IMF Research: El Niño Could Undermine Indonesia's Economic Growth

El Niño is a weather phenomenon that can reduce rainfall and trigger droughts in parts of the world. According to the International Monetary Fund (IMF), El Niño is also prone to eroding economic growth in several countries.

"Such extreme weather conditions can limit the supply of rain-dependent agricultural commodities, driving up prices and general inflation, and can trigger social unrest in countries that depend on imported food commodities," said the IMF in its report *Fair Weather or Foul? The Macroeconomic Effects of El Niño* (April 2015).

The IMF reached this conclusion after analyzing macroeconomic data and El Niño events in 21 countries during the period from the second quarter of 1979 to the first quarter of 2013.

They found that El Niño tends to negatively impact countries that rely on Gross Domestic Product (GDP) from the primary sector, namely agriculture, forestry, fisheries, and mining.

"The smaller the share of the primary sector in a country's GDP, and the more diversified its economy, the smaller the impact of El Niño shocks on that country's GDP growth," said the IMF.

Among the Asia-Pacific countries analyzed by the IMF, Indonesia is the country whose economic growth is most vulnerable to the impact of El Niño.

The IMF estimates that El Niño events could erode Indonesia's economic growth by up to 0.35 percentage points per quarter (median value).

"El Niño is expected to have a significant impact on Indonesia's economic growth, as the primary sector's share in its GDP reaches 25 percent," said the IMF.

On the other hand, the IMF found that several Asia-Pacific countries experienced strengthened economic growth during El Niño events, namely Thailand, South Korea, Singapore, Malaysia, and the Philippines.

"We see considerable heterogeneity in the response of countries to El Niño shocks," said the IMF.

"This raises the question of what policies are needed to counter the adverse effects of El Niño. These policies could include changes in planting patterns, the use of faster-maturing crop varieties, careful release of food stocks, and changes in import policies," it continued.