Highlights:

The surge in energy and food prices that started in the summer of 2020 represents a terms of trade loss for importing countries. It also implies a loss of real income, particularly to those at the lower end of the income distribution. Fiscal policy has a crucial role in lessening the impact on the most vulnerable households.

Governments must balance by ensuring access to energy and food, normalizing fiscal policy after unprecedented support in 2020, and promoting green transformation. The advice will be country-specific but general principles for policymakers include:

Countries with strong social safety nets (SSNs)

• Allow a full pass-through of higher international fuel prices to domestic users.

• Provide targeted and temporary cash transfers to vulnerable households.

• If existing SSN programs do not adequately cover affected middle-class households, consider one-off cash payments, smoothing energy consumption bills over time, or energy bill discounts.

Countries with weak SSNs and without existing energy and food subsidies

• Expand existing SSN programs, such as targeted transfers or child benefits, leverage measures introduced during COVID-19, and harness the power of digital tools to identify eligible households and to deliver assistance.

• Consider reducing education, health, or public transportation fees.

• If food security is a concern and all other options have been exhausted, consider temporarily lowering taxes or providing price subsidies with clear sunset clauses for basic food staples.

• Use the momentum to invest in strengthening the SSN system.

Countries with weak SSNs and with existing energy and food subsidies

• Gradually pass through higher international prices to retail prices while committing to the elimination of subsidies over the medium term.

• Carefully calibrate price increases considering the gap between retail and international prices, the available fiscal space, and the ability to put mitigating measures in place.

  • Fuel: Consider differentiating adjustment paths of domestic prices by type of fuel based on their relative weights in the consumption of different income groups.

  • Utilities: Adjust prices gradually in line with changes in costs while providing uniform lumpsum bill discounts and smoothing energy consumption bills over time.

  • Food: If a food subsidy program exists, increase rationed food prices gradually. Consider improving targeting and reducing leakages to higher income groups.