CENTRAL BANK OF KENYA
Emerging and Frontier Economies at a Crossroads
Dr. Patrick Njoroge
Governor, Central Bank of Kenya
November 2022
(777 words)
The cheery global outlook of a year ago has turned to impending gloom. Central bankers in
advanced economies finally found their resolve to deal decisively with record-high inflation,
no matter if the global recovery stalls. Their earlier indecisiveness drew the ire of the
financial markets and citizens braced for further blows to their livelihoods. These actions
have also had wider spillovers, particularly the frontier and emerging market economies,
which if ignored would imperil all economies.
These recent policy moves have amplified—not reduced—three global concerns:
unanchoring of inflation; the marked strengthening of the US dollar; and turbulence in the
leading financial markets. These winds have combined to a perfect storm for Emerging
Market and Developing Economies (EMDEs). However, there is little effort to capture these
spillovers in the policy choices of advanced economies, even as the spillbacks include
material financial stability risks.
The current conjuncture arises from diverse factors, with excess liquidity from the pandemic
response measures and supply chain disruptions as the early triggers. The war in Ukraine and
the resultant disruptions to energy supplies and global food chains have exacerbated the
situation. Escalating inflation everywhere is elevating the cost of living, crushing the
economic recovery, and made a global recession virtually certain. For low- and middleincome countries, the high prices and shortage of food products, fuel, and fertilizers are
particularly damaging. The United Nations has warned of “a global emergency of
unprecedented magnitude” with up to 345 million people at risk of starvation.
Monetary authorities in advanced economies led by the US Fed are now playing catch-up
and raising interest rates sharply. This has generated significant volatility and movements in
the financial markets with substantial spillovers. The US dollar has surged to a 20-year high
against a basket of major currencies, pushing the euro, sterling pound, Japanese yen and
several emerging markets currencies to historic lows. Further, with the resultant flight of
capital to the safety of the US dollar, financing from the global capital markets has dried up
for EMDEs and particularly for the frontier economies. This has made it difficult to close the
fiscal and external financing gaps in those countries.

In the wake of more volatile markets and a global recession, EMDEs will bear the brunt
through no fault of their own. In designing the emergency policies to protect their
populations, policymakers in low- and middle-income countries are severely constrained by
the limited fiscal space and high debt levels post-COVID. The drying up of external
commercial and concessional financing has only served to worsen the situation.
Unfortunately, the traditional safety nets do not appear to be ready for the impending storm.
They remain small, ineffective, and unable to take up the slack. Concerns about debt levels
have severely limited the scope for additional borrowing from International Financial
Institutions (IFIs). This state of affairs calls for urgent action.
First, policy makers in advanced economies should place more weight on the spillovers of
their policies on EMDEs. A useful starting point would be considering the spillbacks from
financial stability risks in EMDEs. The just concluded IMF/World Bank meetings in
Washington DC provided a platform to reaffirm a stronger solidarity among nations. The
jury is still out on whether this message was received with the appropriate urgency.
Second, the global economy needs rebuilding, starting with eradicating the food shortages.
Resolving the fundamental supply chain constraints particularly for oil, food and other
essential commodities is imperative. Availability of food is critical especially in the Horn of
Africa, where famine is imminent, and millions more staring at hunger. A related important
component will be addressing climate change and accelerating the transition to a low carbonclimate resilient global economy. Significant public and private sector finances will be
required in the transition.
Third, policy makers in advanced economies should support the immediate strengthening of
safety nets for EMDEs from the IFIs. As an immediate step, the level of support from the
bilateral and multilateral development partners to frontier economies should be increased,
sped up, and made more flexible. This could also be in the form of debt management
operations that increase fiscal space and ease the debt constraints. These are especially
critical in this cycle.
Fourth, EMDEs will need to sustain strong macro-economic policies and strengthen the
structure of their economies, as a basis for their resilience. This includes diversifying their
economies for greater protection against shocks and to spur inclusive growth.
Finally, EMDEs bearing the brunt of actions of the advanced economies should stand
together. They should raise their collective voices at the IFIs and other international bodies
on the acute difficulties that they face. They should also learn from each other, and lean on
each other.
Dr. Patrick Njoroge is Governor of the Central Bank of Kenya