Targeted aid best protects the vulnerable from price shocks, says IMF

 The International Monetary Fund says this cushions poorer households against price spikes for essentials while limiting the burden on public finances.

The International Monetary Fund said support should be calibrated to the temporary portion of a price shock and include clear expiration dates. (EPA Images pic)

NEW YORK:

Targeted financial support, rather than broad subsidies, is the most effective way to protect vulnerable households when inflation surges, says the International Monetary Fund (IMF).

In its global economic outlook for October titled “Navigating a Shock-Prone World: Lessons from Cost-of-Living Crises,” the IMF said targeted and temporary cash transfers can cushion poorer households against price spikes for essentials while limiting the burden on public finances.

It said such assistance directs limited resources to those most in need while allowing higher market prices to signal scarcity and incentivise consumers to reduce consumption, Xinhua reported.

The IMF said support should be calibrated to the temporary portion of a price shock and include clear expiration dates, rather than compensate households for permanently higher prices.

If governments broaden eligibility, assistance should remain tied to the average impact of the shock on lower-income households, it added.

Its recommendations come after prices for everyday essentials, including food, electricity and fuel, rose sharply in many countries, putting pressure on household budgets and, in some cases, threatening broader economic stability.

The IMF said the effects can persist long after the initial surge in food and energy prices fades.

Inflation expectations can remain above pre-crisis levels for years, while falling real wages erode households’ purchasing power.

With economies increasingly exposed to shocks, governments should strengthen social protection systems before crises hit, the IMF said.

Doing so could make future interventions more effective while preserving fiscal space to respond to new shocks, it added. - FMT