Inflation causing price rising up, overvalued stock or funds, consumer purchasing power reducing concept, air balloon tied with product price tag flying high rising up in the sky.
Nuthawut Somsuk

Fiscal measures such as tax cuts and household subsidies to combat the effects of inflation may be hard to unwind, putting pressure government finances, warns Fitch Ratings.

In a new report, the rating agency said that, since mid-2021, numerous countries have adopted measures to cushion the impact of rising prices on households.

Over half of the 120 sovereigns Fitch rates have deployed fiscal efforts in addition to monetary policy to fight rising inflation, it reported.

The report suggested that more of these kinds of measures are likely in the face of the effects of the Russia-Ukraine conflict on commodity prices.

Fitch said that if these sorts of measures are removed within a year or two, they are unlikely to directly impact sovereign credit ratings, although they will slow the fiscal consolidation that’s needed in the wake of the Covid-19 pandemic.

However, if measures that were meant to be temporary become entrenched, “they may have a more significant impact on public finances,” Fitch said.

“Many sovereigns should be able to absorb the impact of temporary measures on public finances, but some will find these policies hard to roll back, resulting in lasting effects that could weigh on sovereign credit profiles,” it said.

The risk that governments find it hard to abandon temporary measures is “significant as global commodity prices may stay high for longer than we had anticipated,” it noted, adding that governments may be unwilling to risk the political repercussions of removing subsidies.

“Events in Kazakhstan, where fuel-price liberalization fed into widespread social unrest and violence in January 2022, are an extreme example, but few governments find it easy to remove popular subsidies,” it said.