# _Impact of a single 2022/2023-sized drought_<sup>_9_</sup>

## **For a single drought event, the impact on the livestock sector is less acute than in the agriculture sector,**

**but more persistent** .  Crops have a shorter production cycle than livestock. They can typically be planted, grown, and harvested within a few months to a year, whereas livestock, particularly beef cattle, require several years to reach maturity. This means that the impact of drought on some crops may be felt more acutely in the short term, but the recovery period can also be shorter. Furthermore, crops can be replanted more easily than livestock can be replaced. If crops are lost due to drought, farmers can often replant the same or different crops in the same field in the next growing season. In contrast, if livestock are lost due to drought, farmers may need to invest significant time and resources into rebuilding their herds, which can take years.

**The first exercise describes the impulse-response functions for selected macroeconomic variables of a one-in-a-hundred-year drought such as the 2022/23 drought.** The cumulative impact of this drought on the L&A sector is calibrated to US$1,800 million, which is the estimated direct losses from the current drought in Uruguay. Using public data by MGAP, we assume that 42 percent of these damages are materialized in the crops sector, with the remainder coming from the livestock sector. These losses are spread over three years (with most of the impact occurring in the first year) to account for the persistent effects of the drought, particularly in the livestock sector. For the crops sector, 87 percent of the losses are realized in year one of the drought, and the remaining 13 percent are realized in the subsequent year. For livestock, 60 percent of the losses are realized in year 1, with 30 percent and 10 percent realized in years two and three respectively. These dynamics are driven by econometrically estimated “speed of adjustment” parameters that determine the recovery speed of each industry in the model following a drought shock.

**Overall, the accumulated direct impact on the livestock sector is larger than on the crops sector** . Roughly 58 percent of the damages from this drought are expected to occur in the livestock sector, which contracts by 20 percent during the year of the drought (Figure 11b). In year two, the livestock sector remains 9.9 percent below baseline output, and in year three it is 3.5 percent below baseline. It is only by year four after the shock that the livestock sector has fully recovered from the drought. The impacts on the crops sector are a smaller proportion of total losses (42 percent of total damages to agriculture) but the impact is more concentrated in the year in which the drought occurs. Crop yields contract by 27 percent in the first year, and then rebound to 4.1 percent below the baseline in the second year after the drought. The industry sector, which includes the manufacturing of crop and livestock related products is also impacted, both by higher livestock and crop output prices, and by a reduction in the availability of these intermediate inputs into production. Industrial output shrinks 5.9 percent in the first year of the shock and is still 1.1 percent lower in the second year. By the third year after the shock, both crops and industrial output recover to baseline output volumes.

**On impact, GDP is expected to contract 2.8 percent, while exports are expected to fall 7.3 percent** . That implies a US$2.2 billion in loss of economic activity in the year the drought, and a US$440 million loss the following year, against a baseline of no drought. By the third year, output has recovered to slightly above its usual levels. The 7.3 fall in exports on impact is followed by a recovery in the following year, but still

> 9 For ease of comparison, Annex A presents a summary table of results for the different exercises run in this paper.

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