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This article was originally published by ODI Global as part of “This Week in Macroeconomics” and is reproduced here with permission. This briefing is based on research supported by funding from the International Development Research Centre (IDRC) and the European Union's Horizon Europe Programme. The analysis draws on collaborative work conducted through partnerships involving the Partnership for Economic Policy (PEP), ODI Global, and IDRC, as well as the Sustainability Performances, Evidence and Scenarios (SPES) consortium.
Global commodity volatility is no longer an episodic threat for developing economies – it is now the baseline. Kenya’s experience during the Russia–Ukraine war (RUW) illustrates how external shocks collide with entrenched domestic fragilities: heavy dependence on imported fuel and fertiliser, drought-driven food insecurity, labour market segmentation and limited shock-responsive delivery systems.
As Figure 1 shows, global prices for fuel, fertiliser and cereals all spiked sharply in 2021–2022 – a rare “triple shock” triggered by the RUW that directly impacted the commodities underpinning Kenya’s economy and food system. Recent work from the Partnership for Economic Policy (RUW and SPES studies) clearly demonstrate that these vulnerabilities shape not only how the shock is transmitted, but also who bears its heaviest burden. This underscores that macroeconomic resilience depends as much on institutional readiness as on economic buffers.
The shock unfolded amid tightening global financial conditions, a depreciating Kenyan shilling, rising debt-service pressures and a highly contested 2022 election cycle – turning what began as an external price surge into a broader macroeconomic and political crisis.
Figure 1: Global energy, fertiliser and cereal price indices 2015–2023
Sources: World Bank Pink Sheet; FAO Food Price Index. Values indexed to 2015 = 100.
How the shock entered the economy
The war pushed world prices of crude oil, fertiliser, wheat, and vegetable oil sharply upward – rising between 20% and 50% in a single year. Kenya was among the most exposed countries in Africa, importing nearly all of its petroleum fuels and chemical fertilisers – critical inputs for transport, manufacturing and agriculture.
As costs surged, firms across Kenya faced a sudden profit erosion. PEP’s model-based simulations suggest that labour demand would decline, especially for skilled and semi-skilled workers, while real household consumption would contract across the board. Real GDP would slip slightly below trend, but the primary damage would be to living standards rather than output. Specifically, the simulated shock results in a modest GDP loss of about 0.13%, but its welfare impacts are far more severe: real household consumption falls by over 2%, while nominal incomes drop by more than 8%.
This shock exhibits the characteristics of a mild stagflationary impulse – slower economic activity alongside rising prices – with no easy macroeconomic stabilisation lever.
Who was hit hardest?
The burden of the shock is far from equally shared. Microsimulations show that the effects of the RUW are unequivocally regressive. By 2030, the bottom 10% of households would face real consumption levels more than 20% below their no-shock trajectory.
Urban poor families suffer most, relying entirely on purchased food and transport, with no fallback when prices rise. Rural households also endure heavy losses but can rely partially on subsistence production. Gender dynamics play a key role: women – who disproportionately work in informal, lower-paid roles – would experience slightly larger welfare declines and increased unpaid domestic burdens as households switch from kerosene to firewood, an adaptation documented in related micro-survey evidence.
Labour market downgrading compounds these effects: skilled and semi-skilled workers displaced into lower-wage segments intensify wage compression at the bottom, disproportionately affecting low-paid workers – especially women. Kenya’s segmented labour market thus functions not only as a vulnerability but also as a channel that amplifies shocks.
The policy dilemma
Kenya’s policy response reflects a familiar dilemma. Under pressure for rapid relief, the government relied heavily on fuel and food subsidies. These measures provide temporary price stability and political reassurance but come at a high fiscal cost and significant leakage to better-off households.
Because subsidies benefit all consumers regardless of need, they divert substantial resources to wealthier households while straining public finances. In the model, subsidies increase government expenditure, reduce savings and depress investment – effects consistent with Kenya’s real-world fiscal constraints. These fiscal pressures worsened an already fragile macroeconomic environment: subsidies widened the deficit, contributed to mounting debt-service strains and weakened investor confidence amid tightening global financial conditions.
Politically, the rising cost of living and currency depreciation fuelled public discontent during a highly contested election period, turning a price-stabilisation tool into a trigger for deeper economic and political tensions.
By contrast, targeted cash transfers perform far better in PEP microsimulations. When the poorest rural or urban households receive support, poverty could fall from 38% under the RUW shock to 34%, inequality would ease from 0.43 to 0.40, and real expenditure among the poorest rural households would rise by roughly 7%. These gains, however, fade once the temporary support ends. The limitation lies not in the economic logic of transfers but the institutional capacity required to deploy them quickly and at scale – precisely where Kenya’s systems remain constrained.
What are the key lessons?
Kenya’s structural exposure to commodity shocks is significant, but it is the constraints on timely, targeted delivery – coverage, identification and administrative readiness – that would turn a price surge into a broader welfare crisis.
Resilience must therefore be understood as a function of state capacity. Reducing dependence on imported inputs, strengthening food systems and rebuilding fiscal space are all essential. But without administrative systems capable of reaching vulnerable households swiftly, Kenya will continue to face the same trade-off in every crisis: broad subsidies that work quickly but poorly, or targeted support that works well but arrives too late.
Kenya’s experience shows resilience is not just about fiscal space or macro buffers. It is about institutions capable of delivering timely, targeted support. Without systems that can activate shock-responsive assistance at scale, every global crisis will force the same trade-off: speed versus precision, short-term relief versus long-term vulnerability.
Disclaimer
This briefing was first published by ODI Global and is part of “This Week in Macroeconomics”, a weekly analysis of key economic trends and the forces behind them. All previous issues are available here. Subscribe on LinkedIn to receive it as soon as it's published.
