IMF urges countries to support vulnerable, avoid blanket subsidies

LONDON: The IMF said on Tuesday governments fighting soaring food and fuel prices should target aid to vulnerable citizens rather than issue across-the-board aid that risked adding to strains on public finances.

Over half of 134 countries surveyed said they had introduced subsidies or tax cuts to soften the blow of soaring price rises triggered by the war in Ukraine, the International Monetary Fund said in a blog.

This includes Pakistan that announced energy subsidies back in late February. However, it has now rolled back those packages as it seeks to revive its IMF programme, aiming to balance inflation and a strain on its budget.

Russia's invasion of Ukraine has led to sharp spikes in food and fuel prices, compounding global economic woes, especially for developing economies that have been struggling more than richer ones to recover from the COVID-19 pandemic.

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"Policymakers should allow high global prices to pass through to the domestic economy while protecting vulnerable households affected by the increases," the IMF blog said.

"That's ultimately less costly than keeping prices artificially low for all irrespective of their ability to pay."

The IMF often makes removing subsidies a condition of giving aid.

Pakistan on June 2 slashed fuel subsidies for the second time in a week to secure a bailout from the IMF. Tunisia said on Tuesday it would start cutting energy and food subsidies next year alongside financial transfers to poor families, as it seeks a $4 billion IMF loan.

The IMF blog noted that governments had passed less of the rise in oil prices onto consumers in the first four months of this year than they had in 2021, adding that subsidies encouraged more energy consumption and thus fed the price rises.

Food security concerns may mean that some governments have no option but to introduce subsidies and even hand out basic staples, the blog said, but it advised that "clear sunset clauses" for their termination were needed.