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IMF calls for food, energy subsidy as global recession looms

In an interview with BBC, IMF managing director Kristalina Georgieva voiced concern that without the correct government support the protests seen in Sri Lanka could be repeated in other countries

Governments worldwide need to subsidise the cost of food and energy, "in a much targeted manner, preferably by providing subsidies directly to people,” as global recession fears loom, the International Monetary Fund said.

Reiterating that the poor strata of the society have been struggling due to inflation and the high cost of living, Kristalina Georgieva said while many governments have been providing some kind of help via schemes and other provisions, that may not be enough.

In an interview with BBC, Georgieva voiced concern that without the correct government support the protests seen in Sri Lanka could be repeated in other countries.

When it comes to the cost of living crisis there are two priorities, one the very poor people and segments of society that are now struggling with high food and energy prices; the second is to support those businesses that have been most damaged by the war in Ukraine, the IMF head said.

“The IMF’s role is to work with governments to stabilise the global economy and enhance prosperity. However, that's proving challenging because food prices have hit record highs this year, while oil and gas prices have also risen sharply,” she said.

Georgieva’s call for urgent action by governments to cushion against the impact worldwide stagflation — a combination of spiralling inflation and recession — comes in the wake of a dire warning by the World Bank that the war in Ukraine is set to cause the "largest commodity shock" since the 1970s.

In a grim forecast, the World Bank said disruption caused by the conflict would contribute to huge price rises for goods ranging from natural gas to wheat and cotton, leading to very large economic and humanitarian effects. Already, households across the world are feeling the cost of living crisis.

The Bank of England governor Andrew Bailey also warned of the possibility of more rises in food prices.

Over the last few months governments have made a range of interventions to try and lower the cost of living.

In the US President Biden has released oil from reserves to try and bring prices down. India, Spain and Portugal have capped gas bills.

Over the weekend, India cut levies on pump prices of gasoline and diesel, waived import tax on coking coal and increased payouts on fertilizers as well as cooking gas for the poor. The UK has made some tax changes and is considering a windfall tax on the soaring profits of energy companies.

The IMF chief also called on the countries to support the businesses that have been tattered and "most damaged” due to the ongoing war in Ukraine waged by Russia.

The current scenario is a challenge as food prices have hit record highs, and prices of oil and gas are also shooting up uncontrollably, according to the IMF head. She expressed worries about the higher borrowing costs on governments that are debt-ridden since the Covid-19 pandemic. Governments need to be "very careful" about how much money they spent and what they spent it on, Georgieva warned.

There’s a twin shock due to the coronavirus pandemic. Both Russia and Ukraine are major crops and hydrocarbons exporters of the world and the war has triggered a dearth of the basic commodities.

The annualised inflation rate in 2022 is feared to reach its highest point in decades in many countries —an estimated nine per cent in the UK, 8.3 per cent in the US and 7.4 per cent in the eurozone, according to the IMF.

The central banks have scrambled to lift the interest rate, which has led some influential figures such as Goldman Sachs' Lloyd Blankfein to warn of the risk of recession, while some governments have resorted to tax cuts to curb the increase in prices and control the inflation and price hikes.

Georgieva is concerned that without the correct government support the protests seen in Sri Lanka could be repeated in other countries.

Sri Lanka's economic crisis, exacerbated by rising prices, has led to deadly riots, a new prime minister and a first ever default on its debts.

The IMF boss said such similar unrest before the pandemic, from France to Chile, was caused by "a sense of inequality growing" and decisions being made without the support of the people.

"If we are to learn any lessons from 2019 it is to be much more humble about policy decisions, and engage in multiple ways with people, because policies must be for people, not the paper we write them on," she said.

Georgieva said that while there is plenty of food, it is not evenly distributed.

The solutions, she said, are growing more crops where possible but also a greater focus on agricultural productivity, "not only because of the war, but because of climate change".

She added: "Trade needs to be retained open, we should not have a situation in which countries hold on to food more than they need and create all kinds of barriers for moving it from one place to another."

— issacjohn@khaleejtimes.com