Discussion Paper No. 236 of 2020 on Qualitative Assessment of the Impact of Droughts and Floods on Key Macroeconomic Variables

Abstract

Adverse weather conditions have become more prevalent all over the world with devastating impact on economies. In Kenya, weather conditions are manifested in frequent occurrence of droughts and floods, and while droughts are widespread throughout the country, floods tend to be localized. The economic effects of droughts and floods are manifested in the disruption of production flows, resulting in production losses, income losses, loss of employment and increased operational costs. Droughts and floods do not occur in isolation and at times occur alongside other events, such as political unrest, high international commodity prices, etc. In this study, we identify patterns of disruption of production flows, decline in revenues and higher operational costs that typify disaster periods. Results show that the macroeconomic imbalances that result from drought and floods, though temporary in nature, arise either directly from the disasters and/or from governments’ effort to mitigate the economy against the negative effects of the disasters. These impacts are manifested in increased government expenditure targeted at building resilience and mitigation measures, reduced government revenue from a decline in tax revenue collections, increased imports of food stuffs and price increases.