Bracing for Global Fluctuations in Emerging Markets
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Bracing for Global Fluctuations in Emerging Markets
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By Davis Mwania, Analyst Botho Emerging Markets Group
December 19, 2022
Barely had the world begun its recovery from the COVID-19 pandemic when the Russia-Ukraine war set off an avalanche of economic ripple effects. According to the IMF, economic growth in Africa was expected to slow in 2022 from 4.6% in 2021 to 3.8%. The disruption of wheat, oil, and fertilizer supply chains, especially in emerging markets, has led to high cost-push inflation rates as import-dependent economies are strained due to higher import costs and fuel prices. Already feeling the inflationary effects on purchases, vulnerable citizens have been further affected by government efforts to shrink the economy by hiking interest rates and reducing expenditures. When responding to global macroeconomic volatility, governments in emerging markets should balance contractionary policies with social protection.
In light of external fluctuations and increasing levels of inflation, many developing countries have adopted both contractionary fiscal and monetary policies. Kenya is a good example of how developing nations are responding to fluctuations by adopting this classical economic approach. Kenya's contractionary policies are justified against the backdrop of a hiked inflation rate to 9.18% in September 2022, an increased debt burden, and a downgrade of the country’s debt risk from moderate to high. Similar to its counterparts around the globe, the Central Bank of Kenya increased its interest rate by the highest margin since 2015, from 7.5% in May 2022 to 8.25% in September 2022. The decision was arrived at in view of “sustained inflationary pressures, elevated global risks, and their potential impact on Kenya’s domestic economy.” Raised interest rates may shrink the economy by making it harder for businesses and households to access credit.
In his inaugural speech in Parliament on September 29th, 2022, President Ruto highlighted his intention to steer the country towards austerity measures aimed at cutting $2.48 billion from the 2022/2023 budget by the National Treasury. By reducing government expenditure, Kenya can lower its debt burden. This, in turn, will reduce its budget deficit and national debt, which may allow for higher net savings. An interaction between increased interest rates by the central bank and reduced government expenditure is geared towards lowering the level of economic activity and raising the level of unemployment as demand and consumption decline, driving the rate of inflation down.
Nevertheless, governments need to address a blindspot in implementing these contractionary policies, which is ensuring that vulnerable citizens, who have been gravely affected by the turn of economic events, are well protected. Governments ought to give them their right to basic needs, including food, shelter, clothing, and access to medical care. In the parliamentary address, President Ruto mentioned that his agenda would target transforming the social security infrastructure in Kenya to be more inclusive. This would be attained by stimulating a domestic saving culture through a one-shilling incentive for every two shillings saved and an informal sector’s national savings plan meant to accelerate Universal Health Coverage and enable citizens to set up a retirement health plan.
The announced social security plan for Kenya’s new administration could be viewed as a long-term measure and, thus, inadequate in dealing with the short-term negative effects on households. As the value of household income gets eroded due to higher levels of inflation, access to basic needs such as food and education may be constrained. Currently, Kenya is facing the worst drought in 40 years, which has affected 23 counties and left 4.35 million people in dire need of food. To care for its citizens and address the current situation, the Kenyan government must introduce short-term interventions while laying the proper groundwork for social security infrastructure in health and savings.
The relatively few measures being undertaken to address the needs of the most vulnerable could be explained by some of the challenges that governments in emerging markets face. These constraints include a lack of sufficient funds amidst competing priorities, mismanagement of allocated scarce resources, and mismanagement of information systems that could cripple the monitoring and evaluation of ongoing strategies. With a robust network of stakeholders in the social security ecosystem, governments should build internal capacity to overcome these dynamic challenges. These constraints notwithstanding, governments in emerging countries have the duty and the responsibility to ensure that their citizens are treated with dignity and respect amidst ongoing economic challenges.
Solving short-term may allow for the proper allocation of resources, political goodwill, and social stability needed to implement a long-term framework. A society whose present needs are catered to would have an increased capacity to prefer future consumption to present consumption, thus having a higher marginal propensity to save than a society whose present needs are neglected. Long-term social security measures involve community participation in programs, such as the social savings scheme in Kenya. Long-term measures are thus hinged upon the success of short-term interventions.
Governments in emerging markets like Kenya must address the vulnerable by improving crisis response mechanisms and fostering a multi-agency network between local and international governmental and non-governmental actors, including philanthropists. Tapping the wide network of bilateral engagement with other countries could help channel the right funds and capacity needed to beef up the crisis response time. In so doing, every citizen will be treated with dignity, respect, and care.
Davis Mwania is an Analyst at Botho Emerging Markets Group