improve to 1.5%. East Africa is moving in the opposite direction relative to the bank's May forecasts, with both its public financing shortfall and external deficit revised upwards. The fiscal and external revisions do not mean East Africa's economies are contracting or that every country is experiencing deteriorating financial conditions. Economic growth can remain strong while governments spend more than they collect in revenue and national economies purchase more goods, services and income from abroad than they earn through exports and other current receipts. These imbalances become important when countries must finance them through borrowing, foreign investment, external assistance or changes in financial reserves. For East Africa, the relationship is especially relevant because the region is pursuing large investments in electricity generation, railways, ports, industrial facilities, urban infrastructure and extractive industries. Such investments can increase construction activity, employment and demand for domestic services, while also requiring imported machinery, engineering equipment and other capital goods. The economic benefits may emerge over several years, whereas the financing requirements often arise during construction. Nevertheless, the AfDB's aggregate revisions do not establish how much of the wider deficits results specifically from infrastructure expenditure, and the causes must be examined at country level. The latest outlook therefore raises a question about the sustainability of East Africa's investment driven growth: whether expanding productive capacity, export earnings and domestic revenue can eventually reduce the financing requirements accompanying the region's economic development. East Africa's Growth Forecast Improves as Its Fiscal Outlook Weakens The November assessment represents a substantial improvement in the AfDB's view of East African economic performance. The regional growth forecast increased from 5.9% in May to 6.7%, with Ethiopia's projection rising from 7.8% to 9.3% and Rwanda's from 6.9% to 8.5%. Across the continent, growth is expected to reach 4.6% in 2026, making East Africa's projected expansion 2.1 percentage points faster than the African average. However, the direction of the fiscal revisions is different. While the AfDB reduced the projected 2026 fiscal deficits of North, Central and Southern Africa, it increased the estimates for East and West Africa. North Africa's projected deficit narrowed substantially from 7.8% to 5.7% of GDP, Southern Africa's from 4.3% to 3.7%, and Central Africa's from 2.3% to 2.0%. East Africa's projected deficit increased to 4.4%, while West Africa's rose more sharply from 3.0% to 3.9%. AfDB revisions to East Africa's 2026 outlook IndicatorMay forecastNovember forecastChangeReal GDP growth5.9%6.7%+0.8 percentage pointsFiscal deficit4.2%4.4%+0.2 percentage pointsCurrent account deficit3.4%3.8%+0.4 percentage pointsInflation12.4%11.4%−1.0 percentage pointSource: African Development Bank, November 2026 Macroeconomic Performance and Outlook, compared with its May 2026 projections. All figures are regional forecasts, rather than final 2026 outcomes. A fiscal deficit measures the difference between government expenditure and revenue, including grants under the AfDB's reporting methodology. When expenditure exceeds revenue, the resulting shortfall must generally be financed through borrowing, accumulated cash balances or other available financial arrangements. The fiscal deficit is therefore different from the stock of public debt, which reflects obligations accumulated over time. The current account measures a different part of the economy. It records trade in goods and services, income payments and receipts, and current transfers between residents and the rest of the world. A current account deficit means that outward payments exceed receipts across those transactions. It is consequently broader than a merchandise trade deficit, and it cannot be used interchangeably with the difference between goods imports and exports. These distinctions are central to understanding the AfDB's findings because fiscal deficits and current account deficits can arise for different reasons and have different financing implications. A government may maintain a relatively contained budget deficit while its economy records a substantial external deficit driven by private investment and imports. Alternatively, heavy public borrowing can contribute to both imbalances where government expenditure increases demand for imported goods and services. The AfDB has not published a country by country decomposition establishing the precise contribution of individual projects, imports or government expenditure to East Africa's revised regional deficits. Its analysis instead identifies wider exposure to higher commodity prices, financing costs, supply disruptions and differing national policy responses. The revised figures therefore provide a basis for investigating those pressures rather than assigning them to a single cause. Kenya's External Deficit Widens as Imports Grow Faster Than Export Earnings Kenya provides direct evidence of how a growing economy can experience increasing external financing requirements. According to the National Treasury's first quarterly economic and budgetary review for the 2026/27 financial year, the country's current account deficit widened to $4.87 billion in the twelve months ending September 2026, equivalent to 3.3% of GDP. That compares with $2.99 billion, or 2.2% of GDP, during the corresponding period ending September 2025. The deterioration occurred despite stronger export performance. Kenya's goods exports increased by 25.8%, supported by horticulture, tea and other products, but goods imports grew by 24.6%, reflecting higher spending on food, mineral fuels, intermediate goods and capital equipment. The merchandise trade deficit consequently widened by approximately $2.51 billion to $13.28 billion, exceeding the improvement in goods export earnings. The figures illustrate the difference between stronger exports and an improving external balance. An economy can increase export revenue substantially while its current account deteriorates if imports, income payments or other external obligations grow more quickly. In Kenya's case, higher import spending coincided with reduced secondary income transfers, although stronger services receipts and improvements in net primary income provided partial offsets. The National Treasury reported that remittances remained substantial at approximately $5.03 billion during the twelve months to September, but that inflows had slowed, particularly from the United States and Saudi Arabia. Remittances support household spending and foreign exchange availability, while the wider services sector contributes income from tourism, transport, financial activities and other commercial services. Kenya's experience demonstrates why policymakers cannot rely on export growth alone to measure external financial strength. The composition and cost of imports, the availability of foreign investment and the balance of income payments also influence whether the economy can finance international transactions without persistent pressure on reserves or borrowing. The country also faces fiscal financing constraints. The IMF's October 2026 World Economic Outlook projects a general government deficit of approximately 6.6% of GDP for 2026, while public debt is estimated at 72.9% of GDP. These are IMF projections using calendar year and general government accounting conventions, rather than figures directly interchangeable with Kenya's national budget estimates for the 2026/27 financial year. They nevertheless indicate the scale of the fiscal challenge alongside the widening external deficit. Higher borrowing requirements can influence the funds available for public investment, while debt interest and repayments reduce the flexibility of annual budgets. For businesses, fiscal conditions can also affect domestic interest rates, government procurement and expectations about taxation. Kenya's economic outlook therefore depends partly on whether the expansion of imports supports additional productive capacity and future exports. Machinery and other capital goods can contribute to longer-term manufacturing and infrastructure output, but the economic returns depend on whether investments are completed, operated efficiently and connected to commercially viable markets. Tanzania Maintains a Smaller Fiscal Deficit as Gold Exports Support Its External Position Tanzania's macroeconomic conditions differ from Kenya's in several respects. The IMF's July 2026 assessment projected an overall fiscal deficit of approximately 3.0% of GDP for the 2025/26 financial year, narrowing to 2.9% in 2026/27. The Fund also estimated that the current account deficit had narrowed substantially from 6.6% of GDP in 2022/23 to approximately 2.7% in 2025/26, supported by stronger export performance, particularly gold, manufacturing and internationally traded services. Tanzania therefore provides an example of an East African economy pursuing substantial infrastructure investment while maintaining comparatively contained fiscal and external deficits. Its exports of gold and other products have helped offset demand for imported fuel, machinery and capital equipment, while the government has continued pursuing domestic revenue mobilisation and expenditure controls. The composition of Tanzania's exports is particularly relevant because gold has become a major source of foreign exchange. Higher international gold prices can improve export earnings without requiring an equivalent increase in the physical volume exported, although the benefit depends on actual production, trade arrangements and the prices received by exporters. This can partly offset pressure from petroleum imports and machinery purchases, especially during periods when international energy prices rise. The IMF has nevertheless identified risks affecting Tanzania's external position, including higher fuel and fertiliser prices, international transport disruptions and pressures on tourism and other services. The country remains dependent on imported petroleum products and various industrial inputs, meaning international commodity price movements can affect its import bill even when domestic consumer inflation remains comparatively moderate. There is also a distinction between financing public infrastructure and the economic returns generated by that infrastructure. Tanzania has invested in electricity generation, railways, ports and urban transport, with the intention of improving supply reliability, reducing transport costs and supporting industrial expansion. The financial value of those investments will depend on their utilisation, operational efficiency and the additional production or trade they support. For example, expanding railway capacity can improve freight transport economics if sufficient cargo moves through the system and customers receive reliable services. Likewise, additional electricity generation can support manufacturing where transmission networks, tariffs and industrial demand allow firms to use the increased supply productively. Tanzania's relatively contained fiscal deficit does not eliminate the need for careful project selection and debt management. Public investment can create future financial obligations through maintenance, operating subsidies and borrowing costs, even where the original construction expenditure is supported by concessional finance. The country's position illustrates that strong public investment and moderate macroeconomic deficits can coexist, but maintaining that relationship requires continued export growth, domestic revenue collection and investment decisions capable of increasing productive output. Rwanda's Infrastructure Investment Leaves Substantial External Financing Requirements Rwanda represents a different economic position within the region because its rapid growth has been accompanied by substantial fiscal and current account deficits. The African Development Bank increased Rwanda's 2026 GDP growth forecast to 8.5% in November, following an estimated 9.4% expansion in 2025, supported by services, construction, manufacturing and agriculture. However, its public finances and external accounts remain exposed to the financing requirements of large investment programmes. In June 2026, the IMF projected Rwanda's current account deficit at 14.1% of GDP for the year, with a fiscal deficit of 5.7% and public debt equivalent to approximately 73.1% of GDP. These were projections based on the information available at the time, rather than final 2026 outcomes. The size of Rwanda's current account deficit reflects the country's substantial need for imported equipment, machinery, fuel and other goods, while domestic production and export earnings remain relatively limited compared with the demand associated with investment and consumption. Large infrastructure projects can generate demand for imported engineering services and construction materials, creating additional external financing requirements during implementation. Rwanda's development financing has also depended on concessional loans, grants and external investment. Changes in international borrowing costs or the availability of development assistance can therefore influence the amount of financing available for government programmes. The IMF's October 2026 programme review provided a more favourable assessment of recent developments, reporting that the fiscal deficit had narrowed to 4.8% during the 2025/26 financial year and that stronger exports and remittances had contributed to a reduction in the current account deficit. International reserves covered approximately four months of imports. These developments demonstrate that the country's external position has also been improving in some respects, although the IMF did not provide a revised full year current account estimate in that October announcement directly comparable with its June projection. Rwanda's inflation conditions introduce another challenge. National consumer prices increased by 26.5% in October 2026, while rural inflation reached 31.3%, according to the National Institute of Statistics of Rwanda. Such inflation can increase the cost of public procurement and infrastructure construction, while also weakening household purchasing power and complicating the government's fiscal and monetary policy choices. The relationship between Rwanda's rapid growth and its external deficits illustrates the financing challenge facing countries seeking to accelerate development through investment. Additional construction and capital expenditure can expand productive capacity, but the current account may remain under pressure until completed investments generate additional exports, replace imported products or improve the productivity of domestic businesses. Rwanda's ability to reduce its external financing requirements over time will therefore depend on the performance of manufacturing, tourism, services exports and other activities capable of earning foreign currency, alongside the cost and financing structure of future investment. Uganda's Fiscal Deficit Remains Elevated as Oil Production Moves to 2027 Uganda's economy has maintained relatively strong growth, but its public finances continue facing considerable expenditure and borrowing requirements. The IMF's July 2026 Article IV consultation projected a fiscal deficit of 7.1% of GDP for the 2025/26 financial year, moderating to 6.6% in 2026/27, with recurrent expenditure and rising interest payments among the factors placing pressure on government finances. The country's external position has improved in some respects. The IMF estimated that the current account deficit would narrow to 3.2% of GDP in 2025/26 and 1.9% in 2026/27, supported by strong coffee and gold exports. However, imports of capital goods, services expenditure and investment related activities continued generating external financing requirements. Uganda also faces uncertainty associated with the timing of commercial oil production. The government has invested heavily in petroleum infrastructure, including the Tilenga and Kingfisher developments and the East African Crude Oil Pipeline through Tanzania. Oil production was expected to contribute additional output, exports and government revenue, but the latest timetable announced in November places the commencement of commercial production by June 2027, with crude exports expected to follow. The delay matters because petroleum investment has already contributed to spending and imports, while export revenue remains dependent on the completion and commissioning of the upstream and transportation facilities. Uganda's 2026/27 budget anticipated approximately $380 million in petroleum related receipts, although not every category of petroleum revenue necessarily depends on the first export shipment occurring within the financial year. The IMF had already identified delays in oil production as a risk to Uganda's growth, fiscal and external projections. Its July assessment anticipated that the commencement of oil output would strengthen economic performance and eventually improve the country's external and fiscal balances, provided that production begins successfully and petroleum revenue is managed effectively. Uganda's experience therefore illustrates the timing problem associated with large resource development projects. Construction and equipment imports can increase financing requirements before a project earns export revenue. The economic benefits may be substantial once production begins, but repeated delays can extend the period during which government and private investors carry financing costs without receiving anticipated operating income. The eventual effect on the national budget will depend on actual oil production, export volumes, prices, production sharing arrangements and the timing of government receipts. Until commercial production begins, those benefits remain projected rather than realised. Ethiopia's Export Recovery Provides a Different Route to Managing External Pressure Ethiopia has received one of the largest upward growth revisions in the African Development Bank's November outlook, with its 2026 projection rising to 9.3% from 7.8%. The bank attributes the improvement partly to gold mining and industrial production, alongside changes affecting investment, foreign exchange and wider economic activity. The country's external and fiscal position has been influenced by economic reforms and debt restructuring negotiations. Ethiopia has undertaken changes to its foreign exchange arrangements, monetary policy and public financial management while seeking to improve export performance and attract additional external financing. The IMF's October 2026 country data project Ethiopia's current account deficit at approximately 2.5% of GDP and its general government fiscal deficit at about 2.0% of GDP for 2026. These estimates differ from those for Rwanda, Kenya and Uganda, illustrating the variation within East Africa's aggregate fiscal and external position. Ethiopia's position also shows how stronger exports can improve external financing conditions even while the economy continues importing machinery, energy products and industrial inputs. Gold export earnings provide foreign currency, while manufacturing and other productive sectors can strengthen the economy's export base if they achieve sufficient scale and competitiveness. However, the IMF's 2026 programme reporting indicates that Ethiopia continues to record a substantial merchandise trade deficit. The country's balance of payments is supported partly by services and private transfers, meaning the overall current account deficit is considerably narrower than the gap between goods imports and exports alone. The distinction is relevant for investors and policymakers because a country can run a large goods trade deficit while receiving substantial services income, remittances or other current transfers. Assessing external sustainability therefore requires examining the complete balance of payments, rather than merchandise trade figures in isolation. Ethiopia's debt restructuring negotiations remain another consideration. Even where fiscal deficits are comparatively contained, governments may face financing difficulties when existing debt obligations require repayment, international borrowing access is constrained or foreign currency availability is limited. The expected growth in mining and industrial production could improve Ethiopia's external position over time, but the outcome will depend on actual export receipts, the cost of imported inputs and the capacity of the economy to attract sustainable investment financing. East Africa's Investment Model Requires Stronger Export and Revenue Growth The country evidence demonstrates that East Africa's revised regional deficits do not describe a uniform deterioration across all its economies. Kenya has experienced a widening current account deficit associated with a larger import bill and changes in external transfers. Tanzania has maintained relatively contained fiscal and external deficits, supported partly by gold exports. Rwanda continues to manage substantial investment related external financing requirements, while Uganda's fiscal outlook remains affected by expenditure pressures and the delayed commencement of oil production. Ethiopia's external position has benefited from stronger exports and reforms, although debt and foreign currency constraints remain. The AfDB's aggregate forecast therefore captures the combined position of economies operating under different financial conditions. Its East Africa region also extends beyond the East African Community, meaning the 4.4% fiscal deficit and 3.8% current account deficit are not official aggregate figures for EAC member states alone. Country specific estimates from the IMF and national authorities use different reporting periods and accounting conventions, so they should be interpreted as evidence of individual economic conditions rather than components that can simply be averaged to reproduce the AfDB regional forecast. The most consequential issue is the relationship between investment and the future productive capacity of these economies. Financing roads, electricity, manufacturing facilities and transport infrastructure can increase economic output and support private sector activity, but the returns may emerge gradually. If investments generate additional exports, improve domestic production or reduce operating costs, they can strengthen the revenue and foreign exchange base needed to finance future development. If they are poorly selected, delayed or underused, they may increase public debt and external obligations without producing corresponding economic benefits. Public revenue mobilisation is equally relevant. A government can sustain expenditure more easily when economic growth produces additional taxable income, business profits and consumption. However, rising GDP does not automatically result in proportionate growth in government revenue, particularly where substantial activity occurs outside the formal tax system or where investment benefits are concentrated in sectors with limited immediate fiscal contributions. The African Development Bank's November assessment projects that Africa's overall fiscal deficit will narrow to 4.3% of GDP in 2026 and 4.0% in 2027, reflecting improvement at the continental level. East Africa's upward deficit revisions demonstrate why this trajectory cannot be assumed for every region. The report also identifies higher borrowing costs, commodity price pressures and climate related disruptions as continuing risks, with particular consequences for countries dependent on imported petroleum, food and fertiliser. For East African governments, maintaining strong growth while containing financing requirements will depend on investment quality, export performance, domestic revenue collection and the terms under which public and private capital is obtained. The composition of imports also matters. Spending on machinery that increases future productive capacity has different long term consequences from persistent expenditure on consumption goods, although both require foreign currency when purchased from abroad. The region's growing trade and infrastructure connections could support improvements in external balances over time. Transport investments can reduce the cost of moving goods between producers and markets, while electricity expansion can support manufacturing and processing. Regional trade may also provide opportunities for firms to sell into neighbouring economies, although the benefits will depend on competitiveness, trade arrangements and the practical reliability of transport and border systems. East Africa's projected 6.7% growth establishes a favourable outlook for economic activity, but the accompanying fiscal and current account revisions indicate that financing pressures remain substantial. Whether those pressures moderate will depend on how effectively current investment produces future economic returns. The regional economy can continue expanding rapidly while its governments and businesses require significant external and domestic financing. The durability of that expansion will be determined by whether production, exports and public revenue grow sufficiently to support the cost of maintaining and extending the investments now underway.