Feasibility Study for Agricultural Insurance in Nepal

Key policy and strategy documents including the latest Budget Speech for the Fiscal Year 2008-09 emphasize the major role that agriculture can play in poverty reduction in Nepal. The stagnation in the agricultural sector has become the major factor of underdevelopment and poverty. The main goal of rapid economic growth and poverty alleviation cannot be achieved until agricultural productivity is increased and excess manpower from agriculture is shifted to other sectors of the economy through creation of gainful employment opportunities. Agricultural production can increase if the vagaries of nature and the risks associated with it can be better managed. One third of agriculture land is under irrigation and therefore the majority of the Nepali farmers are exposed to adverse weather events. Given the scarcity of affordable and suitable risk management tools, when exposed to adverse shocks, low income households may be forced to reduce food consumption, take their children out of school, and sell productive assets, which then jeopardize their economic and human development prospects. The study on access to financial services in Nepal conducted by the World Bank in 2007 identified the need for innovative financial products to assist farmers in the management of agricultural (livestock and crop) production and thus contribute to increasing agricultural productivity. Insurance can facilitate access to agricultural credit at better terms as it increases the creditworthiness of farmers and other agents of the agricultural sector. To the extent that farm-level risk management instruments contribute to the overall financial stability of the agribusiness sector, indirect benefits in terms of credit availability may be realized at other levels of the agribusiness marketing chain. Financial instability at the farm-level arising from yield or price shocks may lead to instabilities at other levels of the processing and marketing chain. In this way, instruments that contribute to stability at the farm level may ease credit constraints for agents at other levels of the agribusiness complex.