IMF Blog,update

 

Dear MARIA, We just published a new blog—read the full text below. The Energy Shock Is Testing Government Budgets (Credit: K M Asad/IMF Photo)  By Era Dabla-Norris, Christian Mumssen, Rodrigo Valdés, Daria Zakharova As governments move quickly to shield people and businesses from the energy shock caused by the war in the Middle East, early evidence suggests many countries are resorting to untargeted and potentially expensive policies amid tight budgets. If the recent peace talks lead to a quick normalization of trade and oil flows, and prices go back to their historic trends, the challenge for many governments will be how unwind this support.   A new IMF Global Policy Tracker has recorded nearly 900 policy measures introduced across about 170 countries since the beginning of the war, both in advanced and emerging and developing economies. Fiscal measures dominate the response with governments cushioning the impact of higher energy prices by limiting pass-through to consumers and firms.   The tracker illustrates an important pattern. The composition and sequencing of today’s policies broadly resemble those deployed during the 2022 energy shock. But for many countries, circumstances are not the same: debt service burdens are rising for many countries and fiscal space remains limited, amid an environment of heightened uncertainty and recurrent shocks. Also, the exposures and disruptions of the current energy shock differ from the previous shocks. Both make policy design more consequential. One shock, different responses   Our new tracker shows that, in advanced economies, almost half of the measures are subsidies to energy producers and distributors. Another third are cuts to fuel excise taxes aimed at containing retail price increases. European countries, for example, have leaned heavily on fiscal and pricing measures to cushion households.   Meanwhile, emerging economies have deployed a more varied policy mix. In addition to fiscal measures, which account for around half of recorded policies, many have used price controls—such as fuel price caps or adjustments to pricing formulas—and other administrative interventions. In the Middle East and Central Asia, monetary and financial tools play a larger role, alongside fiscal expansion in oil-exporting economies. African countries rely more on pricing and supply-side measures, while parts of Asia have turned to demand management, including conservation and rationing. The Western Hemisphere region shows a more mixed approach. Policy space also matters. Countries with higher levels of debt and heightened fiscal risks, including emerging market economies, have relied more on pricing measures and demand suppression, including through fuel rationing, mandated remote work, and travel restrictions.   A group of countries has taken a more fiscally sustainable yet politically difficult path: allowing administered prices to rise, scaling back subsidies, or suspending price-smoothing mechanisms. These choices preserve price signals and contain fiscal costs, but they also require strong safety nets (or new interventions, such as containing public transportation tariffs) to protect vulnerable households.   Noble, but potentially costly and risky intentions   The dominance of price containment policies reflects a common objective: to cushion households and firms from a sharp increase in energy costs. Yet a large share of measures described as temporary lack clear expiration dates or fiscal cost estimates. This is how interim support can become permanent: extended incrementally, difficult to unwind, and increasingly costly if prices remain elevated. It is just one of several risks: Fiscal costs can escalate quickly. Broad-based subsidies and tax cuts are expensive, particularly when extended beyond the initial phase of a shock. Price caps by oil importing countries risk becoming impossible to finance if global fuel prices escalate further. Costs do not disappear when they are not visible in standard government fiscal accounts. Pricing measures that compress margins—especially in state-owned energy companies—can generate losses that later surface as contingent liabilities on the public balance sheet. More subtly, widespread suppression of price pass-through can weaken adjustment at the global level. When many countries simultaneously shield consumers, demand responds less, contributing to tighter markets and potentially higher global prices. Individually rational policies can collectively amplify the shock. Finally, by spending more freely now, governments will limit their scope to take further action if, for example, we see an escalation of the conflict, more energy disruptions, or other shocks. The more fiscal space is used today on broad price support, the less remains available tomorrow to respond to new challenges. Protect people, not prices   Energy shocks force policymakers to choose if adjustment happens via prices or is absorbed by budgets. The early responses so far show a clear preference for containing prices. That is understandable. But if sustained, it risks higher fiscal costs and distorted incentives, especially if energy prices eventually normalize.   The alternative is less politically palatable but more fiscally responsible and sustainable: allow prices to adjust and ensure fiscal interventions are temporary and targeted. Some countries are already moving in this direction. Others would be well advised to follow suit.   In an uncertain, shock-prone world, keeping powder dry matters as much as acting quickly. The principle remains simple: protect people, not prices. Read the blog Recent blogs Global Economy Endures War Shock—So Far An overall resilient world economy masks significant differences among countries and regions. Energy importers and countries with limited policy space are most vulnerable World Rethinks Geoeconomic Calculus in a More Contested Era Economic thinking must evolve to account for a shift in how nations pursue security, growth, and influence Industrial Policy Is Adapting to Crises, but Remains Hard to Implement Effectively As governments intervene more, evidence shows that the benefits are modest and depend on thoughtful design Thank you again for your interest in the IMF Blog. Please write to us directly and let us know your thoughts. We would love to hear from you.   Jeff Kearns  Managing Editor | IMF Blog  jkearns@IMF.org Stay connected with the International Monetary Fund:       This email was sent to politikimx@gmail.com on behalf of: International Monetary Fund 1900 Pennsylvania Ave NW · Washington, DC · 20431