The International Monetary Fund recommended that countries stop trying to control growing food and energy prices and instead focus on “protecting the most vulnerable” and ensuring that the poorest people are assisted.
National budgets are burdened by efforts to keep prices low, and “higher prices on energy should encourage more efficient use of energy and investments in renewables, while higher food prices should encourage more agricultural production,” according to the research.
“Ensuring affordable access to basic staples, especially where food security is a concern, therefore, should be prioritized”, the report said, suggesting direct cash transfers to low-income groups or other targeted tools be used, instead of universal tax cuts or subsidies.
Countries with existing energy or food subsidies should gradually pass through international prices to retail prices while committing to eliminate subsidies over the medium term.
While global food prices have fallen from their all-time high in March, the conflict in Ukraine is contributing to already high inflation and driving up prices for oil, gas, and consumables like wheat. This not only makes life more difficult for people around the world, but it also raises costs for national governments, who appear to be utilizing subsidies to prevent the full impact of increased prices from reaching home customers.
Instead of the temporary windfall taxes on energy companies that are being proposed in some countries, such as the United Kingdom, the Fund’s analysis recommends that countries tax surplus earnings permanently.
Excess profits, defined as “economic rents in excess of the return required by investors,” would promote social cohesion and may become “a source of significant revenue while causing little distortion,” according to the report.
The Fund also urged governments not to apply export limits, claiming that doing so could jeopardize global food security and “add to further price pressures, especially when imposed by countries with a sizable share of the global market.”
In May, India imposed a ban on wheat exports in order to preserve food security and price stability. However, the report claims that while export limits help to keep domestic prices stable, they also raise international prices, which can encourage smuggling and reduce incentives to produce more.