How drought insurance and value chains can support Somalia’s livestock economy

October 04, 2022

Pastoralists rely primarily on livestock for their livelihoods. This makes them more vulnerable to climate-related shocks, and therefore they have the highest poverty rates in Somalia. When drought hits, their animals either die or are sold at rock bottom prices. And yet Somalia’s livestock trade contributes to almost 80% of the country’s foreign currency earnings, with much of the livestock exported to countries in the Arabian Peninsula, such as Saudi Arabia, Yemen, Oman, and the United Arab Emirates.

However dependent Somalia is on pastoralists, they are not well integrated, as producers, into the economy because they operate in remote regions and are often on the move. Added to this, the quality of the infrastructure system—used to trace livestock and ensure its standards—is nascent in Somalia and, as a result, importing countries impose additional checks and reduce their prices for it.

To address this challenge, the Federal Government of Somalia launched the De-Risking, Inclusion and Value Enhancement of Pastoral Economies in the Horn of Africa Project (DRIVE) in late August 2022, with World Bank support. The project aims to enhance pastoralists’ access to financial services for drought risk mitigation, as well as to include them in value chains and to facilitate livestock trading in the Horn of Africa (HOA). It covers Djibouti, Ethiopia, Kenya, and Somalia.

The current drought in the Horn of Africa is a reminder of the importance of anticipating droughts and acting early to deal with extreme weather, largely because it is having a severe impact on food security and causing the asset depletion of livestock and income losses for pastoralists. The DRIVE project will help mitigate such effects in future by building a risk-management mechanism that allows households to anticipate the effects of a drought in a timely and efficient manner, and prepare for them.

“Livestock is our nation’s core asset. The misfortune of drought pushes our pastoral communities to overflow to cities. This project will mitigate the loss in livestock and create markets, so that our pastoralist communities get more benefit from their livestock,” says Hassan His Excellency Hassan Hussein Mohamed (Eeley), Somalia’s Minister of Livestock, Forestry and Range.

The DRIVE project will complement humanitarian assistance as part of the country’s response to the current crisis. Findings from a feasibility study on drought insurance, and from the quality infrastructure report undertaken in 2019/2020, have influenced the project’s design, aimed at founding a more sustainable response to drought.

First, it will provide financial services for pastoralists, including drought insurance (also called Index Based Livestock Insurance, or IBLI), savings, and digital accounts. When droughts occur, pastoralists will either be able to use their savings or receive insurance payouts at the onset to keep their animals alive. Studies from USAID and others show that early intervention saves livestock and money, and that keeping livestock alive by spending money to feed them costs less than restocking.

World bank — *Source: USAID (2018), Clarke and Hill (2013), Pastoralist Livelihood Initiative (2007).*

“Climate change is impacting our economy,” said Elmi Mohamud Nur, Somalia’s Minister of Finance. “Providing drought insurance to our pastoralists offers protection for the backbone of our economy.”

Hope Murera, Managing Director of the ZEP-RE, a Kenya-based reinsurance company in charge of this component of the project, sees the launch of the project and its implementation as providing a platform to scale up financial services to pastoralists, including insurance coverage.

Second, the project will link pastoralists to markets, exporters, and processors, so pastoralists can sell quality animals through a Livestock Value Chain Facility. This involves agribusiness activities, including a milk value chain, animal feed production, logistics, the fattening of livestock, abattoirs, and meat processing. Its targets will be women-owned and youth-owned businesses, as well as large investments that demonstrate impact. Accrediting testing laboratories should improve quality control, the certification of livestock products, and the formulation of national quality, food safety, and meteorology policies. The project aims to set international standards for export certification across the Horn of Africa.

DRIVE is financed by a $40 million IDA grant for Somalia, out of the $327.5 million allocated to the Horn as a whole. It will be implemented along key trade routes, including a northern corridor from Ethiopia to Somaliland and a southern corridor from Somalia to Kenya. It is expected to provide 300,000 pastoralists in Somalia access to finance, connect 400 pastoralist groups to markets, mobilize $10 million of private investment in livestock value chains, and greatly improve quality assurance standards in the sector. It will also offer financial support for de-risking the private investment put into value chains.

* The blog was originally published on World Bank Blogs - Link here

Sonia Plaza

Senior Economist, Finance, Competitiveness and Innovation Global Practice

World Bank

Sonia Plaza is a Senior Economist in the Finance, Competitiveness and Innovation Global Practice of the World Bank. She is also the co-chair of the Diaspora Thematic working group of KNOMAD (Global Knowledge Partnership on Migration and Development). Sonia was born in Lima, Peru. Her father had a constructing firm, so some of her earliest childhood memories are of traveling with him to poor areas including Ayacucho where he was working on projects. This is how she was first exposed to development work, and it shaped her. She wrote chapter 5 of the book, “Africa’s Silk Road: China and India’s New Economic Frontier”, which covers trade facilitation, technology, and skills transfer, and regional trade agreements. She advises many universities on the transfer of skills and tapping into their diasporas. Sonia attended the University of Lima and earned a degree in Economics, after which she joined Chase Manhattan Bank, and was then invited to join the Peruvian Ministry of Trade as a manager responsible for counter trade and debt swap agreements. She also has a dual degree from Yale University and the University of Pennsylvania in International Economics and Development. She was Professor of Economics (International Economics) at the Peruvian School of Foreign Service and at the University of Lima in Peru, and was adjunct faculty (Microeconomics and Macroeconomics) at The American University in Washington, DC. Her research interests include international migration, labor mobility, trade, and the future of labor. She joined the Institute for the Study of Labor as a Research Fellow in February 2010.

Expand

CO-AUTHORS

Caroline Cerruti

CFA, Lead Financial Sector Specialist

World Bank

Caroline Cerruti is a Lead Financial Sector Specialist in the Finance, Competitiveness, and Innovation Global Practice of the World Bank. She leads several operational engagements on long-term finance, disaster risk finance, financial inclusion, and financial stability. While on a field-based assignment in Kenya, Caroline worked on the Kenya Livestock Insurance Program, helped establish the Kenya Mortgage Refinance Company to expand affordable housing finance, and mobilized Kenyan pension funds to invest in infrastructure. She developed several regional integration operations in the Africa Region, the latest to date aims to build pastoralists’ resilience to drought in the Horn of Africa. She has been involved in various financial sector assessments with the IMF. She is the author of the toolkit for public asset management companies to manage distressed assets and has restructured various financial institutions. Caroline has a diploma from the Sciences-Po Paris, the Ecole Nationale d'Administration (ENA), and is a CFA Charterholder.

Expand