Ethiopia is looking to partner with Kenya as it seeks to reduce its reliance on its neighbours Eritrea, Sudan, South Sudan and Somalia.
The country is set to sign a trade agreement with Kenya in the next two weeks.

Regional observers say the move will benefit both countries as Kenya is looking to secure a larger market for its companies while Ethiopia wants to have an alternative transport corridor for its goods.

The country will grant Kenya special status allowing companies to invest in sectors like banking and telecommunication, which were out of bounds to foreign investors.

It is emerging that the new Addis Ababa administration, led by Prime Minister Hailemariam Desalegn, is keen to sign the deal, which predecessor Meles Zenawi now deceased, had avoided in a bid to protect local industries.

However, some analysts say the deal is more of a diplomatic move than an economic one given that the telecommunications, insurance and banking sectors are the main sources of revenue for the country.

The analysts doubt Ethiopia is really keen on opening up its strategic sectors to foreign investors.

Diplomatically, Ethiopia is keen to cement ties with Kenya, its most trusted ally within the region, especially as it transits to the new administration. Addis Ababa is surrounded by either rivals or neighbours whom it views with suspicion.

In the north, Eritrea is a sworn enemy as it blocked Ethiopia from accessing the port of Massawa, while the privatisation of the Djibouti port has become too costly to use.

The Djibouti port is strategically located at the crossroads of one of the busiest shipping routes in the world and linking Europe, the Far East, the Horn of Africa and the Persian Gulf.

To the west of the country, Sudan and South Sudan are unstable due to recurrent conflicts although Ethiopia gets most of its oil from Port Sudan, which is the capital of the Red Sea State in Sudan.

In the east, Somalia has been unstable for a long time.

Ethiopia is quite isolated from the rest of the region as it is not a member of the East African Community. The county has membership status in the Common Market for Eastern and Southern Africa (Comesa ) and the Inter-Governmental Authority on Development (Igad).

Patrick Obath, the chairman of the Kenya Private Sector Alliance (Kepsa), said Zenawi had in the past maintained that Ethiopia would not open up certain sectors until a time when Ethiopians were capable of competing with Kenyans.

Despite the immense potential offered by Kenya’s northern neighbour, trade between the two countries remains at Ksh5 billion ($59 million) compared with Kenya-Uganda trade at Ksh76 billion ($904 million) and Kenya-Tanzania at Ksh41.7 billion ($55 million).
Kenya and Ethiopia have for the past two years signed multiple deals, including the $18 billion Lamu Port-Southern Sudan-Ethiopia Transport (Lapset) project, a power purchase deal and an agreement to build the Nairobi-Addis Highway.

Imported power
Under the power purchase agreement, Kenya will in the next few years import 400MW of power from Ethiopia once Gilgel Gibe III hydroelectric dam is completed.

Already, the World Bank and the African Development Bank (AfDB) have undertaken to finance the construction of a $1.2 billion power line that will link the two countries.

Ethiopia has in the past restricted the entry of foreign investors in its manufacturing and financial sectors as it currently does not have well developed sectors.

But this could change with the completion of the Nairobi-Addis Ababa highway. AfDB estimates the highway will boost trade between the two countries to Ksh17 billion ($200 million) by 2017.

By Fred Oluoch and Peterson Thiong’o