Combating inflationary threats in the countries of the Middle East and Central Asia requires a primary focus on tightening monetary policy, Assistant Director of the IMF's Middle East and Central Asia Department Roberto Cardarelli said during the presentation of the International Monetary Fund's regional economic outlook for the Middle East and Central Asia held in Uzbekistan, Report informs.
"The main risk we are recording is that inflation could turn out to be higher than our forecast estimates. We expect inflation to slow down to target levels for a number of economies, but the balance of risks is mainly shifted towards higher values," Cardarelli pointed out.
As the fund's representative emphasized, in an environment of elevated and persistent price pressure, it is monetary policy that should serve as the first line of defense. Given that the region is entering the current cycle with inflation indicators already exceeding targets, central banks bear the key responsibility for countering these threats. At the same time, fiscal policy, according to the IMF's position, should perform a supporting function.
Cardarelli warned the region's countries against seeking to mitigate supply shocks in the energy market through widespread subsidization.
"When a supply shock occurs, driven by rising oil prices, fiscal policy may be tempted to intervene through the subsidy mechanism - we have observed such a practice quite often around the world, and we regard it as a flawed approach," the fund's representative stated.
According to IMF macroeconomic simulations, with limited fiscal space, government attempts to offset the rising cost of energy resources with fiscal tools only hinder the work of monetary regulators. In such conditions, central banks have to resort to even more significant interest rate hikes, which leads to an increase in public debt at a comparable level of economic activity.
The fund notes that in the event of supply shocks, fiscal policy is virtually deprived of room for maneuver, except in cases of pinpointed, time-bound, and carefully calibrated targeted support measures.