## Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices — insea2022001

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---

### Overview
- The surge in energy and food prices began in the summer of 2020 and was exacerbated by Russia’s invasion of Ukraine in February 2022.
- The Food Price Index (FAO) reached its all-time high in March 2022.
- Natural gas prices are at their historical highs, especially in Europe.
- Commodity price context: this is the third global commodity price shock in the last 20 years.

### Magnitude and composition of the shock
- Russia accounts for about 45 percent of the EU’s total gas imports and about 10 percent of total oil exports globally.
- Russia and Ukraine together account for about 25 percent of global wheat exports, about 15 percent of corn exports, and about 75 percent of sunflower oils exports.
- Rising inputs (for example, fuels and fertilizer) and transportation costs are adding further pressure on food prices.
- Historical peak dates and indices:
  - Food Price Index: all-time high in March 2022.
  - Crude oil and natural gas price indices shown through March 2022 (index bases noted in figures).

### Distributional impacts and food/energy shares
- For an average household in a low-income country, food expenditure can take up to 44 percent of the consumption basket (compared with 28 percent in emerging market economies and 16 percent in advanced economies).
- Within-country example (United States): 27 percent of household spending in the poorest income quintile goes to food compared with 7 percent among the richest income quintile.
- Global undernourishment: about 800 million people undernourished in 2020 (10 percent of the world population).
- Energy share: on average, the share of energy in the consumption basket is higher for higher income households; composition differs by product and region (for example, kerosene mainly used by low-income households in developing countries; gasoline by high-income households).

### Recent pass-through and observed retail price changes
- Actual retail price pass-through from international prices has been relatively limited in most countries so far in 2022.
- On average, pass-through for main fuel products (diesel) has been highest in advanced economies and lowest in emerging and developing economies.
- Lower pass-through in emerging and developing economies is explained by prevalence of price subsidies, especially in the Middle East, North Africa, and sub-Saharan Africa.
- In the first four months of 2022, the pass-through on diesel has been lower, on average, for all country income groups compared with last year.
- The limited pass-through increases fiscal pressures, with largest impact expected in the Middle East, North Africa, and sub-Saharan Africa; oil-exporting countries will see increased oil revenues.
- The pass-through of international food prices to domestic markets is usually lower than for non-agricultural goods; pass-throughs for wheat, corn, and rice are lower overall in Africa, Asia, and Oceania, and higher in Europe and North and South America.

### IMF survey (March 2022): policy measures observed
- Survey coverage: 134 countries (31 advanced economies and 103 emerging and developing economies).
- Number of countries announcing at least one measure since the beginning of the year:
  - 26 out of 31 advanced economies.
  - 45 out of 103 emerging and developing economies.
- Share and types of measures:
  - About 55 percent of all announced measures intended to mitigate the impact of higher energy prices.
  - About 30 percent intended to mitigate the impact of higher food prices.
- Most common responses:
  - Advanced economies: cash and semi-cash transfers (including vouchers and utility bill discounts) were announced in about half of all advanced economies.
  - Emerging and developing economies: reductions in VAT and excises (24 percent of all emerging and developing economies), and some temporary reduction or suspension of import duties (examples: Brazil, Iraq, Turkey).
- Cash transfer specifics and examples:
  - About three-quarters of all cash transfer programs announced were in advanced economies.
  - Latvia: monthly support to seniors and persons with disabilities (€20) and families with children (€50).
  - Germany: one-time payment to families of €100 per child and additional one-time payments to recipients of social benefits.
  - Philippines: unconditional cash transfers of 500 pesos per month to the bottom 50 percent of households (about 12 million families) for six months starting in April 2022.
  - Poland: means-tested benefits from Zl400 to Zl1,438 per household to compensate for energy price growth.
- Other announced measures included reductions in income taxes (for example, raising tax-free thresholds), subsidies to specific industries, vouchers, utility bill discounts, trade restrictions, and below-the-line measures such as loans to energy and agricultural firms.
- Historical precedent: food taxes were reduced in more than 80 countries between 2006 and 2008—mostly through reduced import duties rather than VAT or other consumption taxes.

### Fiscal and environmental trade-offs
- Measures that limit price pass-through (for example, tax cuts, price subsidies) are costly and regressive and are not a sustainable response to a persistent shock.
- Several announced short-term measures risk creating challenges for the green transition, for example:
  - Reductions in consumption taxes on energy products.
  - Measures boosting coal production or sustaining consumption of coal briquettes (examples cited: China, Mongolia).
- Some measures maintain incentives for the green transition (examples cited: additional funding for the climate bonus for environmentally friendly vehicles in Sweden; initiatives toward energy efficiency in Luxembourg and Norway).

### Political economy considerations
- Political economy factors help explain limited pass-through and retention of subsidies:
  - Social unrest over fuel and basic good price increases is a recurrent phenomenon (examples: Ecuador, France, Haiti, Iran, Kazakhstan).
  - Conditions that increase the risk of unrest include high poverty, inequality, and proximity to the electoral cycle.
  - High perception of corruption may reduce willingness to remove subsidies because subsidies are seen as one of the few tangible government benefits.
  - Strong and well-organized interest groups benefiting from lower prices can resist reforms.
- Policy implication: a comprehensive communication strategy is crucial to address resistance to reforms and to prevent temporary measures (for example, tax cuts) from becoming entrenched.

### Policy guidance by social safety net (SSN) strength
- General principle: the strength of SSNs should guide policy responses; strong SSNs enable better protection of poor and vulnerable households.

- Countries with strong SSNs:
  - Allow a full pass-through of higher international fuel prices to domestic users.
  - Provide targeted and temporary cash transfers to vulnerable households.
  - If existing SSN programs do not adequately cover affected middle-class households, consider one-off cash payments, smoothing energy consumption bills over time, or energy bill discounts.

- Countries with weak SSNs and without existing energy and food subsidies:
  - Expand existing SSN programs (targeted transfers, child benefits), leverage COVID-19 measures, and use digital tools to identify eligible households and deliver assistance.
  - Consider reducing education, health, or public transportation fees.
  - If food security is a concern and all other options exhausted, consider temporarily lowering taxes or providing price subsidies with clear sunset clauses for basic food staples.
  - Use the momentum to invest in strengthening the SSN system.

- Countries with weak SSNs and with existing energy and food subsidies:
  - Gradually pass through higher international prices to retail prices while committing to elimination of subsidies over the medium term.
  - Carefully calibrate price increases considering the gap between retail and international prices, available fiscal space, and ability to put mitigating measures in place.
    - Fuel: consider differentiating adjustment paths of domestic prices by type of fuel based on their relative weights in consumption of different income groups.
    - Utilities: adjust prices gradually in line with changes in costs while providing uniform lump-sum bill discounts and smoothing energy consumption bills over time.
    - Food: if a food subsidy program exists, increase rationed food prices gradually; consider improving targeting and reducing leakages to higher income groups.

### Managing the effects: considerations for policy design
- Any policy response should be based on a careful assessment of fiscal and welfare trade-offs and be country-specific.
- Key considerations include:
  - Strength and coverage of SSNs.
  - Availability of fiscal space to fund temporary support measures.
  - Threats to food and energy insecurity and the need to preserve incentives for the green transition.
  - The need for targeted, temporary assistance rather than broad, permanent subsidies.
- Communication and sunset clauses are central to avoid entrenching costly measures and to maintain public trust.

---

### Allow Price Pass-through
- Policy recommendation: Countries should aim at allowing domestic prices to follow international prices to preserve price signals that induce demand responses.
- Evidence on demand response for energy:
  - Short-term price elasticity of demand in the empirical literature has been estimated at –0.2, with the highest elasticity for gasoline (–0.29), followed by natural gas (–0.18) and diesel (–0.15) (Labandeira and others 2017).
  - Long-term price elasticities of demand are even greater.
- Rationale and trade-offs:
  - Higher energy prices should encourage more efficient use of energy and investments in renewables.
  - Higher food prices should encourage more agricultural production.
  - Measures that prevent domestic prices from adjusting are costly, crowd out productive spending, and reduce producer incentives.
  - It is possible to design measures to protect vulnerable households while allowing pass-through.

### Protect the Most Vulnerable
- Core premise: Effectiveness of protection depends on the strength of social safety nets (SSNs).
- Characteristics of strong SSNs:
  - High coverage of the poor, adequate benefit levels, good benefit incidence, effectiveness at reducing poverty, and infrastructure to scale up transfers in response to shocks.
  - Scalability depends on universal and robust identification linked to socioeconomic databases, implementation capacity, and strong medium-term fiscal frameworks.
- Recommended instruments:
  - Targeted and temporary cash transfers independent of energy or food consumption are preferred to avoid distorting relative prices; refundable tax credits can also be used.
  - If SSNs cannot be scaled immediately, combine household income information with utility bill information to provide lump-sum discounts to those below an income threshold; lump-sum benefits are preferred over proportional bill benefits as they are more progressive and less distortive.
  - Smoothing energy consumption bills over time can prevent arrears.
  - Immediate relief should be temporary (time-bound); permanent support should be provided by indexing existing SSN benefits to inflation.
- Options for countries without strong SSNs:
  - Expand existing efficient SSN programs (for example, school feeding programs) by increasing benefit levels and coverage.
  - Use alternative targeting approaches: geographic, categorical, self-selection, community-based, or proxy-means testing.
  - Consider ad-hoc measures used during COVID-19; leverage digital tools for beneficiary intake/registration and Government-to-Person (G2P) mobile payment platforms.
  - Examples cited: Brazil and Thailand implemented registration through dedicated websites; Togo used biometric voter IDs plus satellite and phone record data; Nigeria used census data and high-resolution satellite imagery to map poorest urban areas.
  - Caveat: technology-based approaches can exclude low-income households lacking access to digital tools.
  - Other measures: reduce education, health, or public transportation fees when effective at reaching targeted groups.
- Guidance on subsidies:
  - Countries with existing energy or food subsidies should gradually pass through international prices to retail prices while committing to eliminate subsidies over the medium term.
  - Pace of pass-through should be calibrated on the gap between retail and international prices, available fiscal space, and the ability to mitigate impacts on vulnerable households.

- Fuel-specific recommendations:
  - Differentiate adjustment paths by fuel type based on relative consumption weights across income groups (e.g., liquefied petroleum gas and kerosene may require slower adjustment for low-income households; gasoline and diesel could adjust faster).
  - After aligning domestic prices with international prices, adopt an automatic energy pricing mechanism with smoothing to prevent sharp adjustments and transition to liberalized pricing.
  - Risk: expansion of fuel subsidies can impose a risk to fuel security when governments cannot adequately compensate fuel suppliers, leading to supply shortages.

- Utilities-specific recommendations:
  - Adjust utility prices gradually in line with changes in costs.
  - Temporary measures: uniform lump-sum bill discounts; smoothing energy bills throughout the year.
  - Lifeline tariffs may need redesign to be fiscally affordable; lifeline tariffs are generally inferior to lump-sum discounts because:
    - Consumption level of poor households is not always lower (Komives and others 2005).
    - They reduce the average tariff for the utility and distort prices.
    - Poor households without access to the power network do not benefit.

- Food-specific recommendations:
  - Gradually increase rationed food prices where subsidies exist.
  - Improve targeting of existing programs to reduce leakages to higher income groups and along supply chains to lower fiscal burden while protecting the most vulnerable.
  - Prioritize food security within the fiscal envelope.
  - If necessary and all options exhausted, consider temporary price subsidies or lowering consumption/import taxes for basic food staples with clear sunset clauses; import tariff cuts on necessities are preferable as they are less distortionary.
  - Increase food supply by supporting production and avoiding hoarding behaviors; use food reserves when available and prioritize human consumption over other uses of food crops.
  - Guidance on public food stocks: limited but important role for food security, with principles including transparency and accountability; limited size; inclusion of cereals, preferably locally produced; limited types of food.

### Cut Taxes on Affected Goods Only as the Last Resort
- General guidance:
  - Reducing taxes on energy and food is generally not advisable because ad valorem taxes (VAT or ad valorem excises) often yield higher tax revenues when prices rise due to low price elasticity of demand; additional revenues can fund targeted support.
  - General tax reductions provide relief to all households, including affluent ones, and reduce revenues when they are most needed.
- Specific considerations for fuel taxes:
  - Environmental externalities justify maintaining higher fuel taxes to mitigate climate change.
  - A specific excise tax falls as a share of the consumer price when the pretax price rises; rebalancing by cutting the equivalent ad valorem tax while increasing the specific tax could be considered.
- For countries with weak SSNs and severe food security concerns:
  - Consider temporary reductions in taxes with clear sunset clauses for staple foods; import tariff cuts on necessities are less distortionary and preferable.
- On windfall profit taxes:
  - Permanent excess profit taxes targeting economic rents are preferred over ad hoc tax surcharges on windfall profits.
  - Rationale: Excess profit taxes target rents in excess of the return required by investors, support social cohesion, and can be a significant revenue source while causing little distortion; ad hoc surcharges could discourage investments.

### Manage the Rationing Efficiently
- Rationing as an extreme option:
  - Quantitative controls can be used in combination with price mechanisms if prices are too high and raise food security or energy access concerns.
  - Food rationing delivery mechanisms: ration shops (for example, the public distribution system in India), vouchers, or direct food distribution.
- Energy rationing guidance:
  - Maintain price signals to enable demand response and provide clear targets via communication campaigns.
  - Historical examples:
    - Brazil in the early 2000s: an effective quota system with price signals achieved a more than 20 percent reduction in consumption in one year (Maurer and others 2005).
    - Japan after March 2011 earthquake: set consumption targets for enterprises and reduced demand for air conditioning; electricity demand decreased by 15 percent (Kimura and Nishio 2016).
  - Implementing quotas without prices is less efficient.
  - Blackouts should be a last resort because they are indiscriminate and result in larger economic losses.

### Strengthen International Cooperation
- Rationale: International cooperation is key to ensuring adequate and affordable global supplies of energy and food.
- Needs for vulnerable countries:
  - Low-income countries with high food inflation and heavy reliance on imports from Russia and Ukraine (Middle East and North Africa, Central Asia, and sub-Saharan Africa) are particularly vulnerable and need external assistance.
  - External assistance should include emergency food supplies, financial support, and increased agricultural and fertilizer production.
- Multilateral measures and risks:
  - The Doha Program of Action calls for exploring stockholding systems for least developed countries on regional/subregional basis.
  - Export restrictions are harmful to global food security and add to price pressures, especially when imposed by countries with a sizable market share; lessons from 1973 and 2008 show trade barriers are ineffective on average for stabilizing domestic prices and increase world prices.
  - In the long run, export bans may hurt imposing countries by reducing production incentives and encouraging smuggling.

### Accelerate the Climate Agenda
- Opportunity: The crisis can galvanize support to diversify energy supplies away from fossil fuels and to build sustainable, inclusive, and efficient food systems.
- Recommendations:
  - Increase investments in renewable production and reduce dependence on fossil fuels to strengthen energy security.
  - In the short run, pursue alternative nonrenewable energy supplies (for example, enhance markets for liquefied natural gas and expand shale oil and gas production) in ways consistent with climate goals and avoiding long-duration capital-intensive fossil fuel projects.
  - Reconsider excessive incentives for corn-to-biofuel production that compete with the food supply.
  - Promote energy efficiency measures (thermostat adjustments, energy efficiency improvements).
  - Incentivize environmentally and socially responsible food production and consumption.

### References
- Nishio. 2016. “Responding to Electricity Shortfalls: Electricity-Saving Activities of Households and Firms in Japan after Fukushima.” Economics of Energy & Environmental Policy 5 (1): 51–72.
- Komives, K., V. Foster, J. Halpern, and Q. Wodon. 2005. Water, Electricity, and the Poor: Who Benefits from Utility Subsidies? Washington, DC: World Bank.
- Labandeira, X., J. Labaega, and X. Lopez-Otero. 2017. “A Meta-Analysis on the Price Elasticity of Energy Demand.” Energy Policy 102:  549–68
- Maurer L., M. Pereira, and J. Rosenblatt. 2005. “Implementing Power Rationing in a Sensible Way: Lessons Learned and International Best Practices.” World Bank, Washington, DC.
- Martin, W.,  and K. Anderson. 2011. Export Restrictions and Price Insulation during Commodity Price Booms. Washington, DC: World Bank.
- Morrisson, C. 1996. “The Political Feasibility of Adjustment.” OECD Development Centre Policy Briefs 13, OECD Publishing, Paris.
- International Monetary Fund. 2008a. “Fuel and Food Price Subsidies: Issues and Reform Options.” International Monetary Fund, Washington, DC.
- International Monetary Fund. 2008b “Food and Fuel Prices—Recent Developments, Macroeconomic Impact, and Policy Responses.” International Monetary Fund, Washington, DC.
- International Monetary Fund. 2011. Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks. September.
- International Monetary Fund. 2019. “A Strategy for IMF Engagement on Social Spending.” International Monetary Fund, Washington, DC.
- Ruggeri Laderchi, C., A. Olivier, and C. Trimble. 2013 Balancing Act: Cutting Energy Subsidies While Protecting Affordability. Washington, DC: World Bank.
- Strand, J. 2013. “Political Economy Aspects of Fuel Subsidies: A Conceptual Framework.” Policy Research Working Paper 6392, World Bank, Washington, DC.
- World Bank. 2012. “Using Public Food Grain Stocks to Enhance Food Security.” World Bank, Washington, DC.
- World Bank.  2018. “The State of Social Safety Nets 2018.” World Bank, Washington, DC.

*Source: IMF Note NOTE/2022/001, “Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices,” Sections 1–3.*

### Section 1

### Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices — Section 1

### Overview
- The surge in energy and food prices began in the summer of 2020 and was exacerbated by Russia’s invasion of Ukraine in February 2022.
- The Food Price Index (FAO) reached its all-time high in March 2022.
- Natural gas prices are at their historical highs, especially in Europe.
- Commodity price context: this is the third global commodity price shock in the last 20 years.

### Magnitude and composition of the shock
- Russia accounts for about 45 percent of the EU’s total gas imports and about 10 percent of total oil exports globally.
- Russia and Ukraine together account for about 25 percent of global wheat exports, about 15 percent of corn exports, and about 75 percent of sunflower oils exports.
- Rising inputs (for example, fuels and fertilizer) and transportation costs are adding further pressure on food prices.
- Historical peak dates and indices:
  - Food Price Index: all-time high in March 2022.
  - Crude oil and natural gas price indices shown through March 2022 (index bases noted in figures).

### Distributional impacts and food/energy shares
- For an average household in a low-income country, food expenditure can take up to 44 percent of the consumption basket (compared with 28 percent in emerging market economies and 16 percent in advanced economies).
- Within-country example (United States): 27 percent of household spending in the poorest income quintile goes to food compared with 7 percent among the richest income quintile.
- Global undernourishment: about 800 million people undernourished in 2020 (10 percent of the world population).
- Energy share: on average, the share of energy in the consumption basket is higher for higher income households; composition differs by product and region (for example, kerosene mainly used by low-income households in developing countries; gasoline by high-income households).

### Recent pass-through and observed retail price changes
- Actual retail price pass-through from international prices has been relatively limited in most countries so far in 2022.
- On average, pass-through for main fuel products (diesel) has been highest in advanced economies and lowest in emerging and developing economies.
- Lower pass-through in emerging and developing economies is explained by prevalence of price subsidies, especially in the Middle East, North Africa, and sub-Saharan Africa.
- In the first four months of 2022, the pass-through on diesel has been lower, on average, for all country income groups compared with last year.
- The limited pass-through increases fiscal pressures, with largest impact expected in the Middle East, North Africa, and sub-Saharan Africa; oil-exporting countries will see increased oil revenues.
- The pass-through of international food prices to domestic markets is usually lower than for non-agricultural goods; pass-throughs for wheat, corn, and rice are lower overall in Africa, Asia, and Oceania, and higher in Europe and North and South America.

### Survey of policy measures (IMF survey, March 2022)
- Survey coverage: 134 countries (31 advanced economies and 103 emerging and developing economies).
- Number of countries announcing at least one measure since the beginning of the year:
  - 26 out of 31 advanced economies.
  - 45 out of 103 emerging and developing economies.
- Share and types of measures:
  - About 55 percent of all announced measures intended to mitigate the impact of higher energy prices.
  - About 30 percent intended to mitigate the impact of higher food prices.
- Most common responses in advanced economies: cash and semi-cash transfers (including vouchers and utility bill discounts) were announced in about half of all advanced economies.
- Most common responses in emerging and developing economies: reductions in VAT and excises (24 percent of all emerging and developing economies), and some temporary reduction or suspension of import duties (examples: Brazil, Iraq, Turkey).
- Cash transfer specifics and examples:
  - About three-quarters of all cash transfer programs announced were in advanced economies.
  - Latvia: monthly support to seniors and persons with disabilities (€20) and families with children (€50).
  - Germany: one-time payment to families of €100 per child and additional one-time payments to recipients of social benefits.
  - Philippines: unconditional cash transfers of 500 pesos per month to the bottom 50 percent of households (about 12 million families) for six months starting in April 2022.
  - Poland: means-tested benefits from Zl400 to Zl1,438 per household to compensate for energy price growth.
- Other announced measures included reductions in income taxes (for example, raising tax-free thresholds), subsidies to specific industries, vouchers, utility bill discounts, trade restrictions, and below-the-line measures such as loans to energy and agricultural firms.
- Historical precedent: food taxes were reduced in more than 80 countries between 2006 and 2008—mostly through reduced import duties rather than VAT or other consumption taxes.

### Fiscal and environmental trade-offs
- Measures that limit price pass-through (for example, tax cuts, price subsidies) are costly and regressive and are not a sustainable response to a persistent shock.
- Several announced short-term measures risk creating challenges for the green transition, for example:
  - Reductions in consumption taxes on energy products.
  - Measures boosting coal production or sustaining consumption of coal briquettes (examples cited: China, Mongolia).
- Some measures maintain incentives for the green transition (examples cited: additional funding for the climate bonus for environmentally friendly vehicles in Sweden; initiatives toward energy efficiency in Luxembourg and Norway).

### Political economy considerations
- Political economy factors help explain limited pass-through and retention of subsidies:
  - Social unrest over fuel and basic good price increases is a recurrent phenomenon (examples: Ecuador, France, Haiti, Iran, Kazakhstan).
  - Conditions that increase the risk of unrest include high poverty, inequality, and proximity to the electoral cycle.
  - High perception of corruption may reduce willingness to remove subsidies because subsidies are seen as one of the few tangible government benefits.
  - Strong and well-organized interest groups benefiting from lower prices can resist reforms.
- Policy implication: a comprehensive communication strategy is crucial to address resistance to reforms and to prevent temporary measures (for example, tax cuts) from becoming entrenched.

### Policy guidance by social safety net (SSN) strength
- General principle: the strength of SSNs should guide policy responses; strong SSNs enable better protection of poor and vulnerable households.
- Countries with strong SSNs:
  - Allow a full pass-through of higher international fuel prices to domestic users.
  - Provide targeted and temporary cash transfers to vulnerable households.
  - If existing SSN programs do not adequately cover affected middle-class households, consider one-off cash payments, smoothing energy consumption bills over time, or energy bill discounts.
- Countries with weak SSNs and without existing energy and food subsidies:
  - Expand existing SSN programs (targeted transfers, child benefits), leverage COVID-19 measures, and use digital tools to identify eligible households and deliver assistance.
  - Consider reducing education, health, or public transportation fees.
  - If food security is a concern and all other options exhausted, consider temporarily lowering taxes or providing price subsidies with clear sunset clauses for basic food staples.
  - Use the momentum to invest in strengthening the SSN system.
- Countries with weak SSNs and with existing energy and food subsidies:
  - Gradually pass through higher international prices to retail prices while committing to elimination of subsidies over the medium term.
  - Carefully calibrate price increases considering the gap between retail and international prices, available fiscal space, and ability to put mitigating measures in place.
    - Fuel: consider differentiating adjustment paths of domestic prices by type of fuel based on their relative weights in consumption of different income groups.
    - Utilities: adjust prices gradually in line with changes in costs while providing uniform lump-sum bill discounts and smoothing energy consumption bills over time.
    - Food: if a food subsidy program exists, increase rationed food prices gradually; consider improving targeting and reducing leakages to higher income groups.

### Managing the effects: considerations for policy design
- Any policy response should be based on a careful assessment of fiscal and welfare trade-offs and be country-specific.
- Key considerations include:
  - Strength and coverage of SSNs.
  - Availability of fiscal space to fund temporary support measures.
  - Threats to food and energy insecurity and the need to preserve incentives for the green transition.
  - The need for targeted, temporary assistance rather than broad, permanent subsidies.
- Communication and sunset clauses are central to avoid entrenching costly measures and to maintain public trust.

*Source: IMF Note NOTE/2022/001, “Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices,” Section 1.*

### Section 2

### insea2022001 - Section 2

### Allow Price Pass-through
- Policy recommendation: Countries should aim at allowing domestic prices to follow international prices to preserve price signals that induce demand responses.
- Evidence on demand response for energy:
  - Short-term price elasticity of demand in the empirical literature has been estimated at –0.2, with the highest elasticity for gasoline (–0.29), followed by natural gas (–0.18) and diesel (–0.15) (Labandeira and others 2017).
  - Long-term price elasticities of demand are even greater.
- Rationale and trade-offs:
  - Higher energy prices should encourage more efficient use of energy and investments in renewables.
  - Higher food prices should encourage more agricultural production.
  - Measures that prevent domestic prices from adjusting are costly, crowd out productive spending, and reduce producer incentives.
  - It is possible to design measures to protect vulnerable households while allowing pass-through.

### Protect the Most Vulnerable
- Core premise: Effectiveness of protection depends on the strength of social safety nets (SSNs).
- Characteristics of strong SSNs:
  - High coverage of the poor, adequate benefit levels, good benefit incidence, effectiveness at reducing poverty, and infrastructure to scale up transfers in response to shocks.
  - Scalability depends on universal and robust identification linked to socioeconomic databases, implementation capacity, and strong medium-term fiscal frameworks.
- Recommended instruments:
  - Targeted and temporary cash transfers independent of energy or food consumption are preferred to avoid distorting relative prices; refundable tax credits can also be used.
  - If SSNs cannot be scaled immediately, combine household income information with utility bill information to provide lump-sum discounts to those below an income threshold; lump-sum benefits are preferred over proportional bill benefits as they are more progressive and less distortive.
  - Smoothing energy consumption bills over time can prevent arrears.
  - Immediate relief should be temporary (time-bound); permanent support should be provided by indexing existing SSN benefits to inflation.
- Options for countries without strong SSNs:
  - Expand existing efficient SSN programs (for example, school feeding programs) by increasing benefit levels and coverage.
  - Use alternative targeting approaches: geographic, categorical, self-selection, community-based, or proxy-means testing.
  - Consider ad-hoc measures used during COVID-19; leverage digital tools for beneficiary intake/registration and Government-to-Person (G2P) mobile payment platforms.
  - Examples cited: Brazil and Thailand implemented registration through dedicated websites; Togo used biometric voter IDs plus satellite and phone record data; Nigeria used census data and high-resolution satellite imagery to map poorest urban areas.
  - Caveat: technology-based approaches can exclude low-income households lacking access to digital tools.
  - Other measures: reduce education, health, or public transportation fees when effective at reaching targeted groups.
- Guidance on subsidies:
  - Countries with existing energy or food subsidies should gradually pass through international prices to retail prices while committing to eliminate subsidies over the medium term.
  - Pace of pass-through should be calibrated on the gap between retail and international prices, available fiscal space, and the ability to mitigate impacts on vulnerable households.

- Fuel-specific recommendations:
  - Differentiate adjustment paths by fuel type based on relative consumption weights across income groups (e.g., liquefied petroleum gas and kerosene may require slower adjustment for low-income households; gasoline and diesel could adjust faster).
  - After aligning domestic prices with international prices, adopt an automatic energy pricing mechanism with smoothing to prevent sharp adjustments and transition to liberalized pricing.
  - Risk: expansion of fuel subsidies can impose a risk to fuel security when governments cannot adequately compensate fuel suppliers, leading to supply shortages.

- Utilities-specific recommendations:
  - Adjust utility prices gradually in line with changes in costs.
  - Temporary measures: uniform lump-sum bill discounts; smoothing energy bills throughout the year.
  - Lifeline tariffs may need redesign to be fiscally affordable; lifeline tariffs are generally inferior to lump-sum discounts because:
    - Consumption level of poor households is not always lower (Komives and others 2005).
    - They reduce the average tariff for the utility and distort prices.
    - Poor households without access to the power network do not benefit.

- Food-specific recommendations:
  - Gradually increase rationed food prices where subsidies exist.
  - Improve targeting of existing programs to reduce leakages to higher income groups and along supply chains to lower fiscal burden while protecting the most vulnerable.
  - Prioritize food security within the fiscal envelope.
  - If necessary and all options exhausted, consider temporary price subsidies or lowering consumption/import taxes for basic food staples with clear sunset clauses; import tariff cuts on necessities are preferable as they are less distortionary.
  - Increase food supply by supporting production and avoiding hoarding behaviors; use food reserves when available and prioritize human consumption over other uses of food crops.
  - Guidance on public food stocks: limited but important role for food security, with principles including transparency and accountability; limited size; inclusion of cereals, preferably locally produced; limited types of food.

### Cut Taxes on Affected Goods Only as the Last Resort
- General guidance:
  - Reducing taxes on energy and food is generally not advisable because ad valorem taxes (VAT or ad valorem excises) often yield higher tax revenues when prices rise due to low price elasticity of demand; additional revenues can fund targeted support.
  - General tax reductions provide relief to all households, including affluent ones, and reduce revenues when they are most needed.
- Specific considerations for fuel taxes:
  - Environmental externalities justify maintaining higher fuel taxes to mitigate climate change.
  - A specific excise tax falls as a share of the consumer price when the pretax price rises; rebalancing by cutting the equivalent ad valorem tax while increasing the specific tax could be considered.
- For countries with weak SSNs and severe food security concerns:
  - Consider temporary reductions in taxes with clear sunset clauses for staple foods; import tariff cuts on necessities are less distortionary and preferable.
- On windfall profit taxes:
  - Permanent excess profit taxes targeting economic rents are preferred over ad hoc tax surcharges on windfall profits.
  - Rationale: Excess profit taxes target rents in excess of the return required by investors, support social cohesion, and can be a significant revenue source while causing little distortion; ad hoc surcharges could discourage investments.

### Manage the Rationing Efficiently
- Rationing as an extreme option:
  - Quantitative controls can be used in combination with price mechanisms if prices are too high and raise food security or energy access concerns.
  - Food rationing delivery mechanisms: ration shops (for example, the public distribution system in India), vouchers, or direct food distribution.
- Energy rationing guidance:
  - Maintain price signals to enable demand response and provide clear targets via communication campaigns.
  - Historical examples:
    - Brazil in the early 2000s: an effective quota system with price signals achieved a more than 20 percent reduction in consumption in one year (Maurer and others 2005).
    - Japan after March 2011 earthquake: set consumption targets for enterprises and reduced demand for air conditioning; electricity demand decreased by 15 percent (Kimura and Nishio 2016).
  - Implementing quotas without prices is less efficient.
  - Blackouts should be a last resort because they are indiscriminate and result in larger economic losses.

### Strengthen International Cooperation
- Rationale: International cooperation is key to ensuring adequate and affordable global supplies of energy and food.
- Needs for vulnerable countries:
  - Low-income countries with high food inflation and heavy reliance on imports from Russia and Ukraine (Middle East and North Africa, Central Asia, and sub-Saharan Africa) are particularly vulnerable and need external assistance.
  - External assistance should include emergency food supplies, financial support, and increased agricultural and fertilizer production.
- Multilateral measures and risks:
  - The Doha Program of Action calls for exploring stockholding systems for least developed countries on regional/subregional basis.
  - Export restrictions are harmful to global food security and add to price pressures, especially when imposed by countries with a sizable market share; lessons from 1973 and 2008 show trade barriers are ineffective on average for stabilizing domestic prices and increase world prices.
  - In the long run, export bans may hurt imposing countries by reducing production incentives and encouraging smuggling.

### Accelerate the Climate Agenda
- Opportunity: The crisis can galvanize support to diversify energy supplies away from fossil fuels and to build sustainable, inclusive, and efficient food systems.
- Recommendations:
  - Increase investments in renewable production and reduce dependence on fossil fuels to strengthen energy security.
  - In the short run, pursue alternative nonrenewable energy supplies (for example, enhance markets for liquefied natural gas and expand shale oil and gas production) in ways consistent with climate goals and avoiding long-duration capital-intensive fossil fuel projects.
  - Reconsider excessive incentives for corn-to-biofuel production that compete with the food supply.
  - Promote energy efficiency measures (thermostat adjustments, energy efficiency improvements).
  - Incentivize environmentally and socially responsible food production and consumption.

*Source: insea2022001 - Section 2*

### Section 3

### insea2022001 - Section 3

### References

- Nishio. 2016. “Responding to Electricity Shortfalls: Electricity-Saving Activities of Households and Firms in Japan after Fukushima.” Economics of Energy & Environmental Policy 5 (1): 51–72.  
- Komives, K., V. Foster, J. Halpern, and Q. Wodon. 2005. Water, Electricity, and the Poor: Who Benefits from Utility Subsidies? Washington, DC: World Bank. 
- Labandeira, X., J. Labaega, and X. Lopez-Otero. 2017. “A Meta-Analysis on the Price Elasticity of Energy Demand.” Energy Policy 102:  549–68 
- Maurer L., M. Pereira, and J. Rosenblatt. 2005. “Implementing Power Rationing in a Sensible Way: Lessons Learned and International Best Practices.” World Bank, Washington, DC.  
- Martin, W.,  and K. Anderson. 2011. Export Restrictions and Price Insulation during Commodity Price Booms. Washington, DC: World Bank. 
- Morrisson, C. 1996. “The Political Feasibility of Adjustment.” OECD Development Centre Policy Briefs 13, OECD Publishing, Paris.  
- International Monetary Fund. 2008a. “Fuel and Food Price Subsidies: Issues and Reform Options.” International Monetary Fund, Washington, DC. 
- International Monetary Fund. 2008b “Food and Fuel Prices—Recent Developments, Macroeconomic Impact, and Policy Responses.” International Monetary Fund, Washington, DC.  
- International Monetary Fund. 2011. Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks. September. 
- International Monetary Fund. 2019. “A Strategy for IMF Engagement on Social Spending.” International Monetary Fund, Washington, DC. 
- Ruggeri Laderchi, C., A. Olivier, and C. Trimble. 2013 Balancing Act: Cutting Energy Subsidies While Protecting Affordability. Washington, DC: World Bank.  
- Strand, J. 2013. “Political Economy Aspects of Fuel Subsidies: A Conceptual Framework.” Policy Research Working Paper 6392, World Bank, Washington, DC.  
- World Bank. 2012. “Using Public Food Grain Stocks to Enhance Food Security.” World Bank, Washington, DC.  
- World Bank.  2018. “The State of Social Safety Nets 2018.” World Bank, Washington, DC.

*Source: insea2022001 - Section 3*

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_Source: https://www.imf.org/-/media/files/publications/imf-notes/2022/english/insea2022001.pdf_