Ecuador’s Ministry of Economy and Finance has integrated environmental variables (in particular, precipitation in the context of the El Niño phenomenon) into its macroeconomic forecasting.
This has impacted model results through increased inflation and producer prices in the quarter(s) following the El Niño event. The Ministry has also employed a computable general equilibrium (CGE) model to understand the impact an energy crisis caused by an extended and extreme dry season would have on macroeconomic variables.
- In 2023, the Ministry integrated the El Niño phenomenon and associated changes in rainfall into its recurrent macroeconomic forecasting. It was estimated that the 4 millimeter increase in maximum rainfall as a result of the El Niño phenomenon would cause an immediate increase of 0.40 percentage points in annual inflation that would last for at least two more quarters, and cause an increase of 0.59 percentage points in producer prices in the quarter following the event.
- Scenarios used in the periodic external sector programming include external shocks such as climate-related events, in particular the effects of the El Niño phenomenon on exports. Qualitative meetings were held with stakeholders to determine sensitive products in addition to the assumed damage to roads and interruptions to logistics.
- The Ministry has used a dynamic recursive CGE model to measure the impact of electricity rationing caused by the dry season and the diminished capacity to generate electricity since October 2023, and has capped imports of electricity from neighboring countries. The estimated impact on GDP growth is –0.27% below the counterfactual, with a slight permanent effect of –0.01%.
- The CGE model considers 29 sectors, including construction, health, manufacturing, and electricity. It includes 12 types of households and has the capacity to perform microsimulations to determine impacts on poverty and inequality indicators. It does not consider the monetary sector, and as it is deterministic in nature, inferences have not been made about the results. However, sensitivity analysis on elasticities within the behavioral equations has been performed.
Other physical impacts of climate change include forest fires and shortages of public water in main cities. However, no impact assessments have been carried out for these events due to the uncertainty about the real impact of the energy crisis on the year’s multifaceted crisis.
Keywords
damagesmacroeconomic indicatorsmodelsphysical riskscenarios
