ADDIS-ABABA, June 3 – The International Monetary Fund (IMF) has advised governments to avoid large-scale subsidies, price controls and broad tax cuts when responding to rising food and energy prices, warning that such measures can increase public spending, worsen shortages and add pressure to inflation.
In a recent report titled Responding to the Energy and Food Price Shock: Getting the Policy Details Right, the IMF said governments face the challenge of supporting households and businesses while protecting already stretched public finances.
According to the Fund, countries should generally allow domestic energy prices to reflect global market conditions, while providing targeted support to vulnerable households through existing social welfare programmes.
The IMF noted that rising energy prices can reduce household purchasing power and increase operating costs for businesses. It estimated that energy-importing countries could see real income fall by between 2 and 3 per cent of GDP over a short period when faced with major energy price shocks.
To cushion the impact, the Fund recommended targeted cash transfers and temporary support measures rather than broad subsidies that benefit all consumers regardless of income level.
The report also highlighted that lower-income households are often hit hardest by food and energy inflation because they spend a larger share of their earnings on essential goods and services.
For businesses facing temporary financial pressure, the IMF suggested short-term measures such as government-backed loans, credit facilities and temporary tax deferrals. It said these options are generally less costly and easier to withdraw than direct subsidies.
The Fund warned that widespread fuel subsidies, energy price caps and broad tax reductions often benefit higher-income groups more than vulnerable households while placing a heavier burden on government budgets.
It added that while emergency interventions may sometimes be necessary, they should remain temporary, targeted and clearly defined to avoid creating long-term fiscal and economic challenges.
