Shielding households from the recent surge in oil prices could impose high fiscal costs on governments—about 0.9 percent of GDP in emerging and developing economies and 0.4 percent of GDP in advanced economies. Some highly vulnerable countries could face costs up to 3 percent of GDP.
The war in the Middle East has triggered a major oil price shock for the global economy, with potentially significant consequences for growth and inflation. Disruptions to supply and shipping routes are pushing up oil and gas prices. As these higher costs are passed through to domestic markets, they are likely to raise energy and food prices and weaken growth prospects in countries at all income levels in the short to medium term. According to Kristalina Georgieva, managing director of the International Monetary Fund, a sustained 10 percent increase in oil prices could raise global inflation by about 0.4 percentage points.
Policymakers may face a difficult trade-off. If the higher prices are not passed through to consumers, governments would need to absorb the costs through subsidies or tax reductions, thereby raising budget deficits. For countries that already have high debt levels, this could pose serious fiscal challenges. Yet allowing full pass-through also carries risks, as higher food and fuel prices may feed social unrest, particularly in developing countries.
Higher oil prices reduce the real value of household consumption in the absence of corresponding income increases and also raise transportation costs. An IMF study suggests that higher oil prices affect household consumption in both advanced and developing countries, with a key channel being the rise in transportation costs that results from higher oil prices
Countries are beginning to respond
South Korea has announced a fuel price cap to shield its economy from an energy shock. The measure would be the country’s first such intervention in nearly 30 years, with the cap adjusted every two weeks. Korea is relatively well-positioned to implement such a policy, given its stronger fiscal position as its public debt is half that of an average advanced economy. This is not the case for many other countries, particularly developing economies, where debt-to-GDP ratios are already high and several are at risk of, or already in, debt distress.
In the short term, governments are likely to avoid passing higher oil prices through to domestic consumers to limit the risk of social unrest. Here, we estimate the immediate fiscal impact of such a policy response.
Oil prices have risen from around $60 per barrel at the beginning of 2026 to around $100—an increase of more than 50 percent. The longer prices remain at these elevated levels, the larger the budgetary impact will be. Of course, if the war and its disruption prove to be short-lived, the fiscal impact would likely be relatively less.
Budgetary costs of not passing through price increases
We estimate the costs to governments of keeping gasoline and diesel prices constant by either providing outright subsidies to producers to compensate for higher international prices or reducing taxes. The latter was implemented by several European countries in response to the rise in prices at the beginning of Russia’s war on Ukraine in 2022, at an average budgetary cost of 3 percent of GDP. This estimate can also be thought of as the fiscal cost of compensating consumers (via income transfers) for higher consumer prices. Our estimates of the impact of recent price increases use the IMF’s 2026 projected consumption of fuels for over 180 countries and the estimated increase in supply cost for these fuels. To be conservative, we assume that the 50 percent increase in oil prices translates to a 25 percent rise in supply cost for gasoline and diesel, given that refining and transportation costs will not, in the short term, be affected.
Our results indicate that the fiscal costs of shielding households from the oil price increase are significant. In emerging markets and developing economies, the median fiscal cost would be 0.9 percent of GDP a year, with especially high levels for countries that are intensive in energy use per unit of GDP. Notably high-cost examples include Sudan (3.3 percent of GDP), Suriname (2.7 percent of GDP), and the Kyrgyz Republic (2.6 percent of GDP). In many countries, low energy prices for gasoline and diesel have encouraged an energy-intensive pattern of consumption and production, contributing to their vulnerability to shocks in international prices. In sub–Saharan Africa (SSA), the median cost would be 0.8 percent of GDP, with a cost as high as 2.1 percent of GDP in Sierra Leone and as low as 0.4 percent of GDP in Rwanda. Given that about 70 percent of SSA countries collect less than 15 percent of GDP as taxes, absorbing higher energy costs in the budget is likely to further strain the provision of social services, coming in the wake of aid cuts in 2025. The impact on developing countries would be larger if advanced economies decide not to raise prices as they did in 2022.
Advanced economies face less of a fiscal challenge because their gasoline and diesel consumption has diminished in importance as green energy and the service sector have expanded as a share of GDP, and because their fiscal space is less constrained than that of developing economies. Their median fiscal costs would be 0.4 percent of GDP, half the costs faced by SSA. There are important differences within advanced economies, with the cost in the US of 0.5 percent of GDP--more than double the ratio in Denmark and Sweden. Some emerging market economies exhibit costs more typical of advanced economies, including China, where the cost would be 0.4 percent of GDP.
The bottom line
The fiscal cost of offsetting higher oil prices will, of course, depend on the duration of the war in the Middle East and continued disruptions to oil supplies. If these price increases last for only three months, fiscal costs would be about a quarter of our annual estimates. Even if the war ends quickly, the disruptions to oil supplies are estimated to persist for about three months. Committing to lower prices now would put fiscal policy on a risky course, given high levels of public debt in many countries.
In any case, policymakers face the unpleasant choice of disappointing markets by adding to public debt or enduring the public pushback and social unrest that often accompanies higher energy prices. In several developing countries, there is a risk that public service provision will face an even greater squeeze. On top of this, central banks in all countries will face the challenge of calibrating monetary policy to preserve price stability.
