How Costly Will the Drought be?

The current drought in Ethiopia has left more than 8.2 million people in need of aid. However, will this situation affect the country’s overall economic growth? That’s a subject of debate for many. Some say that one harvesting season isn’t likely to be overly detrimental to the country’s development goals. Prior droughts, however, paint a different picture. World Bank data demonstrates that Ethiopia’s GDP fell by 7Pct during the 1985 drought. Others are concerned that the drought will directly contribute to the country’s already increasing inflation rates. EBR’s Ashenafi Endale spoke with key stakeholders to learn more about the far-reaching implications of the current drought.

Although policy makers and government officials launched the first phase of the Growth and Transformation Plan (GTP I) with excitement and energy, evaluating its implementation five years later has proven to be not so exciting.
Since the beginning of the current fiscal year, top government officials have been busy chairing various meetings to evaluate the work that has been done to accomplish what has been dubbed an ‘ambitious yet achievable’ economic road map.
Officials and employees at the former Ministry of Agriculture (MoA), led by Tefera Deribew, who is tasked with transforming the poor-performing agricultural sector that’s supposed to smooth Ethiopia’s transition towards industrialisation, was among the civil servants gathered to assess what the GTP I has achieved during the five years it was implemented.
Tefera, who chaired the meeting along with four state ministers, was first to point out the elusive overall performance of the sector. He boldly stated that during the Plan’s period, the sector recorded an average 6.6Pct growth rate, which is below the minimum 8.6Pct growth target envisioned. The sector’s contribution to GDP, which was projected to decline to 36.8Pct, stood at 40.2Pct at the end of the period.
Filled with uncertainty about what will come in the future, close to 300 employees who gathered for two days beginning on October 1, 2015, at the newly inaugurated Oromo Cultural Centre, acknowledged that the agricultural sector is not reaching its full potential in feeding the country’s people or providing enough surplus that industries can use as raw material.
The agricultural shortfalls of the GTP I are not the only challenge facing the sector: a looming drought is another problematic obstacle that surfaced as early as February 2015. The effect of the rainfall shortage, which has left 8.2 million people vulnerable and in need of emergency aid, has made things complicated for Tefera and his colleagues. The challenge will continue through the end of 2015, resulting in a year’s worth of damage. “A failed Belg followed by a poor Kiremt season means that challenges could continue into next year,” warns John Aylieff, WFP’s Ethiopia representative.
The UN Office for the Coordination of Humanitarian Affairs – Ethiopian Humanitarian Country Team published a report on September 30, 2015 that reveals the extent of the damage. After analysing a wide range of data recommended by the Ethiopian National Meteorological Agency’s analogue years of El Niño episodes of 1997 and 2002, the team concluded that there is a high probability of significant food insecurity and nutritional disaster in Ethiopia and the hunger season for many Ethiopians could be extended: until the October 2016 harvesting season. According to the report, the Eastern Afar and the southern part of the Ethiopian Somali regions, the central and eastern Oromia region, the SNNP regional state, and the northern Tigray and Amhara regions have suffered the most because of the drought.
Tefera and his colleagues seem confident in controlling the situation, since the government imported 224,000 metric tonnes of wheat that is being distributed to areas hit by the drought and another 450,000 metric tonnes is already imported. He told participants that “additionally, 50 metric tonnes will be purchased from the local market, for distribution starting in October 2015.”
He expects the effects to be dire, but says the government has control of the issue. “The impact of the drought will be equal to the 1985 drought,” Tefera told participants. “Although the response of the donors is not like in the past because their eyes are currently focused on the problems in Syria, South Sudan and Yemen, we have managed to save people from dying or migrating with our own capacity.”
Apart from its immediate impact, critics say the drought may have economic implications, since experience demonstrates that economic downturns often materialise after a drought. “Drought can bring damage on economies like Ethiopia that are prone to shocks,” argues a macro economist that EBR spoke to on the condition of anonymity.
Despite the progress the country managed to register in the past decade, which lifted ten million people out of poverty, studies conducted on the status of the Ethiopian economy reveal that many remain just below the poverty line. For instance, a poverty assessment released by the World Bank last year states those individuals who are classified as non-poor are vulnerable to shocks. According to the assessment, these vulnerable people account for 14Pct of the total population.
Tefera seems aware of the burden that might befall vulnerable communities if the drought persists. “Although the number of people living under the poverty line has dropped from 29.6Pct in 2010/11 to 22Pct currently, the drought might drag those people into poverty once again,” Tefera acknowledged. “We recognize the problem and the government will support them.”
The macroeconomist predicts that since Ethiopia’s growth is driven primarily by agriculture, the effects of droughts will be direct and can be expansive due to the decline of agricultural production. “This is because in Ethiopia the growth of the economy directly linked to growth in agriculture,” he said.
Yet, the full impact of the drought remains to be seen. Both the MoA and the Central Statistical Agency (CSA) are surveying the amount of the agricultural production that will be lost because of the current drought. It is believed that the on-going, El Niño-caused drought’s impact will significantly harm the 29.4 million metric tonnes of expected agricultural production during the current harvesting season. The country produced 27 million metric tonnes in the previous harvesting season, a 50Pct increase from the 18 million metric tonnes produced when the GTP I was launched in 2010/11. The plan was to double production at the end of GTP.
Drawing from experience, a report published by the World Bank puts the effects of the anticipated production decline into perspective. According to the report, in the year after the 1985 drought, which affected many sub-Saharan African countries, the gross domestic product (GDP) of Ethiopia fell by 7Pct.
Similar affects occurred in other sub-Saharan African countries that experience droughts. For instance, in the past decade, rain-related shocks depressed Mozambique’s GDP growth by more than one percentage point each year. In Zambia, intermittent rainfall was responsible for the decline of the country’s agricultural growth by one percentage point each year, which cost the country USD4.3 billion over 10 years. It is from such experience that some experts argue the rainfall shortage will have measurable economic implications.
However, others are not overly concerned about the effects the drought will have on the economy. “Production fluctuation registered in a single harvesting season [will not] have a [significant] impact on the economy because the loss can be compensated by overproduction in consecutive years,” argues Demise Chanyalew (PhD), general manager of Demal Ethiopia Afrique PLC, a consulting company that specialises in food security and agriculture policy analysis.
But there is another way the drought might affect the economy, according to Tesfachew Taffere (PhD), director of the Division for Africa, Least Developing Countries and Special Programmes at the United Nations Conference on Trade and Development. “If the government takes finance from developmental projects in order to import essential food items,” says Tesfachew, “the drought will have an indirect but enormous effect on the growth of the economy.”
Although importing essential food items at great costs will affect the economy, Demise says it is unavoidable. “Since donors’ attention towards the drought is minimal, it is only by importing these food items that the government can fight inflation,” he argues. “As long as the government imports and makes available basic food commodities in the market, there will not be a rise in food prices.’’
The government’s response to the crisis is similar to the recommendation of Demise. Recently, the federal government announced that it allocated ETB750 million from its reserve budget, in addition to what the regional governments contributed, to the supply of basic food commodities.
This tactic is a strategy to ostensibly help quell rising inflation rates. The official inflation rate announced by the CSA, however, shows that the increase was not as slight as the government had hoped through its plans to keep it under control. After remaining below 10Pct for more than 24 months, the month-to-month inflation rate started to enter double-digit figures in recent months. In August 2015, the inflation rate climbed to nearly 11.6Pct, up from 8.2Pct when the drought started. Food inflation, which increased from 9.6 to 14.7Pct during this period, is the main reason behind the increment, according to the latest Consumer Price Indices published by the CSA.
Citing the official inflation rate, the macroeconomist says a continually elevating inflation rate is inevitable in the future. “In an economy where 57Pct of the consumer price index comprises spending on food items, any rise in food price directly affects the overall inflation rate massively,” says the economist.
Sileshi Getahun,state minister for Agriculture, however, has a different explanation for the rising inflation rate. “The current increment of inflation is not because of the decline in agricultural production but because of the growth of the economy itself,” Sileshi said at the meeting. “The best way to keep the inflation low is investing more, keeping the development on track and boosting saving.”
As confident as government officials seem regarding the unlikely impact of the drought on the economy and the purchasing power of Ethiopians, some have noted the negative impact the drought will have on the revenue the country receives from export.
Ethiopian export commodities, like many other African nations, are limited to a few primary products, which are mainly agricultural. Just last fiscal year, agricultural products accounted for 60Pct of the export revenue the country earned. Since the planned export revenue for the current fiscal year stands at USD6 billion, which is almost double the amount of export earnings the country managed to receive in last fiscal year when the agriculture didn’t encounter a rainfall shortage , experts say the country’s economic success is at stake.
Demise agrees with this analysis. “Instead of exporting, the government will have to import basic food items to protect citizens,” he argues. “The only agricultural commodities that will be exported will be those that are used as raw materials for manufacturing.”

Breaching the Vicious Cycle
The reality confronting an agrarian-based economy in the midst of a drought has made policymakers rethink how to move forward with the country’s development goals. Recently, the MoA finalised the preparation of the second phase of the GTP in order to end the dependency on rain-fed agriculture, unlike the past, when the government only set goals to increase the production from the rain-fed agricultural system.
Additionally, the government is planning to increase agricultural productivity to 23.2 quintal per hectare within five years – up from the current 21.5–to achieve the vision of reaching middle-income status by 2025.
Attaining such an ambitious plan, however, will not be an easy job, according to the macroeconomist: “With the current farming system, which is almost the same when it was started, the sector will not be enough to make dramatic increment,” he said. “Even if the production increases, it will only be enough to feed the growing population, let alone of supplying raw materials for industries.”
However, government officials say they have a new approach that is different from previous years. “The government will focus on doubling the size of the land cultivated by irrigation and will start a mechanized farming system to achieve the plan,” Tefera says. “Depending on [the circumstances], rain-fed agriculture will not be viable in the future.”
Although the country has a rich history of farming practices, the development of agricultural mechanisation is still negligible. Farmers are dependent on oxen drafting and humans using traditional farm equipment and techniques. Still, peasant farming at the household level contributes the largest proportion to the total agricultural output. In fact, 80Pct of agricultural yields come from small-scale farmers who use traditional farming methods.
Depending on these households to dramatically increase agricultural output, which is crucial for the country to transform the entire economy, has now become practically unattainable. That is why the government has plans to increase the 2.4 million hectares of irrigated large-scale farmland to 4 million within the next five years, according to the Agriculture Minister. However, one of the ambitious plans that will be included in the second phase of the GTP is to familiarise small-scale farmers with technologies that can boost crop production.
In tandem with these ambitious targets, government officials have concerns about how best to achieve the Plan. “We cannot achieve the GTP II with a general approach. So our strategy should consider specialisation and careful analysis because agriculture is everything for Ethiopia,” Tefera told the participants.
Indeed, agriculture is a foundational element of the country’s economy – a fact that does not elude Tefera. At the end of the meeting, he charged his colleagues with the task of helping the country realise its full potential: “our level of achievement and commitment in the next five years will decide whether the Ethiopian economy leaps forward or [gets] stuck in the middle.” EBR

4th Year • October 16 – November 15 2015 • No. 32