WASHINGTON — The International Monetary Fund on Tuesday cautioned governments against deploying large-scale energy subsidies in response to rising global costs, urging instead more targeted and temporary measures as the world economy absorbs a fresh supply shock linked to conflict in the Middle East.
IMF Chief Economist Pierre-Olivier Gourinchas said policymakers must tread carefully as inflation remains elevated and fiscal flexibility has narrowed following years of heavy public spending.
“We’re somewhat concerned about it,” Gourinchas said, referring to government efforts to shield households and businesses through subsidies and price caps.
While acknowledging that such interventions are politically and economically understandable, he warned they can create unintended consequences if not carefully structured.
“It’s very understandable that governments would want to… shield part of their population and businesses against that external shock,” he said.
However, Gourinchas emphasized that many countries no longer have the same financial capacity to absorb large-scale interventions after repeated spending during the COVID-19 pandemic and previous energy crises.
“Fiscal resources have become much more limited,” he said, noting that governments are now trying to rebuild reserves while facing new economic pressures.
He pointed to earlier energy support programs as a cautionary example, saying they came at a high cost.
“The fiscal measures… were quite expensive… on the order of two to three per cent of GDP,” he said, adding that much of that spending was financed through deficits and increased debt.
“In the environment we’re in… adding two to three (per cent)… that’s really not advisable,” he said.
According to Gourinchas, excessive government spending risks unsettling financial markets.
“It could lead to a situation where you get markets becoming more nervous… interest rates rising… (and) financial instability,” he said.
Instead of broad subsidies, the IMF is urging governments to focus on narrowly targeted support aimed at the most vulnerable populations.
“The support should be very targeted… (and) temporary,” he said.
He also stressed the importance of designing policies that phase out automatically after a defined period.
“You put them in place for three months or six months… it rolls off on its own,” he said.
Another concern is how fiscal policy interacts with monetary policy at a time when central banks are trying to control inflation.
“If fiscal authorities (are) adding fiscal stimulus… that would make the inflation pressures even worse,” he said.
Gourinchas noted that the current crisis is fundamentally driven by supply constraints rather than demand.
“There isn’t enough energy… so the demand is gonna have to come down and meet supply,” he said.
Attempts to artificially hold down prices, he added, do not resolve the core issue.
“Any measure that tries to keep the price unchanged… it doesn’t do the job,” he said.
The IMF’s warning comes as several countries weigh or implement measures to cushion consumers from rising fuel and energy costs following disruptions tied to the Middle East conflict. While such policies may provide short-term relief, the fund warned they could add to already elevated debt levels and increase risks to financial stability if maintained over time. (Source: IANS)
