Should governments in emerging economies subsidize the rising fuel and energy prices? | Experts’ Opinions

The upcoming winter in the Northern Hemisphere could literally freeze household incomes, with a major impact on the most vulnerable. The ongoing conflict in the Middle East and the war in Ukraine continue to drive fuel and energy price spikes and price fluctuations, with developing countries bearing the greatest pressure. A heavy burden in this context lies on the Governments that have to balance their anti-crisis decisions between cushioning economic shocks and preventing vulnerable populations from deeper poverty. Thus, the debates around subsidies as an effective protection mechanism have once again emerged. Can state subsidies protect vulnerable populations, or are there any other targeted and more effective measures available? We asked six international development experts for their perspectives.

DevelopmentAid: As fuel prices grow, should governments subsidize fuel and energy costs to protect households and businesses, or do these measures generate negative outcomes in the long run?

“The decision ultimately depends on country‑specific circumstances, including whether the country is a net fuel importer or exporter, the level of fiscal space and public debt, the expected duration of the price shock, and the strength of existing social protection systems. In most cases, however, universal price subsidies create higher long‑term costs than the short‑term relief they provide. Subsidies are expensive and open‑ended, crowding out priority spending on health, education and infrastructure. They are also regressive, with wealthier households, who consume more fuel, capturing most of the benefit. Moreover, they encourage wasteful consumption, smuggling and rent-seeking; weaken the price signals needed to promote energy efficiency and support the energy transition; and become politically difficult to unwind once introduced. A stronger case can be made for staggered or tiered pricing structures that protect a basic level of consumption for low‑income households, while ensuring that higher‑income households and large commercial users pay full, cost‑reflective prices. Governments should also avoid indirect subsidies delivered through wholesale market interventions, such as squeezing refinery or distribution margins or requiring state‑owned enterprises to sell below cost, which merely shifts the fiscal burden out of public view. Any support should be temporary, targeted, transparent and rule‑based, with a clearly defined exit strategy.”

“Cheap energy matters more than people think. For decades, mainstream growth models left energy out altogether, treating it like air: taken for granted, yet nothing lives without it. For developing economies, a good policy model separates two horizons. In the short run, the job is to keep the economy running, protect families and smooth the shock so it doesn’t turn into lasting inflation. In the long run, the job is to become less exposed. Price caps belong, at most, to the first. Hungary used them twice, in 2021–2022 and again in 2026. They shielded households and held back inflation for a while. The price caps were not sustainable, but they were never meant to be. Critics point to the side effects. In late 2022, imports fell and supply was disrupted; in 2026, imports again weakened, while strategic reserves were also drawn down amid wider supply disruptions. The lesson is to be pragmatic, not ideological. Time bought in a crisis can be valuable, but only if it is used to build lasting solutions.”

“Developing countries should generally avoid universal fuel subsidies as their main response. For fuel-importing economies, subsidies shift part of the price shock onto public budgets without removing its underlying cost. Wealthier households generally receive greater direct benefits because they consume more fuel, while subsidy spending can displace investment in health, education and infrastructure. Artificially cheap fuel also weakens incentives to conserve energy. However, a regressive subsidy can still protect poor households indirectly through transport and food prices. Removing it abruptly without effective compensation can deepen hardship. Reform should therefore combine phased price adjustments with support delivered before, or alongside, the increases. Temporary price smoothing may be justified during an exceptional, short-lived shock if fiscal space allows. Any intervention should have a spending ceiling, transparent financing and a credible expiry date. Otherwise, viable businesses facing temporary cash-flow problems should receive targeted liquidity support. My recommendation is to assess intervention by how effectively each public dollar preserves vulnerable households’ purchasing power and essential economic activity, while keeping future fiscal commitments manageable.”

“In my view, developing countries should avoid universal fuel subsidies. They can provide temporary relief, but they are expensive, difficult to sustain and often benefit higher-income consumers more than vulnerable households. At the same time, governments cannot ignore the wider economic impact of rising fuel prices. If transport costs increase, the effects quickly spread to food, public services and essential goods. A bakery, for example, faces higher delivery and production costs and will eventually transfer part of that increase to consumers. The least damaging short-term solution is therefore targeted and temporary support. Governments could assist companies operating in essential sectors, such as food production and distribution, agriculture and public transport. However, this support should be conditional on transparent costs, reasonable profit margins and limits on unjustified price increases. It should be combined with direct assistance to the most vulnerable households. This approach will not eliminate inflation, but it can protect essential consumption without creating the excessive fiscal burden and market distortions associated with subsidizing fuel for everyone.”

“Increased energy prices is the unavoidable reality that must be addressed through measured policies. A straightforward transfer of the rising costs to the market will fuel inflation. However, the state cannot fully absorb these costs either, as fiscal capacity will not support it anymore. Managing overall consumption and introducing categorized subsidy structures could be a possible best trade-off.”

 

 

DevelopmentAid: If universal subsidies are not sustainable, how can governments protect low-income households from energy-price shocks?

“The most effective approach is to protect people rather than prices. This begins with a transparent, automatic or market‑based fuel-pricing mechanism, ideally overseen by an independent regulator who aligns domestic prices with international costs and makes any fiscal support explicit in the budget. Protection should then be delivered through targeted cash transfers designed to offset both the direct impact of higher fuel prices and the often-larger indirect effects on food, transport and electricity costs. Savings from eliminating universal subsidies can finance these transfers while still generating net fiscal gains. Delivery should leverage existing social registries, digital identification systems and mobile payment platforms. In situations with high informality and limited administrative capacity, a broader transfer that excludes only the most affluent may be more feasible in the short term, complemented by lifeline or tiered pricing to provide interim protection. Compensation should be in place before, or concurrently with, gradual, pre‑announced price adjustments. Clear communication on how savings are used, including reinvestment in public transport and energy‑efficiency measures, will help build public trust and reduce vulnerability to future price shocks.”

“For developing countries, one promising approach, which the Hungarian government appears to be adopting, is to support people rather than prices. Income transfers preserve the price signal, keeping incentives for imports and supply intact, while the fiscal cost can be capped in advance. In September 2026, the government announced a modest payment for owners of lower-powered diesel cars, to be paid automatically on the basis of vehicle-tax records. For agricultural users, the government went further: until the end of the year, farmers can reclaim a significant portion of the excise duty included in the price of diesel used for agricultural purposes. On the other hand, targeting is only as good as the eligibility criteria: engine power is an imperfect proxy for need. Choosing the right tool also requires policy space: fiscal buffers, reliable registries and institutions able to act quickly. Many developing countries lack these, so building them before the next shock is part of the answer. Moreover, transfers mitigate the shock without reducing exposure to it. Lasting protection requires diversified supply routes, adequate reserves, energy efficiency and domestic low-carbon power. Even home-grown power is not risk-free: high Danube temperatures forced Paks (a city in Hungary that hosts the only nuclear power plant in the country) to decrease output in 2024, while exceptionally low water levels caused major curtailments in 2026. Energy sovereignty means avoiding single points of failure, not autarky.”

“Targeted cash transfers are generally the strongest first response, provided governments can identify vulnerable households and deliver payments reliably. They support purchasing power while retaining incentives to save on fuel. Assistance should reflect both direct energy expenses and indirect increases in food and transport costs, with coverage extending to households at risk of falling into poverty. Implementation determines effectiveness. Governments should increase existing benefits, expand enrolment and establish accessible payment channels. The World Bank’s 2025 social protection report emphasizes the importance of investing in delivery systems before crises. I would prioritize simple applications, offline access and appeals procedures to limit exclusion, especially among informal workers and remote communities. Where delivery systems are weak, temporary, capped support for essential public transport may serve as a bridge while cash-transfer capacity improves. Such measures need explicit budgets and expiry dates. Over time, governments should invest part of the savings in reliable public transport, energy efficiency and stronger social protection systems. Success should be measured through household welfare and payment coverage, alongside fiscal savings.”

“In my opinion, no single subsidy can fully protect low-income households from an energy-price shock. Higher energy costs affect not only electricity and heating bills but also food, transport and many other essential services. Attempting to compensate households for every price increase would be fiscally unrealistic, particularly for developing countries with limited public resources. A more effective response would combine two targeted sets of measures. First, governments should introduce energy vouchers or social tariffs for electricity, heating and basic utilities. Eligibility should depend on income, household size and vulnerability, while support could be credited directly to utility bills. Second, governments should address the indirect effects of higher energy prices by subsidizing public transport and providing targeted assistance for basic food products, for example through food vouchers, school meals or a limited basket of essential goods. This is not a perfect solution, but it is probably the least harmful and most realistic one. It protects energy, food and mobility without creating the enormous fiscal cost of universal subsidies.”

“Energy has been overused and inefficiently consumed for decades, and that pattern must be addressed. Late-night commercial activity, heavy-displacement engines over 2,000 cc, and buildings lacking natural ventilation all warrant reconsideration. Tiered subsidy structures offer a practical mechanism based on usage volume and purpose. For instance, consumers could pay standard rates up to a baseline threshold, with a 25% surcharge on the next tier of consumption and a 50% surcharge beyond that. On the purpose side, basic residential consumption would be charged standard rates, while luxury households, special events, and non-essential businesses would face higher tariffs. This approach reduces overall demand, insulates essential users, and helps balance fiscal costs at the wholesale level.”

“Developing countries should replace broad fuel subsidies with direct payments to low-income households. Broad subsidies are costly and favour better-off households, yet they survive because they are fast: a subsidy works the day oil prices jump, while a targeted payment often takes weeks or longer. I judge readiness for reform by two clocks: the days a price shock takes to reach the pump, and the days the state needs to pay a low-income household. Iran credited household accounts from October 2010 and released the money on 18 December, the day energy prices rose. Nigeria announced the end of its petrol subsidy in May 2023; by May 2025, 5.6 million of 15 million targeted households had received a payment. Low-income households are best protected by a payment system that works before prices change. In my work on government digital programs, the weak points are outdated records, failed payments and people who were never registered. Data tools, including AI, can flag these early, but only when someone owns the fix. If you design or fund these programs, write the payment clock into the results framework as a number of days, and run a live test payment before any price moves.”

See also: Tax mobilization: The new development imperative in a world of foreign aid decline | Experts’ Opinions

Beyond expert insights, the DevelopmentAid platform helps professionals stay connected to career opportunities, projects and resources that can support their next professional step. With the Individual Professional Membership, experts get access to more than 4,300 openings in the international development sector, tenders and grants for individuals, salary trends, latest news and many more other resourceful tools to help them succeed in this fast-changing landscape.