The country's water reserves are on average below 50 percent of capacity, while levels have fallen to roughly 25 percent in the two worst-hit areas -- Andalusia in the south and Catalonia in the northeast.
The bulk of the money, 1.4 billion euros ($1.5 billion), will be earmarked to build new infrastructure, such as desalination plants, to boost the amount of available water, the government said in a statement.
Another 784 million euros will be used to help farmers and ranchers cope with the lack of precipitation which has decimated crops and driven up the cost of livestock feed.
"Spain is used to facing periods of drought, but due to climate change they have become much more frequent and intense and we must prepare ourselves," Spain's Minister for Ecological Transition, Teresa Ribera, told a news conference
The announcement of the aid package comes ahead of regional and local elections on May 28 and what promises to be closely fought national elections at the end of the year.
Socialist Prime Minister Pedro Sanchez's government has already urged Brussels to activate the bloc's agriculture crisis reserve to help farmers cope with the exceptional drought
Spain has recorded its driest start of the year since such records began in 1961, with the country receiving less than half the normal amount of rain during the first four months of 2023, according to national weather agency AEMET.
There appears to be no relief in sight. No rainfall is expected in the coming weeks that could "alleviate" the drought, AEMET spokesman Ruben del Campo said Thursday.
The lack of rainfall has been catastrophic for the agriculture sector in Spain, which is the world's biggest exporter of olive oil and the European Union's biggest producer of fruit and vegetables.
Spain's olive oil production plummeted 55 percent in the 2022-2023 season to 660,000 tonnes, compared to 1.48 million tonnes in 2021-2022 due to the lack of rain and the extreme heat, agriculture ministry figures show.
The situation is so bad that some farmers have opted not to plant crops, with the COAG farmers' union warning that 80 percent of farmland was "suffocating" from lack of rainfall.
The drought was made worse by an unusually early heatwave at the end of April that brought exceptionally high temperatures across much of the country.
The mercury hit 38.8 degrees Celsius (101.8 degrees Fahrenheit) in the southern city of Granada on April 27, the hottest temperature ever recorded in mainland Spain during that month.
Last year, Spain experienced its hottest year since records began, with UN figures suggesting nearly 75 percent of its land is susceptible to desertification due to climate change.
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