Fuel subsidies amid the oil price shock could exceed $1 trillion this year, the United Nations said, warning that many governments are running out of fiscal resources to sustain subsidies, fuel tax reductions, or price caps.
Estimates in a United Nations Development Programme (UNDP) report suggest that at current energy prices, global fossil fuel subsidies could easily surpass $1 trillion this year.
“Countries are reaching a breaking point in their efforts to shield vulnerable populations from energy and food price hikes,” the UNDP report said.
According to the UN program, the overwhelming number of government policy interventions focus on shielding people from price hikes through subsidies, price caps and/or rationing.
“Most government requests to the UN development system involve mobilizing additional fiscal and financial resources to pay for this growing burden,” UNDP said.
Developing economies are particularly vulnerable and “are reaching a breaking point in trying to contain the adverse socio-economic impacts of the fuel, energy, food and transport price shocks.”
The Middle East crisis extends far beyond the region, as the spillovers from the Iran war are exacerbated by El Niño, increased volatility in bond markets, and constraints in four shipping corridors at once — the Strait of Hormuz, the Red Sea and Bab el-Mandeb, the Black Sea, and the Panama Canal, UNDP said.
“These effects extend far beyond the Middle East region through energy, food, fertilizer, transport, trade, and volatility in financial markets – creating a broad shock-management challenge for developing countries already struggling with limited fiscal space, high debt, inflationary pressures and import dependence,” UNDP’s report says.
“As oil prices surge to $100/barrel, governments are facing a sharper trade-off: if they pursue price containment, they need additional fiscal resources; if they allow prices to pass through, they also need additional resources to protect the vulnerable with temporary and targeted cash transfers.”
By Tsvetana Paraskova for Oilprice.com
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