Kenya and Ethiopia, two nations that have co-existed peacefully for five decades in one of Africa’s toughest neighbourhood, last week deepened their economic ties with a major energy-sharing deal.

Meeting on the sidelines of the African Union conference, President Mwai Kibaki and his counterpart, Ethiopia’s Prime Minister Meles Zenawi, signed deals for a new power–grid connection.

This will enable Kenya to tap into cheaper electricity as its northern neighbour embarks on one of the continent’s biggest large-scale hydroelectric power projects.

The deal opens a crucial strategic front on Kenya’s northern border, which is expected to expand the country’s trade routes and renew security ties with a historical ally.

Marriage of convenience

It is a marriage dictated by the fast changing fortunes of the East African and Horn of Africa regions.

Kenya has long dominated the region economically, but its political stability was shaken by a disputed presidential election in 2007.

The country is now facing up to the reality of having to accommodate its fast rising neighbours, Uganda and Tanzania.

Uganda, soon expected to be awash with oil wealth, has been courting Southern Sudan and deepening its links with the Great Lakes economies.

In general, it is looking beyond Kenya, even as the East African Community blossoms.

Tanzania’s economy, rich with natural gas and minerals, is fast catching up with Kenya’s. The country is also expanding its links with the Great Lakes region.

Ethiopia, a nation that has remained aloof for most of its history, preferring not to join any of the regional economic groupings, currently faces not only an acute currency crisis, but also an increasingly hostile neighbourhood across all its borders, except with Kenya and Djibouti.

Sudan accuses Addis Ababa of arming the Government of Southern Sudan. Addis has sent troops into Somalia and is now facing a backlash from Somali rebel groups in its Ogaden region, aided by Eritrea, a breakaway nation with which it still has border disputes.

All this turmoil has sapped the strength of the Ethiopian economy, while the Eritrean succession has long cut off its access to the sea.

Yet, the Ethiopian economy, with its access to big rivers that feed the Nile and fertile lands, and a population of 80 million, has the potential of becoming a major trading partner with Kenya.

This, combined with Kenya’s strategic location and relatively developed infrastructure, is increasingly pushing the two nations closer.

Kenya enjoys a historical national security arrangement with Ethiopia, which has one of the largest armies in Africa — with 1 million regular troops, not to speak of easy-to-conscript reserves.

With a GDP of $20 billion, Kenya’s economy as recently as 2005 easily dominated the region. Not any more.

Riding a combination of high economic growth driven by reforms and a stable political environment that has attracted high foreign investment flows, Ethiopia has not only caught up with the Kenyan economy but overtook it in size in 2008.

The Ethiopian economy is currently going through a rough patch due to the global financial crisis.

This, according to estimates by the Economist Intelligence Unit, will allow Kenya to catch up by 2011.

By this time, the two economies with have an annual output of $36 billion each.

Regional powerhouse

Ethiopia plans to sell 200MW of power to Djibouti and Sudan each when the ongoing hydro dam projects connect to the national grid.

Ethiopia, with a potential of 45,000MW power generation, will have 2,000MW hydropower available in the coming two months.

It plans to sell 30 to 40 per cent surplus hydropower to neighbouring countries.

It commissioned two hydro dams within the past three months — Tekeze (300MW) and Gilgel Gibe II (420MW). Within the next three weeks, the third hydro dam plant, Beles (460MW), will connect to the national power grid.

Fincha (100MW) and Gilgel Gibe III (1870MW) hydro dams are under construction.

Work on Gibe IV and Gibe V dams is expected to start soon.

If all goes to plan, Ethiopia will begin selling power to Kenya beginning 2012.