Response to High Food, Energy Prices Should Focus on Most Vulnerable
IMF Blog, June 7, 2022
Source details
- Canonical URL
- Response to High Food, Energy Prices Should Focus on Most Vulnerable
Other formats
Bibliographic details
- Authors: David Amaglobeli, Emine Hanedar, Gee Hee Hong, Celine Thevenot
- Published: June 7, 2022
Soaring prices and exposure
- Russia’s invasion of Ukraine followed last year’s steep gains in commodity markets, pushing food prices to a record and natural gas to historic highs.
- Prices for wheat, a staple in which Russia and Ukraine together account for about a quarter of global exports, are up 54 percent from a year earlier.
- People in low-income countries are most vulnerable because food accounts for 44 percent of consumption on average, compared with 28 percent in emerging market economies and 16 percent in advanced economies.
- Higher-income households tend to use more fuel than lower-income households; higher-income households are bigger users of gasoline while poorer households in many developing countries tend to consume more kerosene.
- With food and energy imports from Russia and Ukraine disrupted, countries face high costs and uncertainty about supplies.
Policy responses observed
- More than half of the 134 countries surveyed had announced at least one measure in response to higher energy and food prices.
- The pass-through of international fuel prices to domestic consumers has been lower in the first four months of this year than last year.
- Fuel price pass-through has been highest in advanced economies and lowest in oil-exporting emerging and developing countries.
- Fuel subsidies prevalent in many oil-exporting countries in the Middle East, North Africa, and sub-Saharan Africa contribute to lower consumer pain at the pump but create mounting fiscal costs and potential future cuts in other public services.
- In advanced economies, cash and semi-cash transfers (including vouchers and utility bill discounts) were announced by the greatest number of countries.
- In emerging and developing economies, reductions in consumption taxes were the most frequently announced measures.
- Emerging and developing economies announced fewer new policy measures, likely because they continue to rely on existing energy and food subsidies, have less fiscal room to react, or face more difficulty quickly scaling up social safety nets.
Social safety-net considerations and economic rationale
- Limiting price pass-through is common but not always advisable; price signals are crucial to letting demand and supply adjust and inducing a demand response, particularly for energy.
- Subsidized prices encourage more consumption, putting further pressure on energy prices, are costly, crowd out more productive spending, and reduce producer and distributor incentives.
- A demand response can be sizable for energy, but much less so for food because people need to eat about the same amount.
- The note advises allowing price pass-through on food, provided that the vulnerable are protected and food security is not at risk.
Tailored policy guidance and recommendations
- Policymakers should allow high global prices to pass through to the domestic economy while protecting vulnerable households affected by the increases — a strategy that is ultimately less costly than keeping prices artificially low for all irrespective of ability to pay.
- Countries should calibrate measures based on individual circumstances, such as the strength of the social safety net, the level of existing food and fuel subsidies, and the availability of fiscal space.
- Countries with strong social safety nets:
- Use targeted, temporary cash transfers to lessen the impact on vulnerable people.
- Provide targeted transfers relying on existing social programs.
- Countries where safety nets are not strong enough:
- Expand their most efficient existing programs by increasing benefit levels and coverage as needed.
- Use digital tools to register beneficiaries and deliver benefits.
- Countries with existing energy or food subsidies:
- Gradually pass international prices through to consumers while committing to eliminating subsidies in coming years.
- Calibrate the pace of pass-through based on the gap between retail and international prices, the available fiscal space, and the ability to implement measures to protect the vulnerable.
- Where food security is a concern and other options are exhausted:
- Consider temporary steps such as price subsidies or import taxes with clear sunset clauses for basic food staples.
- Increase food supply by supporting production, avoiding stockpiling, and using food reserves when available.
- Where food security is at risk, direct distribution of staple foods may be necessary.
- Over the next two to three years:
- Focus on investing in social safety nets and reforming existing subsidies to improve resilience and promote more productive spending to support inclusive growth.
IMF blog: Response to High Food, Energy Prices Should Focus on Most Vulnerable (June 7, 2022) — David Amaglobeli, Emine Hanedar, Gee Hee Hong, Céline Thévenot
