The surge in international oil prices following the conflict in the Middle East has imposed an unwelcome supply shock on the world economy. While many advanced economies, particularly in Europe, used their fiscal space to cushion households and firms from higher fuel costs, this option was unavailable to many developing economies. Faced with limited fiscal space and mounting budget pressures, they had little choice but to pass higher international oil prices through to domestic consumers.
For many developing economies, especially in sub-Saharan Africa (SSA), this was an appropriate response. Governments that were already struggling with high debt burdens and weak revenue mobilization could not afford to absorb rising import costs through tax cuts or fuel subsidies.
Diplomatic efforts are now underway between the United States and Iran to reduce tensions and reopen the Strait of Hormuz. If successful, oil prices could gradually decline as production recovers and the flow of energy supplies through one of the world's most important shipping routes returns to normal.
How should developing countries respond if international oil prices fall? Should they immediately pass on lower prices to consumers? We argue that they should resist doing so, at least in part, and instead use the opportunity to increase energy taxation.
The fiscal case
The strongest argument is fiscal.
More than 70 developing economies still collect less than 15 percent of GDP in tax revenue—a threshold widely regarded as the minimum needed to finance essential public services and support sustained economic development. In sub-Saharan Africa, roughly two-thirds of countries (34 out of 49) remain below this benchmark, with average tax revenues of only about 10 percent of GDP. Moreover, while median revenue performance in the region improved by about 1 percent of GDP in 2025, IMF projections suggest hardly any further increase through 2031.
Against this backdrop, maintaining domestic fuel prices above their pre-conflict levels would provide a valuable source of additional revenue. These resources could help reduce fiscal deficits, lower public debt, or finance much-needed investments in infrastructure, education, health care, and climate resilience. In doing so, these countries would need to deal with fuel price-setting regimes that are politically messy in both directions.
The political economy argument is equally important. In many countries, efforts to broaden the tax base, reduce exemptions, and strengthen tax administration encounter strong resistance. By contrast, policymakers may find it easier to prevent fuel prices from falling than to raise them outright. Once consumers have adjusted to higher prices, maintaining those prices through higher fuel taxation may generate less opposition than introducing a new tax increase. This creates a rare window of opportunity for governments seeking to strengthen public finances.
Economic and environmental benefits
The benefits extend beyond revenue generation.
Higher fuel prices encourage more efficient energy use and reduce dependence on imported oil, thereby strengthening energy security. They also create incentives for households and businesses to invest in energy-saving technologies and accelerate the transition toward cleaner energy sources.
Importantly, fuel prices in most countries remain well below levels that fully reflect the social costs of fossil fuel consumption. These costs include greenhouse gas emissions, local air pollution and its adverse health effects, and road congestion. Estimates suggest that these negative externalities globally amount to roughly $7 trillion annually, or 6 percent of world GDP. Higher energy taxes would move prices to their true economic cost while curtailing excessive consumption.
Protecting the vulnerable
Any strategy to maintain higher fuel prices must be accompanied by measures to protect vulnerable households.
Governments should strengthen social safety nets through targeted cash transfers, food assistance programs, or other well-designed mechanisms that shield low-income households from higher energy costs. These efforts could leverage the efforts in many countries, including in SSA to better identify the vulnerable groups with social registries and the use of digital payments. Equally important, governments should use the additional revenues transparently and demonstrate clearly how they are being spent. Allocating these resources to visible improvements in health, education, social protection, and infrastructure can help build public trust and support for reform.
Revenue potential
The revenue potential is substantial. Several developing countries—including Benin, Ghana, Kenya, Lesotho, Liberia, Malawi, Mali, Pakistan, the Philippines, Sierra Leone, Tanzania, Rwanda, Zambia, and Zimbabwe allowed higher international oil prices to pass through to domestic consumers, either through formal fuel-price increases or automatic pricing mechanisms. Assuming a short-term elasticity of price demand of 0.2, maintaining domestic fuel prices at levels reached during the recent oil price spike could generate more than 1 percent of GDP revenues in countries such as Lesotho, Mali, and Mauritania. Although revenues would decline somewhat over time as consumers adjust their behavior, the medium-term gains would provide a welcome boost to government finances.
For countries where tax reform has stalled and revenue mobilization remains weak, such gains could make an important contribution to achieving development objectives.
A rare opportunity
Many developing-country governments have already demonstrated political courage by allowing international oil prices to be reflected in domestic prices. If global oil prices now decline, they should seize the opportunity to lock in part of the adjustment through higher energy taxes.
Such a policy would strengthen public finances, promote energy efficiency, enhance energy security, support climate objectives, and create fiscal space for development spending. With inflation expectations better anchored than in the past and monetary frameworks more credible, the long run inflationary effects are likely to be limited.
Experience has shown that opportunities to implement politically acceptable tax reforms are rare. A decline in oil prices could provide precisely such a moment. Governments should seize it rather than allow it to pass.
