Below average rainfall takes R$80 billion a year from the Brazilian GDP

Drought, declining hydroelectric reservoirs, more expensive electricity bills and food price shocks. These images, which became common throughout 2021, point to an impacting fact: Brazil loses, on average, R$ 80 billion of GDP (Gross Domestic Product) per year due to the lack of rain.

The calculation was made by economist Bráulio Borges, LCA Consultores and Ibre/FGV (Brazilian Institute of Economics, of the Getulio Vargas Foundation), and it already considers the effects of inflation in the period.

Although the rainfall picture was particularly dramatic in 2021, with severe drought months and 26% below the average (1980-2019), since 2012, the rains in Brazil have been below expectations, in all years except in 2013, according to data from Inmet (National Institute of Meteorology).

“The low intensity of the rains is one of the ingredients that contributed to the lost decade of GDP, but which used to be ignored”, says Borges. “Usually, the biggest highlights are international factors and domestic economic policy issues, such as the new economic matrix.”

Brazil went from one extreme to the other in a short period of time: in the previous decade, between 2002 and 2011, the balance was inverse, with rainfall above the historical average in nine out of ten years.

According to Borges, when considering the direct and indirect effects of rainfall shortages, the accumulated impact on GDP in the period from 2012 to 2021 is 17%, in real terms.

If the situation were different, inflation in the period would be lower, and this year’s nominal GDP, higher. The current projection is that it will reach BRL 8.7 trillion, but without the shocks that occurred, it could be going to BRL 9.5 trillion.

This is a difference of R$ 800 billion — or R$ 80 billion per year, on average, for the period, explains the economist.

Of the BRL 80 billion lost per year, BRL 50 billion are due to the direct effects of the lack of rain, as in the case of productivity in agricultural activities and more expensive energy, which causes a cost shock for the economy as a whole.

Borges explains that these effects on the economy are like a snowball: with the lack of rain reducing agricultural productivity and making energy more expensive, GDP grows less, generating this shock.

Indirectly, more expensive energy also reduces families’ income, mainly because it is a more difficult expense to avoid, and they end up being able to consume less other items. The lack of rain also affects tourism and waterways.

Companies also lose steam and investment capacity, energy impacts inflation and monetary policy ends up becoming more restrictive, with the rise in interest rates.

World Bank projections bring a worrying scenario about rainfall in different countries, based on scenarios for greenhouse gas emissions. In most of them, Brazil will remain drier for the next few years, with rainfall 10% below average

In addition, a report by the IPCC (Intergovernmental Panel on Climate Change) this year points out that, while rainfall intensity is expected to increase in some regions, increases in drought are expected in others, such as southwestern South America.

“This only reinforces the prescription to reduce dependence on hydroelectricity, which must take place in large steps, to remove this restriction from the front and the country can grow with less risk of energy supply”, says Borges.

The hydroelectric matrix currently represents around 63.5% of the total, according to the Ministry of Mines and Energy. “Wind and photovoltaic energy have costs that are closer and closer to hydroelectricity. It is necessary to move towards a matrix being in one third for hydroelectric plants, the other for wind and solar energy and the rest for thermoelectric plants.”

“This will happen naturally, since the main points for the installation of hydroelectric plants are occupied”, assesses Armando Castelar, coordinator of applied economics at Ibre/FGV. “The expansion will take place at the margin in other types of plants, and the impact of the drought will further stimulate this movement.”

From the standpoint of agribusiness, the impacts of drought and frost were felt in the 8% drop in GDP in the third quarter, released last week by the IBGE (Brazilian Institute of Geography and Statistics). In addition to seasonal factors, climatic shocks hampered planting.

“The reality of agribusiness around the world —and especially in Brazil— is going to be producing more with less and less water and environmental impacts. It’s not something for the future, but for now,” says Paulo Camuri, senior economist at WRI Brasil.

The Map (Ministry of Agriculture, Livestock and Supply) highlights that it does not have water governance, but says it follows the meteorological scenario for analysis and estimation of agricultural crops.

In October, the ministry launched the National Program for Sustainable Soil and Water Management in Hydrographic Microbasins, Águas do Agro. “The goal is to promote sustainable development in rural areas, through the adoption of soil and water conservation technologies and practices.”

Borges emphasizes that, in addition to specific initiatives, the country should adopt a green investment package, similar to developed countries. The IDB (Inter-American Development Bank) estimates that Brazil could generate up to 7 million jobs from the energy transition.

“It would be a way to get around the problem of lack of rain and the recovery of the economy after the pandemic, but leadership and coordination are needed to attract capital. What we see today, unfortunately, is denial in the climate agenda.”