Agriculture is a key sector inBangladesh, but it is highly exposed to risks. Whileagriculture is a source of employment and livelihood fornearly one in two adults in Bangladesh and contributes about16 percent to GDP, it is highly exposed to natural hazards.Indeed, Bangladesh is commonly ranked as one of the mostvulnerable countries in the world to natural disasters withagriculture heavily exposed to floods, cyclones, anddrought. In 2007, for instance, Cyclone Sidr destroyed 0.69million ha of cultivated crop lands and killed over 460,000head of livestock and poultry.In the past, the government ofBangladesh and development partners have providedsubstantialsupport to farmers in the aftermath of largedisasters, but this approach has disadvantages in thatsupport is not guaranteed to farmers and may be slow. In theaftermath of Cyclone Sidr,recovery and reconstruction needswere estimated at USD 1.3 billion, or 28 percent ofgovernmentexpenditures. In spite of efforts by thegovernment of Bangladesh, the gap between available fundingand needs is often large and can reach more than USD 1.5billion in bad years (Air Worldwide and ADPC 2014).Bangladesh often relies on international assistance, as overthe past ten years, only 33 percent of disaster-relatedexpenses has been met by domestic resources. In addition,disaster relief transfers often take substantial time toreach beneficiaries and require to divert resources awayfrom long term development projects. Agricultural insuranceoffers the government a planned, fast, ex ante alternativeto ad hoc disaster response, one that (1) reduces the expost fiscal burden on the government, (2) improves farmers’resilience to shocks, and (3) supports the expansion ofagricultural credit. Every five years on average inBangladesh, production shocks lead to a drop of up to 50percent in crop income available for consumption in averagerural households. This drop pushes many small- and medium-scale farmers into poverty. Although many Bangladeshifarmers can access credit, their exposure to risks makesformal financial institutions reluctant to lend to them, sothat most farmers borrow from informal lenders at averageannual interest rates ranging from 19 percent to 30 percent.Agricultural insurance transfers risk away from farmers, andtherefore benefits financial institutions and the governmentof Bangladesh as well as the farmers themselves.
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