Public measures to limit the increase in the cost of living only for the most vulnerable
According to the IMFBlog, contrary to what is happening in many countries, governments should allow international prices to pass through to domestic prices while protecting households that are most vulnerable and strengthening social safety nets instead to try to shield all their people.
Key highlights from the IMF´s article:
- Limited fiscal room after the pandemic: Many governments tried to limit the rise in domestic prices or to mitigate its economic impact as international prices for energy and other commodities such as food were rising. Among other support measures cut taxes or direct price subsidies were provided. These public support measures come at a cost and put additional pressure on budgets that were already under pressure due to the pandemic.
- So far, the pass-through of international fuel prices to domestic consumers has been lower in the first four months of this year than last year. It has been highest in advanced economies and lowest in oil-exporting emerging and developing countries (in the Middle East, North Africa, and sub-Saharan Africa). In many cases, less pain in prices will imply future cuts in other public services.
- Government policies should be temporary and targeted to vulnerable people not everyone equally: Apart to protect households that are most in need, this is less costly than keeping prices artificially low for all irrespective of their ability to pay. It also allows to introduce price signals that are crucial to letting demand and supply adjust and encouraging people to be more energy efficient:
- People in low-income countries are most vulnerable to higher prices because food accounts for 44% of consumption on average, compared with 28% in emerging market economies and 16% in advanced economies.
- Higher-income households tend to use more fuel than lower-income households.
- Although a demand response can be sizable for energy, but much less so for food because people need to eat about the same amount, the IMF advise allowing price pass-through on food, provided that the vulnerable are protected and food security is not at risk.