The economic cost of the floods in Serbia and Bosnia

Report
from European Bank for Reconstruction and Development
Published on 29 May 2014 View Original

The devastating floods in Serbia and Bosnia and Herzegovina have already damaged their economies and will hit growth and inflation in the future as well

Author(s): Jakov Milatovic

Serbia and Bosnia and Herzegovina have suffered their worst flooding since records began, with some 60 people killed in the disaster and well over a million affected by damage to housing, schools or hospitals, arable land or public infrastructure.

While the shocked reaction to the sight of the floodwaters has so far focussed on the suffering caused by the devastation, it is probably time to start looking at the economic damage they will inflict as well. It is likely to be substantial.

No official estimates as to the cost of this natural disaster are available as yet. However, some very rough preliminary estimates put the damage at around €1.5-2 billion in Serbia, and about €1.3 billion in Bosnia and Herzegovina.

For example, the agriculture sector, which accounts for about 10 per cent of GDP in Serbia and 6 per cent in Bosnia, has been particularly badly affected. Most of the arable land in flooded areas has been destroyed and the damage in both countries could be in the hundreds of millions in euros.

Power generation and mining has been heavily disrupted, especially in Serbia, where the damage to the state-owned power company EPS is likely to be extremely costly.

Serbia’s largest mining complex Kolubara, crucial for the country’s energy system as it provides coal to the thermal power plants that produce more than 50 per cent of the energy Serbia needs, has been flooded.

Roads and railways (as well as water supply and energy transmission infrastructure) have been badly hit too, which will cause major problems for the free movement of goods and people and affect businesses across the region.

To make matters worse, the stricken areas in Bosnia are also at risk from mines, a legacy of the war in the 1990s, dislodged by the floods and landslides. And public health is under threat from the contamination of drinking water supplies and therefore disease.

The floods could also have a sizeable macro-economic impact on Serbia and Bosnia, affecting short-term growth and inflation as well as their policy priorities and the budget for this year.

Low economic forecasts for this year were predicated on the introduction of austerity programmes to tackle high levels of public deficits and debt. This may now be delayed, as the countries’ short-tern priorities could well change.

Current EBRD growth forecasts for 2014 are 1.8 per cent for Bosnia and 1.0 per cent for Serbia and they may well need to be revised further downwards.

On the other hand, mitigating factors would include the size of bilateral and IFI support for the relief and reconstruction programmes, which could give a boost to construction and related industries.

Inflation is low in both countries but could spike upwards if food shortages occur. Nevertheless, according to Serbia's Chamber of Commerce, the supply of agriculture and food products to the domestic market will remain stable in the coming period but exports will probably decline.

Serbia and Bosnia do not have to cope with the aftermath of this disaster on their own. The international community sent operational teams together with high capacity water pumps, rescue boats and helicopters to support the evacuation of residents and the transportation of water and medicines within hours of the rivers breaking their banks.

The EU this week allocated an extra €65 million to tackle the aftermath of the flood. The international community has also made clear its determination to hold a donor conference to help speed up the two countries’ recovery.

The EBRD has already described responding to the crisis as one of its major priorities and aims to reallocate existing funding in the region to help finance food relief.

The EBRD will place a priority on the rehabilitation of damaged roads and water systems as well as damaged power stations and transmission and distribution networks.

It also aims to respond rapidly to the immediate needs of any of the EBRD’s corporate partners in the private sector whose activities have been harmed by the flooding.

As an EU candidate country, Serbia can also apply for financing from the EU Solidarity Fund, which helps member states in case of severe natural disasters if the estimated damage exceeds 0.64% of their GDP.

As for Bosnia, the EU is looking into how its instruments for pre-accession could be deployed to help. And the World Bank is lending Bosnia $24mn to help it cope with the disaster and is discussing an emergency loan of over $50m that would finance reconstruction works, procurement of goods and services and the preparation of technical studies.

The World Bank has also said it could change the purpose of part of an already approved but still to be disbursed $500m budget support loan to Serbia, thus channelling the funds towards recovery from the floods.