Drought affects food security, but how big is its impact on economy?

With the onset of the monsoon it is easy to forget the economic and social impact of the drought in the first half of the year. The severe drought that began in the latter months of last year and continued into the first five months of this year affected agricultural output significantly and reduced hydroelectricity generation drastically. Consequently, there have been increased imports of oil and large imports of rice. These are likely to increase import expenditure and strain the balance of payments.

A serious consequence of the drought was the erosion of food security of the rural and urban poor. The impact on GDP growth is likely to be marginal as manufacturing and services are likely to offset the reduced agricultural and electricity output. There is also the possibility of increased agricultural production in the second half of the year.

Food security

The erosion of food security of farmers and of the rural and urban poor is the most serious impact of the drought. According to the UN Office for the Coordination of Humanitarian Affairs (OCHA), more than 240,000 families had been affected by diminished water supply and harvest losses by the end of March 2014. The Northern, North Central and Southern Provinces were the worst affected regions in the country. The Ministry of Disaster Management has so far spent $ 2.3 million in assistance.

The social impact of the drought may be more severe than its economic consequences. About a third of the country's labour force of 8.6 million derives incomes from agriculture. A substantial proportion of them are in this droughtaffected areas. While the destruction of crops would reduce incomes of farmers and others dependent on crop cultivation, their capacity to purchase adequate food is also affected by higher prices they have to pay. Their reduced incomes coupled with a lesser purchasing power mean lesser access to food and consequently their nutrition and health would be adversely affected. The urban poor are affected through increases in prices of their staple and other food prices that have been soaring. The lowest twenty per cent of income receivers would be hard hit to manage with their low incomes.

Paddy production and prices

As drought conditions began in the latter part of last year, the crop losses in the Maha season were huge. The shortfall in paddy production is initially estimated at about 210,000 metric tonnes. The delayed rains till late May are also likely to have affected Yala paddy output in some areas. Indications are that paddy production in Maha 201314 will fall short of the estimated paddy harvest of 2.4 million metric tonnes -- a decline compared to the previous year's drought affected Maha crop of 2.85 metric tonnes.

Last year, paddy production caught up in the Yala season to reach 4.6 metric tonnes. Yet stocks have not been adequate to cope with this year's Maha shortfall. This raises questions on the reliability of paddy production statistics.

The shortage of rice due to the shortfall in production increased rice prices sharply. Rice shortages have also been aggravated by a cartel of large mill owners who have cornered the market to increase prices. Furthermore, small- and medium-sized mill owners failed to collect sufficient stocks owing to the higher paddy prices during the harvesting season. Rice imports have stabilised prices but at a higher level.

Imports of rice

The stocks of rice from previous harvests have been inadequate to cope with the shortfall in production in Maha 2013/14. Initially, 200,000 tons of rice have been imported to make up for this shortfall in rice production and to stabilise rice prices. Further imports of rice are also likely as domestic rice supplies could continue to be in short supply. This loss in crops affects the country's agricultural output, increases prices and erodes real incomes as rice prices are much higher than before the drought. Consequently the nutrition levels of the poor are likely to be affected adversely. Farmers' livelihoods and food security are also adversely affected.

Other crops

The production of other crops too has been affected by the drought. Tea production fell in the first four months by 13 million kilograms. However, production increased in May and there is a possibility of production catching up during the rest of the year. Fortunately tea prices have remained high and tea export earnings have increased to offset the fall in output and export volumes owing to a decline in tea production in India, too.

Rubber production, too, has declined as wet conditions are important for latex production. Coconut production is likely to fall in the latter part of the year and next year owing to the lag effects of the drought.

Hydroelectricity and oil imports

Decreased generation of hydroelectricity and the consequent increase in oil imports have been significant. Generation of hydroelectricity fell from about one half of total electricity generation to as low as 13 per cent. This necessitated higher import expenditure on oil in the first half of the year. Additional coal power generation later this year is expected to reduce oil dependency, generation costs and CEB losses.

Economic growth

Economic growth will not be severely affected by the drop in agricultural output, as agriculture's contribution to GDP is small. Agriculture, including forestry, fisheries and livestock contributed only 10.8 per cent to GDP in 2013. Paddy output contributed only 1.6 per cent to GDP. Since crop agriculture contributed only about 5 per cent to GDP, the drop in production of rice, vegetables, tea and other crops in the first half of the year will decrease GDP only marginally. Growth in manufacturing and services could easily offset this fall.

Conclusion

Decreased agricultural production will affect food security of a significant proportion of the population and increase food import expenditure, while the reduction of hydroelectricity generation owing to the drought will increase imports of oil. Economic growth is likely to be affected marginally due to the drought as agriculture's' contribution to GDP is small. Higher rainfall in the second half of the year may enable a catching up of agricultural production.