National Drought Insurance for Malawi
Malawi has experienced several catastrophic droughts over the past few decades. The impact of these shocks has been far reaching, and the resulting macroeconomic instability has been a major constraint to growth and poverty reduction in Malawi. Thi...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2010/01/11634487/national-drought-insurance-malawi http://hdl.handle.net/10986/19950 |
| Summary: | Malawi has experienced several
catastrophic droughts over the past few decades. The impact
of these shocks has been far reaching, and the resulting
macroeconomic instability has been a major constraint to
growth and poverty reduction in Malawi. This paper describes
a weather risk management tool that has been developed to
help the government manage the financial impact of
drought-related national maize production shortfalls. The
instrument is an index-based weather derivative contract
designed to transfer the financial risk of severe and
catastrophic national drought that adversely impacts the
government's budget to the international risk markets.
Because rainfall and maize yields are highly correlated,
changes in rainfall -- its timing, cumulative amount, and
distribution -- can act as an accurate proxy for maize
losses. An index has been constructed using rainfall data
from 23 weather stations throughout Malawi and uses daily
rainfall as an input to predict maize yields and therefore
production throughout the country. The index picks up the
well documented historical drought events in 2005, 1995,
1994, and 1992 and a weather derivative contract based on
such an index would have triggered timely cash payouts to
the government in those years. This innovative risk
management instrument was pioneered in 2008/2009 by the
Government of Malawi, with the assistance of the World Bank,
and was a first for a sovereign entity in Africa. Several
piloting seasons will be necessary to understand the scope
and limitations of such contracts, and their role in the
government's strategy, contingency planning, and
operational drought response framework. |
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