World Bank, UK offer Malawi drought insurance

The World Bank on Tuesday announced its first-ever weather risk management contract to help Malawi mitigate itself from the risk of a severe drought that could leave it vulnerable to having food shortages.

Under the contract, if the maize production in the country, as estimated by the rainfall index, falls to 10% below the historical average, Malawi will receive a payout of up to a maximum of US$5 million.

The UK Department of International Development (DfID), on behalf of Malawi, provided the financial support to cover the premium payment for the contract.

Drought-prone Malawi approached the World Bank for help with managing the risk posed by severe drought. The country is known to suffer from chronic drought that cuts agricultural yields and depresses farmers’ incomes, negatively affecting the government’s budget.

Finance Minister Goodall Gondwe said when drought strikes, it increases the price of maize, the main source of food for a large part of the local population.

He said the purchase of the weather hedge is part of a larger framework designed to reduce agricultural risk in the country

\"Agriculture is a major sector and source of growth for the Malawi economy. Market-based weather risk management tools cannot only help protect against the adverse effects of drought but are also potentially valuable for enhancing Malawi\’s food security,\" he said.

According to Director of /the World Bank Treasury’s Banking and Debt Management Department, Gloria Grandolini, weather risk management transactions can be adapted to countries’ specific needs, depending on the type of weather hazard, level of protection, and the estimated financial loss associated with a severe and catastrophic event.

She said the potential application of this product spans diverse sectors like agriculture, energy production, and tourism

\"We see a Malawi contract as a natural complement to our work to help countries access market-based tools for managing a range of risks, including interest rates, currency, commodity and weather related risks,\" she said.