The International Monetary Fund has advised governments around the world to avoid relying on blanket subsidies, price controls, and broad tax cuts in response to rising food and energy costs, warning that such measures could worsen inflation, strain public finances, and deepen shortages.
In a report titled “Responding to the Energy and Food Price Shock: Getting the Policy Details Right,” the IMF said policymakers face difficult choices as households and businesses struggle with increasing costs amid ongoing global economic uncertainty.
According to the Fund, governments must strike a balance between protecting citizens from economic hardship and preserving limited fiscal resources.
“When global energy prices spike, governments face an unenviable dilemma: shield people and businesses while straining already reduced room in public budgets or let prices rise for everyone and risk social and political backlash,” the report stated.
The IMF noted that there is no one-size-fits-all approach to managing energy and food price shocks, as countries differ in their levels of energy dependence, fiscal strength, social protection coverage, and market structures.
However, it urged governments to adopt policies that allow domestic energy prices to reflect international market realities while providing targeted support to vulnerable populations.
“Fiscal measures have a role to play, but they need to be temporary, targeted, timely, and tailored,” the Fund said.
The report described the current situation as a negative supply shock that simultaneously drives up prices and slows economic activity, making policy decisions more challenging for governments and central banks.
It warned that sustained increases in food and energy costs could significantly erode household purchasing power, especially among low-income earners, and place severe financial pressure on businesses.
“If unaddressed, this can cause lasting damage by pushing more people into poverty and forcing businesses to shut down,” the IMF cautioned.
The Fund argued that countries dependent on imported energy should generally allow higher international prices to pass through to domestic markets, explaining that such shocks represent a loss of national income that cannot be avoided indefinitely.
According to the report, imported energy shocks can reduce national income by between two and three per cent of Gross Domestic Product within a relatively short period.
“When price shocks are unusually large or disruptive but likely to be temporary, governments may have a case for more active fiscal policy, only if they can afford it,” the IMF said.
The organisation maintained that even when intervention becomes necessary, governments should focus on easing the adjustment process rather than attempting to suppress price increases entirely.
“Most of the price increases should be passed through upfront,” it added.
To protect vulnerable households, the IMF recommended targeted cash transfers through existing social welfare programmes, describing them as the most efficient and cost-effective option.
The report noted that poorer households typically spend a larger share of their income on food and energy and therefore suffer disproportionately when prices rise.
“Protecting them is important to preserving social cohesion and avoiding a surge in poverty,” the Fund stated.
Where social safety nets are weak, the IMF suggested temporarily increasing benefits or expanding eligibility to cover more households facing economic hardship.
It also indicated that governments dealing with exceptionally large but temporary shocks could consider one-off rebates or policies that spread price increases over time.
For businesses, the IMF said support measures should focus on addressing temporary liquidity challenges rather than sustaining companies with long-term viability problems.
“Support should address short-term cash-flow problems, not deeper viability issues,” the report said.
The Fund recommended tools such as government-backed loans, temporary credit facilities, and tax payment deferrals as more effective alternatives to direct subsidies.
The IMF strongly criticised widespread energy subsidies, fuel tax reductions, and price caps, arguing that they often provide greater benefits to wealthier households while creating significant fiscal burdens.
“Energy tax cuts, price caps, or general subsidies mute the important signals from prices, usually benefit higher-income households more, and are hard to phase out,” it stated.
The report further warned that such measures can increase global demand, worsen shortages, and place additional upward pressure on international prices.
While acknowledging that price controls may be justified in rare circumstances, the IMF stressed that they should only be used as exceptional and temporary measures.
“As a rule, full price freezes should be avoided,” the Fund advised.
The IMF noted that emerging and developing economies face greater challenges in responding to food and energy inflation due to weaker social safety nets, tighter fiscal conditions, and more fragile inflation expectations.
It also warned that interventions by wealthier countries can have adverse effects on poorer nations.
“When larger or richer countries suppress domestic price signals, global demand rises, international prices increase, and shortages worsen, hurting poorer importing countries the most,” the report said.
The Fund concluded by urging governments to adopt carefully targeted and temporary interventions while allowing market signals to guide resource allocation.
“The key question is not whether to act, but how to act effectively,” the IMF stated, adding that well-designed policies can help economies adjust to shocks without undermining fiscal sustainability or creating long-term distortions.
