The International Monetary Fund (IMF) has advised countries to stop trying to limit the rise in food and energy prices and instead consider introducing excess profit taxes.
According to a new IMF report, policymakers should allow high global prices to pass through to the domestic economy while protecting the vulnerable affected by the increases.
“That’s ultimately less costly than keeping prices artificially low for all irrespective of their ability to pay,” the report said.
It argued that price signals are crucial to letting demand and supply adjust and inducing a demand response.
“Higher prices on energy should encourage more efficient use of energy and investments in renewables, while higher food prices should encourage more agricultural production.”
On the other hand, it said, subsidised prices encourage more consumption, putting further pressures on energy prices. Moreover, they crowd out productive spending and reduce producer incentives.
As such, the IMF said “countries with existing energy or food subsidies should gradually pass international prices through to consumers while committing to eliminating subsidies in coming years”.
“The pace of pass-through should be carefully calibrated based on the gap between retail and international prices, the available fiscal space, and the ability to implement measures to protect the vulnerable.”
Commenting on global calls to impose taxes on windfall profits on energy companies, the IMF argued that such taxes could discourage investments and thus be counterproductive.
Instead, it said, a tax on excess profits – defined as economic rents in excess of the return required by investors – is preferred.
“Excess profit taxes would support social cohesion by enabling contributions from businesses that prosper during the crisis rather than those companies that are hit hard and earning normal profits or even incurring losses.
“Such taxes could become a source of significant revenue while causing little distortion,” the report said.
Ultimately, the IMF advised governments to focus on investing in social safety nets and reforming existing subsidies over the next two to three years.
Moreover, it noted that the current crisis offers an opportunity to galvanise support for diversifying energy supplies away from fossil fuels and for achieving more sustainable, inclusive, and efficient food systems.
Recognising that in the short run, as economies grapple with supply shortages, alternative supply sources of non-renewable energy, may be needed, the IMF noted that this should be done in a way that is consistent with climate change goals. This, it said, may include enhancing markets for liquefied natural gas, and expanding production of shale oil and gas.
