IMF cautions countries against broad fuel subsidies

The war in the Middle East has intensified strains on an already fragile global fiscal situation, with higher interest rates and rising energy prices already fueling calls for support from emerging markets and developing economies, the International Monetary Fund (IMF) said yesterday in its Fiscal Monitor report.

Rodrigo Valdes, the IMF’s new fiscal affairs chief, said countries should skip fuel subsidies to help their citizens deal with a shortage of oil and the corresponding surge in energy prices and opt instead for targeted, temporary cash transfers that do not obscure higher prices and keep demand high.

“We don’t have oil. We don’t have energy. Energy needs to be more expensive for everybody, so that the adjustment happens and we consume less,” Valdes told Reuters in an interview.

The IMF on Tuesday cut its growth outlook due to war-driven energy price spikes and supply disruptions, saying the global economy could be driven to the brink of recession if the war widens and oil stays above $100 per barrel through 2027.

Era Dabla-Norris, deputy fiscal affairs director, said in a news conference the response thus far had been more restrained than during the energy price shock of Russia’s invasion of Ukraine in 2022.

Valdes said imposition of export controls, the extent of damage to energy infrastructure and the capacity of other countries to boost oil output would determine the war’s impact, and its policy implications.

Once the current strains eased, he said it was critical that countries stay focused on medium-term challenges in an environment where public debt continued to increase, driven by expanded permanent spending on entitlement programmes or reduced revenues, particularly in some of the largest economies.

The IMF’s advice was simple: “Rebuild fiscal buffers once conditions stabilize and do so without delay.”

Valdes warned of emerging risks, including a reshaping of debt markets that gives a larger role to investors such as hedge funds, who he said were “less firm hands to hold debt for the long run.” The duration of debt had also been declining, which meant that short-term interest rates transmitted more quickly to debt dynamics.

Other challenges included higher security costs, energy and climate transition spending and rising interest bills at a time when revenues had not kept pace, the IMF said in a blog accompanying the report.

—Reuters

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