Blog | 15 Feb 2021

Does Keynesianism exist on the frontier?

Jacques Nel

Head of Africa Macro

Economic policy discussions that take place at a global level are more often than not deliberations over the best way forward for advanced economies. The institutional and developmental realities in frontier markets mean that not only do policy objectives differ, but the policy tools available to authorities are in most cases much more limited.

While acknowledging the risk of overgeneralisation, monetary policy in most African countries is qualitatively different from that of advanced economies in both objective and scope. Whereas central banks in advanced economies have consistently missed inflation targets, as highlighted by my colleague Innes McFee in a recent blog post, frontier-market central banks have for the most part been preoccupied with containing inflation. This is difficult in an environment in which structural impediments to the transmission mechanism hinder a quick and complete pass-through of central bank signals to commercial interest rates. Consequently, many African central banks have used exchange rate policies to combat inflation. This has been to the detriment of external liquidity, as seen in countries such as Nigeria, Ethiopia and Angola.

On the flip side, monetary stimulus also takes another form in frontier markets (in those that have monetary sovereignty, that is). While policy rates have dropped to all-time lows in countries from South Africa to Morocco and Rwanda to Côte d’Ivoire during the Covid-19 pandemic, the more effective measures, arguably, have included widening the collateral accepted for central bank lending facilities and reducing liquidity and capital requirements for banks. Interest rate reductions merely reflect intentions.

Then there is the question of credibility. We have argued that this is an era for adventurist rather than conservative economic policy, and that risks to emerging market credibility from expansionary policies have rarely been lower. However, there is again a big difference between an emerging market context (with deep capital markets and a robust domestic financial sector) and frontier markets (without). If even the Bank of England’s credibility is being questioned, what recourse will the central banks of Kenya, Ghana or Mozambique have when the ground starts to shake?

On the fiscal side, there is an inherent contradiction when it comes to credibility in a Keynesian framework: using fiscal stimulus accompanied by a credible fiscal commitment towards deficit reduction. But future use of stimulus will be dependent on what fiscal authorities deem adequate employment or economic growth, meaning consolidation always takes a back seat. This question around credibility is complicated further in the African context, with government efforts to provide basic services already weighing on fiscal finances and pushing public debt higher and higher.

In recognising the central role that fiscal policy will play in the post-Covid recovery, we constructed a Fiscal Space Index to identify where fiscal stimulus could provide significant (and sustainable) support to the economic recovery. As expected, most African governments have almost no room for stimulus when taking into account the nature of spending (recurrent vs capital), steadily deteriorating debt metrics, and the economic devastations wrought by the coronavirus pandemic. In fact, some governments (notably the oil producers) will need to cut spending, thus exacerbating the economic fallout. Many African governments are already in debt distress.

Demand management in the Keynesian context seems somewhat abstract when basic needs remain unsatisfied.

You may be interested in

MENA Region


Fossil-fuel subsidies hinder the clean energy transition in the MENA

The MENA region is a key player in the energy sector as a large producer of oil and gas, but over time, it has also come to be a significant energy consumer Growth and development in Middle East and North Africa (MENA) countries have fuelled an appetite for energy, much of it satisfied by oil and natural gas. This carbon-intensive mix has been enabled by low fossil-fuel energy prices thanks to generous government subsidies. Removing subsidies is politically challenging and difficult in a high-price fossil fuel environment. 

Find Out More


Understanding Africa’s climate risks

We have expanded our climate transmission channels on the Global Economic Model to include more sub-Saharan African economies. Through scenario analysis, we can better understand the climate risks faced by Botswana, Ghana, Kenya, Mauritius, Mozambique, Nigeria, Tanzania, Uganda, and Zambia.

Find Out More
Map of Kenya


In Kenya the two-horse presidential race begins

There are five days to go until Kenya's high-stakes elections on August 9. All eyes are on the presidential vote, which will essentially be a tight two-horse race between veteran opposition figure Raila Odinga and Deputy President William Ruto. The likelihood of a run-off is low. This Research Briefing explores these candidates' prospects of winning the top job and assesses the tense election environment. Along with a new president, Kenyans will vote for members of the National Assembly and Senate, as well as local county governors and members of the 47 county assemblies. Tough economic conditions have fuelled voter apathy, as citizens consider politicians' promises empty. Economic policy will play a larger role than before in voter decision-making, but identity remains key. There is a high risk of sporadic election-related violence, particularly along ethnic lines. However, it is not expected to be as devastating as in 2007.

Find Out More