Towards a Sustainable Agricultural Credit Guarantee Scheme

TL;DR

This paper proposes a sustainable, actuarially sound approach for agricultural credit guarantees in Botswana, emphasizing drought risk management and introducing a novel subsidy and premium rate setting method.

Contribution

It introduces a quasi self-financing mechanism and a new method for setting subsidies and premiums based on drought risk, improving scheme sustainability.

Findings

The scheme's financial burden is unsustainable under current practices.

A quasi self-financing model can mitigate government financial risks.

A novel subsidy and premium rate setting method is proposed.

Abstract

Since 1986, Government of Botswana has been running an Agricultural Credit Guarantee Scheme for dry-land arable farming. The scheme purports to assist dry-land crop farmers who have taken loans with participating banks or lending institutions to help them meet their debt obligations in case of crop failure due to drought, floods, frost or hailstorm. Nonetheless, to date, the scheme has focused solely on drought. The scheme has placed an unsustainable financial burden on Government because it is not based on sound actuarial principles. This paper argues that the level of Government subsidies should take into account the gains made by farmers during non-drought years. It is an attempt to circumvent the challenges of correlated climate risks and recommends a quasi self-financing mechanism, assuming that the major driver of crop yield failure is drought. Moreover, it provides a novel subsidy and premium rate setting method.