Governments have difficult policy decisions as they
attempt to protect their citizens from record food prices and skyrocketing
energy costs, which have been exacerbated by the Ukraine conflict.
In reaction to the enormous rise in the prices of the
most important commodities, countries implemented a number of policy measures.
Many governments tried to restrain the rise in domestic costs as international
prices rose, either by cutting taxes or offering direct price subsidies,
according to our analysis of these reported initiatives by member nations.
However, such assistance initiatives place further strains on already stretched
finances as a result of the pandemic.
Keeping price pass-through to a minimum isn't always
the greatest strategy. According to a new IMF paper, authorities should allow
rising global prices to trickle down to the local economy while protecting
vulnerable consumers. This is less expensive in the long run than keeping
prices artificially low for everyone, regardless of their ability to pay.
Not every country is capable of following the same
path. The pace of price changes and the amount to which social safety nets are
employed will vary from country to country where subsidies exist. That is why,
based on unique national circumstances such as the robustness of the social
safety net, the degree of existing food and fuel subsidies, and the
availability of budgetary space, our paper provides nuanced policy advice for
countries.
Prices are on the rise
Following last year's sharp increases in commodities
markets, which pushed food prices to new highs and natural gas prices to new
highs, Russia invaded Ukraine. Wheat prices are up 54 percent from a year ago,
a staple in which Russia and Ukraine contribute for almost a quarter of global
exports. Countries face high costs and supply uncertainty as a result of the
disruption of food and energy imports from these sources.
Food accounts for around 44 percent of consumption in
low-income nations, as compared to 28 percent in emerging market economies and
16 percent in advanced economies, making them the most sensitive to rising
prices.
Oil prices have also risen dramatically, putting a
variety of strains on consumers. Higher-income families use more fuel than
lower-income households, and they use more gasoline as compared to poorer
households, who use more kerosene in many developing nations.
Government actions aimed at reducing the social impact
of rising prices must account for these disparities and guarantee that the poor
are not disproportionately affected.
Interventions in policy
In the first four months of this year, foreign fuel
prices were passed on to domestic customers at a lower rate than last year.
Furthermore, established economies have had the most pass-through, whereas
oil-exporting emerging and developing countries have had the lowest.
Fuel subsidies, which are common in many oil-exporting
countries in the Middle East, North Africa, and Sub-Saharan Africa, are a big
reason why consumers in those regions may be paying less at the pump, albeit at
the cost of rising fiscal costs and, in many cases, future cuts in other public
services.
In reaction to rising energy and food prices, more
than half of the 134 countries we studied announced at least one step. Emerging
and emerging economies announced fewer new policy measures, owing to the fact
that they continue to rely on existing energy and food subsidies, as well as
limiting — or avoiding — domestic price adjustments.
They may also find it more difficult to quickly expand
their social safety nets due to a lack of fiscal room to react. Cash and
semi-cash transfers (including vouchers and utility bill cuts) were declared by
the most countries in advanced economies. The most often stated initiatives in
emerging and developing economies were reductions in consumption taxes.
Considerations for a social safety net
Although most governments have imposed restrictions on
international price pass-throughs, this is not recommended. Price signals are
critical for allowing demand and supply to change, as well as producing a demand
response, in which high costs encourage consumers to use less energy.
Subsidized pricing, on the other hand, encourage
increased use, placing upward pressure on energy prices. Countries should
provide temporary and targeted assistance to the most disadvantaged households
at the same time.
For electricity, a demand response can be significant,
but for food, it is much less so because people need to eat roughly the same
quantity. Nonetheless, countries should avoid preventing domestic prices from
adjusting because such policies, which result in subsidies, are ineffective in
supporting the most disadvantaged.
They're also expensive, divert investment away from
more productive activities, and undermine manufacturer and distributor
incentives. Allowing price pass-through on food is recommended, as long as the
weak are safeguarded and food security is not jeopardized.
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