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Table 4. fiscal cost of price subsidies exceed fiscal windfall in large economies
Economic slack is mostly concentrated in sectors such as transportation, accommodation and catering. other sectors, like information and communication technology, finance and agriculture are close to their productive capacity.
A sustained increase in producer prices, driven by high import prices could add further pressure to consumer prices. Several countries in the region announced price stabilizing measures on crucial food items such as rice, meat, and cooking oil in early 2022 to cap the increase in food prices. While helpful in containing price pressures in the short term, subsidies to limit price increases impose a significant fiscal cost. Commodity exporters indonesia and Malaysia benefited from fiscal windfalls that made the subsidies more affordable than they were in other countries like Thailand (table 4).
Table 4. fiscal cost of price subsidies exceed fiscal windfall in large economies
Market intervention
Price control Trade restriction Fiscal intervention (percent of GDP)
Food subsidy Agriculture/ fertilizer subsidy
Fuel subsidy
other transfers* Total Cost (percent of GDP)
Fiscal windfall (percent of GDP)
Malaysia Chicken etc. Poultry export ban 0.1 0.8 1.4 0.2 2.50 1.23 Thailand Food, construction material etc. 0.39 0.56 0.27 1.22 Indonesia Cooking oil Temporary export ban of palm oil 0.04 1.10 1.14 0.94
Philippines 0.12 0.02 0.21 0.35 0.41
Vietnam 0.30 0.30 0.38
China Coal Coal tariff elimination, Fertilizer export restrictions 0.02 0.02
* include cash transfers to low-income households, tourism sector and social security contribution cut Source: World Bank
The new shocks will sharpen fiscal policy trade-offs. EAP countries were already struggling to reconcile fiscal support, for relief, recovery, and growth, with shrinking fiscal space. The new shocks will create more needs for support and a further contraction in revenues. one risk is that fiscal support implemented by entities like local governments and stateowned enterprises could undermine their own financial viability. Another risk is lower investment in the infrastructure of trade, energy, and technology diffusion - which are needed to harness new growth opportunities by enhancing domestic capacity and international connectivity.
Three measures can help. First, more efficient social protection would protect the vulnerable and free fiscal space for other ends. EAP countries have shielded households from recent CoViD-related income shocks though a broad-based increase in social protection and from price shocks through a combination of price controls and subsidies (or tax cuts). Both types of measures may be the only form of assistance that is feasible in the short term, but neither is efficient or fiscally sustainable. Direct transfers to poor households and firms, once the relevant digital infrastructure is in place, would alleviate the pain from the cumulative shocks without distorting price signals or subsidizing the wealthy. Second, governments should reconcile spending needs with tightening budget constraints, by committing (a) to restoring fiscal discipline through the (re)introduction of fiscal rules (see below); and (b) to fiscal reform through enactment of legislation to be implemented conditional on objective measures of recovery. For example, new tax reform legislation in Indonesia is expected to raise revenue by 1.2 percent of GDP in the medium term.
Improved targeting of government assistance could ensure continued protection of those who need it most while conserving scarce government resources. To date, social assistance programs and price regulation have not been targeted
