New research by the International Monetary Fund has found that a country's exposure to the conflict in the Middle East was not the sole factor in determining how its government responded. Other factors, including public debt levels, financing conditions, inflation rates, reserve buffers, existing pricing systems, and institutional capacities, also played a role in shaping policy choices.
According to the IMF, governments worldwide have successfully targeted assistance to those who need it most. However, as the conflict continues, the number of measures announced by governments has decreased compared to the initial shock in February. Governments have two main options: using budget resources to mitigate the shock through subsidies or tax cuts, or allowing local prices to adjust to the shock's impact.
In economies more exposed to the energy shock, higher public debt was associated with more measures that allowed the impact of price increases to be passed on to consumers, rather than the government bearing the full cost through support measures. Countries with already high inflation rates announced a larger share of monetary policy measures, including raising key interest rates and increasing interest rates on lending facilities and deposits.
The IMF found that fiscal constraints affected household support, with more indebted countries allocating a smaller share of their response measures to targeted cash transfers to households. Despite these transfers being more targeted, these countries continued to rely on producer support. The IMF attributed this difference partly to administrative capacity, as reaching millions of households requires reliable social registers and payment systems.
Countries with stronger foreign exchange reserve buffers were more able to intervene in the foreign exchange market, using part of their reserves to limit pressure on their currencies. They also relied on tools aimed at maintaining market and financial sector stability. As the shock continued, demand management measures gained importance, including requirements to ration consumption and reduce working hours.
The IMF emphasized that policy frameworks and institutional capacities play a crucial role. Investing in social registers and effective payment systems can achieve significant benefits by improving beneficiary targeting, accelerating support delivery, and reducing financial costs. Predictable pricing frameworks can also help governments respond more quickly.
The IMF concluded that countries with stronger fiscal and external buffers had more options for responding to the shock. In contrast, countries facing high debt levels or more restrictive financing conditions relied more on immediate price adjustments and demand reduction measures. As the crisis evolved, countries used a variety of measures to cope with the shock, adapting their tools to changing circumstances.
Key points
- Countries' responses to energy shocks depend on their financial and external conditions
- Higher public debt is associated with more measures passing on price increases to consumers
- Investing in social registers and payment systems can improve support targeting and delivery
