Financing Strategies for Climate-smart Agriculture Investments

in Belize

October 26, 2018

Agriculture Global Practice

Latin America and Caribbean Region

World Bank

This document is one of three complementary documents that focus on the prospects for climate smart agriculture (CSA) in Belize: Belize Climate-Smart Agriculture Country Profile (World Bank 2018a), Belize Climate Smart Agriculture Prioritization Framework (World Bank 2018b), and Financing Strategies for Climate Smart Agriculture in Belize (World Bank 2018c). The three documents describe the opportunities and challenges associated with CSA in Belize, identify a set of “best bet” practices that based on preliminary analysis appear to have great promise, and discuss opportunities for mobilizing the resources that will be needed to finance CSA investments.

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Contents 1. Introduction .................................................................................................................... 1

1.1 Background to the report ................................................................................................. 1

1.2 Structure of the report ..................................................................................................... 1

2. Climate-smart agriculture for Belize ................................................................................ 1

2.1 Agricultural sector ............................................................................................................ 1

2.2 Climate change anticipated effects .................................................................................. 3

2.3 Risk mitigation in the agricultural sector .......................................................................... 4

2.4 Recommended climate-smart agricultural practices ....................................................... 5

2.5 Projected CSA adoption rates ........................................................................................... 8

2.6 Estimated costs of recommended CSA practices ........................................................... 10

3. Financial infrastructure in Belize ................................................................................... 11

3.1 Overview of the financial sector in Belize ...................................................................... 11

3.2 Agricultural and climate finance in Belize ...................................................................... 13

4. Strategies for financing CSA practices and risk mitigation .............................................. 15

4.1 The Maximizing Finance for Development (MFD) concept in agriculture ..................... 15

4.2 Strategies for financing best bet CSA practices .............................................................. 17

4.2.1 Overall approach to financing of CSA practices .................................................................. 17

4.2.2 Application of the MFD approach to financial services ....................................................... 18

4.3 Complementary measures needed to support CSA practice ......................................... 24

4.3.1 Indispensable support arrangements ................................................................................. 25

4.3.2 Desirable support arrangements......................................................................................... 26

4.4 Strategies for risk management through insurance ....................................................... 27

4.4.1 Insurance sector in Belize .................................................................................................... 27

4.4.2 Assessment of insurance options ........................................................................................ 29

4.4.3 Application of the MFD approach to insurance .................................................................. 31

4.5 Strategies for complementary disaster risk management ............................................. 32

5. Advancing the CSA agenda: Next steps .......................................................................... 33

Bibliography ........................................................................................................................ 34

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List of acronyms

CBB Central Bank of Belize

CCRIF Caribbean Catastrophic Risk Insurance Facility CIAT International Centre for Tropical Agriculture CSA Climate-smart agriculture CSA-PF CSA Prioritization Framework CU Credit Union

EFA Economic and Financial Analysis FFS Farmer Field School FI Financial institution GAP Good agricultural practice

GDP Gross Domestic Product GoB Government of Belize IFAD International Fund for Agricultural Development LLP Loan loss provisions

LT Long-term MAFFESDI Ministry of Agriculture, Fisheries, Forestry, the Environment,

Sustainable Development and Immigration

MFD Maximizing Finance for Development MG Matching grant MT Medium-term

OSIPP Office of the Supervisor of Insurance and Private Pensions Pp Percent points R&D Research and Development ST Short-term

TB Treasury Bill VC Value chain VCD Value chain development WB World Bank

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Tables Table 1. Best-bet CSA practices identified for Belize ....................................................................... 6

Table 2. Area currently cultivated that could benefit from 24 best-bet CSA practices ................... 7

Table 3. Economic and financial analysis – key results .................................................................... 8

Table 4. Estimated area that could be brought under CSA practices over 5 years ......................... 9

Table 5. Investment costs for CSA practices and funding gap ....................................................... 11

Table 6. Complementary measures for supporting the adoption of climate-smart practices ...... 25

Table 7. Payout vs. premium for the non-life sector ..................................................................... 28

Table 8. Administrative cost vs. premium for the non-life sector ................................................. 28

Figures Figure 1. Anticipated climate change effects in Belize: Temperature and precipitation ................ 4

Figure 2. Maximizing Finance for Development cascade............................................................... 16

Figure 3. Applying the MFD approach to financial services ........................................................... 18

Figure 4. Flow of funds of equity, matching grant, and loan, and main actions ........................... 24

Figure 5. Applying the MFD approach to insurance services ......................................................... 31

Acknowledgments Preparation of this report was led by Michael Marx (Consultant, World Bank). The author wishes to express his sincere gratitude to the Ministry of Agriculture, in particular to Hon. Godwin Hulse (Minister of Agriculture, Fisheries, Forestry, the Environment, Sustainable Development and Immigration), Mr. Jose Alpuche (Chief Executive Officer in the Ministry of Agriculture, Forestry, Fisheries, the Environment, Sustainable Development and Immigration), Mr. Jose Novelo (Director of Projects), and Dr. Victoriano Pascual (Director of Water Management and Climate Change), for their strong interest in the subject matter and in solutions, for their willingness to share insights, ideas and concepts, and for providing excellent logistical support in all aspects. The author further wishes to thank the representatives of banks, credit unions, government bodies in charge of oversight over the financial and insurance sectors, farmers and producers, and their member associations, research institutes and agribusiness, for their time and willingness to share their view, practices and experiences.

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Executive Summary Climate-smart agriculture (CSA) is agriculture that has been transformed and reoriented to support development and ensure food security in the face of climate change. In Belize, a country that is highly vulnerable to the effects of climate change, 24 promising CSA practices were identified through a participatory exercise involving a large number of stakeholders and partners. For these CSA practices to be adopted on a large scale, however, they will have to meet at least three criteria. They will have to be: (1) technically feasible, (2) environmentally sustainable, and (3) financially viable. Financial viability will depend on the presence of markets into which farmers can sell at remunerative prices, along with sufficient cash flow to allow farmers to repay their loans within a reasonable period of time.

Based on available evidence, the 24 CSA practices that were identified appear to meet the first two of the above three conditions. While the preliminary analysis suggests that the practices are also financially viable, there is a need to be cautious about the validity of rapid ex-ante economic assessments. Until more robust data can be generated about the costs and returns to these CSA practices under actual field conditions, it will not be possible to draw definitive conclusions about their financial viability, and an element of uncertainty will remain. Without more robust data, few farmers are likely to experiment with the practices on a large scale, and without large-scale experimentation, it is unlikely that large numbers of farmers are going to accept them as standard agronomic and business practices.

What strategies are available to the Government of Belize to promote the adoption of CSA practices? In light of the continuing uncertainty about the financial viability of many CSA practices, to accelerate large-scale adoption it may be necessary to introduce, for a limited period, subsidies for first movers. For each CSA practice, the amount of the subsidy should be calculated in anticipation of (1) what would induce farmers to take up the practice, (2) what would be the financing gap in case the practice will not be immediately profitable, and (3) what level of comfort financial institutions would need to entice them finance the investment. To control the cost borne by the Government, the use of subsidies to encourage adoption will be attractive only if the CSA practices being promoted can be fine-tuned over time to become commercially viable, so that the subsidies can gradually be phased out.

What mechanisms are available to the Government of Belize for delivering the subsidies, and what would be the cost? Analysis carried out for this report suggest that matching grants appear to offer a cost-effective mechanism. Based on the preliminary economic and financial analysis that has already been undertaken, complemented by conservative estimates of feasible adoption rates, it is estimated that about 27,000 acres could be brought under CSA practices over five years, requiring total investments of almost 60 million Belize dollars (BZD) and requiring grant support in the amount of about BZD 9 million.

Increasing the availability of financing will be necessary to ensure widespread uptake of CSA practices in Belize, but it will probably not be sufficient. Farmers are likely to be unwilling to take out loans to support investments in CSA unless they are able to manage the risks associated with these investments. A range of insurance products—at micro, meso, and macro level--could be considered to help farmers protect against these risks. However, experience worldwide suggests

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that no single instrument can help a country to overcome shocks. Policy makers in Belize therefore need to be thinking about developing multi-dimensional risk financing strategies, identifying combinations of financing instruments (i.e., catastrophe funds, insurance, contingency funds, etc.) that provide an acceptable level of coverage at the lowest possible cost. It will be important to accept this “bottom line” recommendation as point of departure for a disaster risk management strategy.

Promoting the uptake of CSA practices is necessary to ensure that agriculture in Belize will be productive, competitive, and sustainable, but it will not be sufficient. Efforts to promote CSA in isolation might not have much impact without complementary investments to identify new products and commodities whose production could be scaled up over time, make production systems more market-oriented, make value chains more modern and more efficient, open new export markets, and improve the environmental sustainability of agriculture. Promotion of CSA practices therefore needs to be integrated into a larger transformation strategy designed to move the agricultural sector towards better land and water use and management and to stop, at least slow down deforestation.

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1. Introduction

1.1 Background to the report

The Government of Belize (GoB) recently commissioned and published a “National Adaptation Strategy to Address Climate Change in the Agriculture Sector in Belize,” which provides an overview of the projected impacts of climate change on the agriculture sector in Belize and presents a comprehensive strategy to address the anticipated effects if climate change on agriculture.1 The World Bank and the CGIAR Program on Climate Change Agriculture and Food Security (CCAFS) are preparing two complementary documents pertaining to the protection of the agriculture sector in the face of climate change: the Belize Climate-Smart Agriculture Country Profile and the Belize Climate Smart Agriculture Prioritization Framework. These documents provide an overview of investment options into CSA with the associated merits, including the profitability of these options.

Because these documents do not include a formal assessment of the costs and financing options for CSA practices in Belize, this report is intended to serve two purposes:

1. Provide information that the Government of Belize can use to inform the design of initiatives to promote the adoption of CSA practices and technologies, and

2. Build awareness of the business case for investing in CSA practices and technologies and provide information about mechanisms that can be deployed to incentivize commercial financial institutions, institutional investors, agribusiness companies to increase lending for and/or investment in CSA.

1.2 Structure of the report

Including this introduction, the report includes five chapters. Chapter 2 describes a set of “best bet” CSA practices and technologies identified to have high potential in the context of the agricultural sector in Belize and the anticipated impacts on the sector of climate change. Chapter 3 presents an overview of the finance and insurance sectors in Belize, with particular emphasis on agricultural finance as provided by financial institutions (FIs). Chapter 4 discusses a number of options for financing of CSAs and increasing the flow of finance to the agricultural sector in general, as well as options for managing risk through insurance. Chapter 5 summarizes the main points and recommendations and proposes next steps.

2. Climate-smart agriculture for Belize

2.1 Agricultural sector

Size. During the 2011 agriculture census of Belize, almost 20,000 people identified themselves as farmers, equivalent to slightly more than one-fifth of all households. Of these, 24 percent

1 See “Caribbean Community Climate Change Centre and The National Climate Change Office, MAFFESDI (2015),

“A National Adaptation Strategy to Address Climate Change in the Agriculture Sector in Belize,” Belmopan.

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reported owning fewer than 5 acres, 33 percent reported owning between 5 and 20 acres and the remaining 43 percent reported owning more than 20 acres. Factoring in employment in several agro-processing plants, the significant number of farm workers employed in the larger estates and factories, and the presence of diversified input supply, research and development, and transport services, it may be estimated that one-third of all households in Belize depend on agriculture as one among several livelihood sources.

Economic importance. The economic contribution of the agricultural sector of Belize in real terms has remained very stable over the past six years, with agriculture contributing about BZD 250 million per year on average to GDP. The fisheries sector, which accounted for BZD 100-120 million per year during 2012-2014, has decreased dramatically in recent years, falling to less than BZD 30 million in 2017, mainly due to uncontrolled outbreaks of diseases in shrimp production. In 2017, agriculture contributed 8.8 percent of GDP, while fisheries contributed an additional 1.0 percent.

Annual growth rates in the agricultural and fisheries sector have fluctuated significantly over the past six years, with a high of 10.2 percent in 2012 and a low of -8.3 percent in 2016. Variability was even more pronounced in the fisheries sector, with a high of 23.1 percent in 2013 and a low of -62.8 percent in 2016.

Important crops include sugar cane, banana, citrus and papaya mainly produced for exports, and corn and dry beans produced for domestic consumption and exports. Cattle raising is the most important livestock activity, followed by poultry and pig production. Shrimp production has been very important and may soon become more important once new investors have come in and the sector’s degraded infrastructure has been rehabilitated. Since domestic markets are too small to absorb the entire production, Belizean farmers are heavily dependent on export crops, so any changes in tariffs, market access regulations, not-tariff trade barriers and prices have immediate and significant impacts on producers and the entire economy. Table 1 below provides an overview of the land use of the different crops in Belize.

The policy of the government, supported by MAFFESDI, and of the private sector has been to focus mainly on export commodities. Less attention has been dedicated to alternative crops and livestock products that could be developed, such as coconut, lime, cashew, fruits/berries, medicinal plants, herbs, cocoa, cattle and small ruminants, all of which present opportunities for value addition (e.g., through selling at more lucrative prices to the hotel and catering industry). An exception appears to be the Mennonite community, which has been more proactive in seeking out alternative crops and production systems, and which has developed the necessary infrastructure once a decision was made in favor of a new crop.

Cross border trade in agricultural commodities is significant. While this generates income for traders and some farmers, it does not facilitate external financing as there is no evidence on the volume and value of trade.

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2.2 Climate change anticipated effects

As a low-lying country located in a region that is subject to frequent severe weather events, Belize is extremely vulnerable to the effects of climate change.2 The most likely effects of climate change in Belize include:

• Sea level rise;

• More frequent and more intense tropical storms;

• Decreased precipitation throughout the country (ranging from 6.9 percent in the northern zone to 10 percent in the southern zone);

• Increased variability in the seasonal distribution of rainfall, resulting in greater frequency of droughts, floods, and landslides triggered by extreme precipitation; and

• Increased temperature (annual mean temperature rising by 1.3 °C by the 2030s and by 1.7–1.8 °C by the 2050s in all districts, with the highest increases occurring during the months from March to May).

These likely effects of climate change pose significant threats to Belizean agriculture. In addition to threatening to adversely affect the productivity of many crops and livestock species, they raise the possibility of higher infestation with pests, diseases and insect attacks, against which effective protection may not be immediately possible.

The anticipated changes in temperature and precipitation in Belize by the year 2050 are depicted in Figure 1.

Comparing the likely impacts on productivity under a climate change scenario (CC) and a no climate change scenario (no-CC), it is clear that some crops are likely to be affected much more than others. Under the CC scenario, yields are expected to be lower by 2.5 percent points (pp) in the case of banana, by 21 pp in the case of beans, by 26.6 pp in the case of corn, by 2.7 pp in the case of sugarcane, and by 8.5 pp on average in the case of vegetables. Cacao will be adversely affected by climate change, experiencing a projected decrease in yield of 7 pp. These changes in productivity will lead to changes in overall production, in turn affecting trade. Imports of cattle, cacao, corn and rice are likely to decrease, while imports of vegetables are likely to increase. Exports of banana, beans and tropical fruits are likely to increase.3

2 This section draws heavily on the chapter “Agriculture and climate change” in CIAT and World Bank (2018: 7–9). 3 Data excerpted from the draft report “Climate-Smart Agriculture in Belize,” CIAT and World Bank (2017).

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Figure 1. Anticipated climate change effects in Belize: Temperature and precipitation

Source: World Bank 2018a

2.3 Risk mitigation in the agricultural sector

The only strategy available to Belizean farmers today to reduce the risks associated with agricultural production is to adopt good agricultural practices in order to raise and stabilize production. Financial mechanisms to reduce or distribute the risks associated with agricultural production are not currently available. Agricultural insurance, be it multi-peril or index-based insurance does not exist in Belize. Farmers can insure their life, health, houses, barns, tractors and transport vehicles, but they cannot insure against risks affecting their production outcome. Moreover, no financial mechanisms are available that farmers can use to reduce price risk for their crops. While hedging is theoretically possible for commodities traded in international markets, such as corn and cacao, the comparatively small volumes produced in Belize means that this is not a realistic option at the moment.

The fact that Belizean farmers are completely exposed to risks forces them to adopt certain behaviors and practices. Farmers borrowing to meet seasonal production requirements or investments usually must provide full or near-full collateral coverage—in most cases a mortgage on land and buildings. Farmers defaulting on a loan cannot hope for extended mercy, as in many other countries which are less rule-based. As nobody wants to lose her/his house, or forfeit an income, farmers borrowing for their business must be reasonably sure that they will be able to harvest a satisfactory crop. Farmers are well aware of the many factors that can adversely affect production, including insects, pests, rains, droughts, storms or price declines, and they are keen observers of changes in the environment and in the climate. Knowing they are exposed to risks, many farmers are very conservative, and they tend to have reservations regarding innovations

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that could bring additional risk exposure. On the other hand, when they are convinced that an innovation will reduce risk and generate reasonable returns, they are generally willing to invest, as indicated by the cases of fertilizer,4 pesticides,5 and tractors.6

Farmers in Belize, like farmers everywhere, are aware of the threats posed by climate change, and they are interested in learning about measures that can be taken to reduce the possible impacts of climate change on production, income, and well-being. Risk-deducing measures that have generated a lot of interest in Belize include irrigation, varietal selection, cultivation techniques, shelter for animals on pastures, intercropping systems, crop rotation, mulching and other measures to maintain moisture in the soil, and others.

2.4 Recommended climate-smart agricultural practices

Definition. Agricultural technologies and practices are considered CSA if they enhance food security while addressing at least one of three other objectives of CSA: (1) sustainably increasing agricultural productivity and farmers’ incomes, (2) adapting and building resilience to climate change, and (3) reducing and/or removing greenhouse gas emissions.7

Using a participatory exercise involving a large number of key stakeholders and partners, MAFFESDI, CIAT and WB identified 24 “best bet” CSA practices of relevance to the country’s 10 most important production systems and rated them according to their climate smartness (fro details, see World Bank 2018b). The ratings were based on individual scores assigned for eight dimensions of climate smartness: (1) impact on productivity; (2) impact on income; (3) water use; (4) impact on soil quality; (5) riskiness; (6) energy use; (7) carbon emissions; and (8) nitrogen emissions. Descriptions of these 24 CSA practices appear in Table 1.

4 In 2015, average consumption of mineral fertilizers in Belize was 431.6 kilograms per hectare of arable land. See

https://data.worldbank.org/indicator/AG.CON.FERT.ZS?locations=BZ. 5 In 2010, agrochemical consumption was 21.22 kilograms per hectare. See http://sib.org.bz/wp-

content/uploads/2017/05/Environmental_Statistics_2012.pdf, p. 23. 6 By 1985, the number of tractors per 100 km2 of arable land was 219

(see https://data.worldbank.org/indicator/AG.LND.TRAC.ZS?locations=BZ ), which was already much higher than the world average for 1997 of 191 units for the world or 32 units for Latin America and the Caribbean, excluding high-income countries (see https://data.worldbank.org/indicator/AG.LND.TRAC.ZS).

7 CIAT and World Bank (2018: 9).

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Table 1. Best-bet CSA practices identified for Belize

Crop CSA practice Practice

Sugarcane Soil and land management (minimum tillage) & planting of high sugar content varieties Sc SLM & HSCV

Sugarcane Water-efficient management (vinasse for irrigation) & soil and land management (minimum tillage) & planting of high sugar content varieties

Sc WEM & SLM & HSCV

Citrus Use of certified planting material & improved drainage (raised beds) Ci UCPM & ID

Citrus Intercropping with coconut Ci INTC

Cattle Use of improved pastures (Mombasa) & use of improved breeds (Brangus) Ca UIP & UIB

Cattle Use of hay and silage Ca UH&S

Beans Crop rotation with corn & planting high yielding varieties Be CR & HYV

Beans Adjust planting date Be APD

Banana Premature bagging & water-efficient management (drainage [canals] and irrigation [drip]) Ba PB & WEM

Corn Crop rotation with beans & plant density management Cor CR & PDM

Corn Water efficient irrigation Cor WEM

Rice Water-efficient irrigation (alternate wetting and drying) Ri AWD

Rice High yielding varieties Ri HYV

Rice Water harvesting Ri WH

Coconut Dwarf variety Co UCPM

Coconut Intercropping with lime Co INTC

Coconut Use of high-quality certified planting material & IPM (pheromone traps) Co UCPM & IPM

Cocoa Agroforestry & management of cacao trees: pruning & grafting Cac AFS & PRU

Vegetables Tomato - Cover structures (bubble house) Tom CS

Vegetables Tomato - Disease tolerant varieties & drip irrigation (fertigation) Tom UDTV & DI

Vegetables Onion - Disease tolerant varieties & drip irrigation (fertigation) On UDTV & DI

Vegetables Pepper - Disease tolerant varieties & drip irrigation (fertigation) Pep UDTV & DI

Vegetables Pepper - Cover structures (bubble house) Pep CS

Vegetables Cabbage - Disease tolerant varieties & drip irrigation (fertigation) Cab UDTV & DI

Source: World Bank 2018a

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The area currently cultivated at present are summarized in Table 2.

Table 2. Area currently cultivated that could benefit from 24 best-bet CSA practices

Crop Practice Area cultivated in ha Area cultivated in acres

Sugarcane Sc SLM & HSCV 42,066 105,164 Sugarcane Sc WEM & SLM & HSCV 42,066 105,164 Citrus Ci UCPM & ID 25,742 64,354 Citrus Ci INTC 25,742 64,354 Cattle Ca UIP & UIB 50,800 127,000 Cattle Ca UH&S 50,800 127,000 Beans Be CR & HYV 9,200 23,000 Beans Be APD 9,200 23,000 Banana Ba PB & WEM 4,709 11,772 Corn Cor CR & PDM 17,600 44,000 Corn Cor WEM 17,600 44,000 Rice Ri AWD 3,920 9,800 Rice Ri HYV 3,920 9,800 Rice Ri WH 3,920 9,800 Coconut Co UCPM 2,000 5,000 Coconut Co INTC 2,000 5,000 Coconut Co UCPM & IPM 2,000 5,000 Cocoa Cac AFS & PRU 628 1,570 Vegetables Tom CS 480 1,200 Vegetables Tom UDTV & DI 480 1,200 Vegetables On UDTV & DI 480 1,200 Vegetables Pep UDTV & DI 480 1,200 Vegetables Pep CS 480 1,200 Vegetables Cab UDTV & DI 480 1,200

Source: Author’s calculations

Targeting needed for CSA practices. These 24 best-bet CSA practices are not suitable for every part of the country; each practice will be attractive in specific areas where the soil, temperature and rainfall patterns are conducive and where they fit well into the prevailing production systems. In addition, the appropriateness of some of the practices varies according to the type of productions system; some practices are more attractive to smallholder farmers, whereas others are more attractive toe larger-scale farmers. A good matching of types of farmers, ecologies and economies of CSAs is therefore needed.

Profitability of CSA practices. Following the identification of the 24 best bet CSA practices based on their climate smartness, preliminary economic and financial analysis (EFA) was carried out to assess the financial viability of each practices. Key results of the EFA are presented in Table 3. Noteworthy findings:

(1) For most practices, the estimated rate of return is positive; where data allowed calculation of internal rates of return, these were found to be much higher than current financing costs;

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(2) Payback periods (the periods over which a client borrowing 100 percent of the capital requirements could repay a loan) are in the range of 1-6 years, with most practices needing only one year; exceptions are new plantations of tree crops, which have a longer payback period in view of the delayed cash inflows.

Table 3. Economic and financial analysis – key results

Crop CSA practice NPV IRR Payback period Cost

Sugarcane Sc SLM & HSCV 2,517 56 2 M Sugarcane Sc WEM & SLM & HSCV 51,391 148 1 H Citrus Ci UCPM & ID 3,531 16 6 M Citrus Ci INTC 23,214 54 3 M Cattle Ca UIP & UIB 7,292 52 1 M Cattle Ca UH&S 7,381 52 1 M Beans Be CR & HYV 1,665 1 L Beans Be APD 1,665 1 L Banana Ba PB & WEM 3,356 15 4 H Corn Cor CR & PDM 1,237 1 L Corn Cor WEM 872 1 L Rice Ri AWD 8,146 1 M Rice Ri HYV 3,968 1 M Rice Ri WH 7,888 4 M Coconut Co UCPM 4,143 34 4 L Coconut Co INTC 20,608 41 5 M Coconut Co UCPM & IPM 11,560 40 4 M Cacao Cac AFS & PRU 5,091 30 4 L Vegetables Tom CS 965,035 2023 1 H Vegetables Tom UDTV & DI 219,432 1 H Vegetables On UDTV & DI 55,495 1 H Vegetables Pep UDTV & DI 376,100 1 M Vegetables Pep CS 969,342 2180 1 H Vegetables Cab UDTV & DI 156,707 1 M

N.B.: H=High; M=Medium; L=Low Source: Author’s calculations

It should be noted that the CSA practices characterized here as “best-bet” represent a point of departure for determining the most appropriate CSA practices for Belize, i.e. the list is not cast in stone. One issue in particular that requires further analysis relates to possible economies of scale and the indivisibility of some key inputs, especially machinery. Little is known about the minimum size of an agricultural production unit on which the adoption of each of the CSA practices would start to become profitable; this may depend on the availability of appropriately sized machinery, which in turn could influence investment requirements. Further efforts will be needed to test the best-bet practices and adapt them to local conditions, with the goal of definitely establishing their robustness in terms of technical feasibility, climate-smartness and financial viability.

2.5 Projected CSA adoption rates

How likely is it that farmers will adopt the best-bet CSA practices? The willingness of farmers to take up innovations such as these is difficult to predict. Their willingness to adopt will depend on

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a number of technical, economic, and social factors, only some of which can be influenced from outside.

Using a combination of quantitative data and qualitative judgments, a team from MAFFESDI estimated the likely extent of adoption of the 24 best-bet CSA practices. The quantitative data included information on the area currently planted to the 10 crops for which the 24 CSA practices are relevant and the vulnerability of those crops to climate change. The qualitative judgments related to the likely interest of farmers in the crop/activity, their perceived familiarity with the CSA practices, and their likely propensity to change and innovate, under the assumptions that technical assistance and training, some (unspecified) subsides will be available and that financial institutions will provide access to credit. The results of this exercise appear in Table 4, which shows the area that could be brought under each of the 24 best-bet CSA practices, expressed in absolute terms and as a share of the total area planted to each crop. The areas are surprisingly modest: it is estimated that CSA practices will not cover more than 1-5 percent of the total area in most cases, with several notable exceptions in the cases of banana (25 percent), beans (22 percent), cocoa (19 percent) and coconut (10 percent).

Table 4. Estimated area that could be brought under CSA practices over 5 years

Crop Area cultivated (acres) Year 1 Year 2 Year 3 Year 4 Year 5 CSA area

(acres) CSA area

(%) Sugarcane 105,164 400 700 1000 1300 1600 5,000 5 Sugarcane 105,164 100 100 150 150 150 650 1 Citrus 64,354 80 140 200 260 320 1,000 2 Citrus 64,354 80 140 200 260 320 1,000 2 Cattle 127,000 300 450 600 750 900 3,000 2 Cattle 127,000 200 300 400 500 600 2,000 2 Beans 23,000 1,000 1,000 1,000 1,000 1,000 5,000 22 Beans 23,000 500 500 500 500 500 2,500 11 Banana 11,772 200 400 600 800 1,000 3,000 25 Corn 44,000 200 200 200 200 200 1,000 2 Corn 44,000 100 100 100 100 100 500 1 Rice 9,800 80 80 80 80 80 400 4 Rice 9,800 60 60 60 60 60 300 3 Rice 9,800 40 40 40 40 40 200 2 Coconut 5,000 80 80 80 80 80 400 8 Coconut 5,000 60 60 60 60 60 300 6 Coconut 5,000 100 100 100 100 100 500 10 Cacao 1,570 60 60 60 60 60 300 19 Vegetables 1,200 1 1 1 1 1 5 0 Vegetables 1,200 2 2 2 2 2 10 1 Vegetables 1,200 3 3 3 3 3 15 1 Vegetables 1,200 2 2 2 2 2 10 1 Vegetables 1,200 1 1 1 1 1 5 0 Vegetables 1,200 3 3 3 3 3 15 1

Source: Author’s calculations based on MAFFESDI estimations

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2.6 Estimated costs of recommended CSA practices

What would be the cost of adopting the 24 best-bet CSA practices if they were to be adopted throughout the area on which adoption is deemed likely (27,110 acres)?

The cost of adopting the 24 best-bet CSA practices was calculated using the following assumptions:

• For the 4 CSA practices that are profitable, farmers will pay the investment cost.8

• For the 20 CSA practices whose profitability remains uncertain, a 25 percent subsidy is provided on the initial investment cost (as calculated by the Economic and Financial Analysis mission in July 2018). If the addition of the subsidy makes the practice profitable, farmers pay the remaining 75 percent of the investment cost.

• Farmers pay all operating costs.

• Farmers are free to negotiate a loan from a financial institution; if they secure a loan, their initial capital layout decreases to the amount requested by the financial institution as equity contribution.

• Adoption takes place over five years.

Based on the above assumptions, the investment cost for the 24 best bet CSA practices on the entire area that could be brought under CSA practices in three years was estimated as follows:

1. Total investment cost of BZD 58.5 million including:

− BZD 22.8 million for practices that would not require subsidies − BZD 35.7 million for practices that would require subsidies

2. Cost paid by farmers for non-subsidized CSA practices: BZD 22.8 million9

3. Cost paid by farmers for subsidized CSA practices: BZD 26.8 million10

4. Cost of the subsidy (to be paid by the Government): BZD 8.9 million.11

Details of the economic and financial analysis appear in Table 5.

8 The four CSA practices likely to be profitable even without a subsidy include: (1) Sugarcane: soil and land

management (minimum tillage) and planting of high-sugar-content varieties; (2) Cattle: use of hay and silage; (3) Beans: adjusting the planting date; and (4) Cacao: agroforestry and improved management of cacao trees (pruning and grafting)

9 This refers to total investment costs of crops numbered 1, 6, 8 and 18 in Table 5 below, which are expected to be profitable without any subsidy as indicated in column “private” under “financing mode”.

10 This refers to total investment costs of all 20 crops listed in column “private + loan + public” under “financing mode,” minus an assumed amount of subsidy of 25% of the investment costs.

11 This refers to the amount of subsidy of 25% of the investment costs total investment costs of all 20 crops listed in column “private + loan + public” under “financing mode.”

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Table 5. Investment costs for CSA practices and funding gap

No. CSA practice

Adoption area

Operating cost

Investment cost

Total investment

Financing modality Funding

gap Private Private + loan + public

Public

1 Sugarcane 5000 4,3 6,0 21.500 yes 0 2 Sugarcane 650 6,5 7,0 4.225 yes 1.056 3 Citrus 1000 2,1 4,0 2.100 yes 525 4 Citrus 1000 1,6 4,0 1.600 yes 400 5 Cattle 3000 0,8 4,0 2.400 yes 600 6 Cattle 2000 0,4 4,0 800 yes 0 7 Beans 5000 0,2 1,0 1.000 yes 250 8 Beans 2500 0,1 1,0 250 yes 0 9 Banana 3000 7,0 8,0 21.000 yes 5.250 10 Corn 1000 0,2 1,0 200 yes 50 11 Corn 500 0,3 1,0 150 yes 38 12 Rice 400 0,9 2,0 360 yes 90 13 Rice 300 0,9 2,0 270 yes 68 14 Rice 200 0,9 2,0 180 yes 45 15 Coconut 400 0,8 1,0 320 yes 80 16 Coconut 300 2,4 4,0 720 yes 180 17 Coconut 500 1,0 2,0 500 yes 125 18 Cocoa 300 0,7 1,0 210 yes 0 19 Vegetables 5 60,0 236,0 300 yes 75 20 Vegetables 10 1,1 6,0 11 yes 3 21 Vegetables 15 1,0 6,0 15 yes 4 22 Vegetables 10 3,3 6,0 33 yes 8 23 Vegetables 5 59,0 239,0 295 yes 74 24 Vegetables 15 1,3 5,0 20 yes 5 27,110 58,459 4 20 0 8,925

Source: Author’s calculations

3. Financial infrastructure in Belize

3.1 Overview of the financial sector in Belize

Overview. In 2017, the financial sector in Belize comprised 5 commercial banks, 5 international banks,12 14 credit unions (CUs), and 42 money lenders and pawn shops,13 in addition to a government-owned development bank. Institutions engaged in financial services (deposit taking or credit provision) must be licensed by the Central Bank of Belize (CBB) and are supervised by the CBB. The Development Finance Corporation is not subject to CBB supervision but reports data to CBB on a voluntary basis. For the most part, the commercial financial sector is well developed, subject to standard regulations, and supervised by the CBB in line with those standards. To advance their interests, the banks have created an association of banking institutions and the CUs have created the Credit Union League, both located in Belize City.

12 Not deemed relevant for the purposes of this study. 13 Not deemed relevant for the purposes of this study.

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The introduction of regulations pertaining to loan loss provisioning was somewhat slow, and most financial institutions (FIs) took some time to adjust fully to the regulations, but this necessary exercise considerably strengthened the FIs. In 2017, all banks and CUs were profitable and complied with minimum capital requirements. Only one commercial bank has been liquidated (more than a decade ago), but the event had no lasting effect on customer confidence. Likewise the closing of four CUs by the CBB in 2017 does not seem to have reduced the general public’s confidence in CUs. The financial infrastructure, with a credit bureau, a collateral registry, transfers and payments, and securities settlement, is adequate to the size and complexity of most operations.

As can be expected in a comparatively small country with a limited number of players and low levels of competition, FIs are generally conservative. They are conscious of the cost and risk implications of their lending operations, rather than very pro-active and innovative. The market forces that could push these institutions to become more dynamic, extend their frontiers, and expand their products and services are lacking. Lending has not increased much over the past years, with growth rates rarely exceeding 1 percent.

Commercial banks play by far the most important role in financial service delivery. They offer traditional banking services, such as loans for production and consumption, sales of foreign currency, credit cards, deposits, checking accounts, letters of credit, and guarantees. The international banks offer banking services in foreign currencies exclusively to non-residents. Their main services comprise personal and commercial loans, at times at rates more advantageous than commercial banks, brokerage services, foreign exchange, credit cards, and current, savings, and term deposits. Three commercial banks also own international banks, and are thus able to offer services to all potential clients within their network. Three of the five commercial banks are of a similar size, each owning 25–30 percent of total assets. The fourth has about 15 percent of total assets and the fifth, the smallest, owns 2 percent.

Banks are mostly highly liquid, have limited options for investing in treasury bills and bonds as the yield rates are comparatively low, and are mostly interested in identifying good-quality customers for lending. Lending is apparently more profitable than investing in bonds, as loan loss provisioning, cost of funds, and inflation rates are relatively low in this stable economy and do not fluctuate much over time.

By the end of 2017, the domestic banks had further improved the quality of their balance sheets as the non-performing loan (NPL) ratio fell to 2.4 percent. With these loan write-offs, all banks are now in full compliance with the loan loss provisioning standards introduced in 2011. Consequently the profitability of domestic banks has increased, with average returns on assets of 1.3 percent and average returns on equity of 9.2 percent in 2017. The intermediation rate14 is satisfactory for the commercial banks, with an average of 60 percent and a range of 46–76 percent. Operating costs are well managed and under control; on average they account for 2.2 percent of total loans and 1.3 percent of total assets, with very little variation between FIs.

14 Amount of total assets used for lending.

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Base lending rates differ considerably between banks, however, ranging from a low of 5.5 percent to a high of 14.0 percent, although the variation in average lending rates is less marked, with a high of 10.8 percent and a low of 6.6 percent. Average interest rates paid on deposit were in the range of 0.5 percent and 2.3 percent per annum.15

Credit unions operate as not-for-profit cooperative societies and typically offer savings and term deposits and consumption and production loans to their members/shareholders. CUs often operate with tighter liquidity constraints and use most of their available funds for lending. As a consequence, they can increase their loan portfolio only if they mobilize more deposits or obtain external loans. Some CUs also offer term loans, mostly not exceeding three years. Asset-liability management does not appear to be a constraint. One dominant CU controls 61 percent of total assets, followed by four CUs (each with between 7–11 percent of total assets), and a couple of smaller CUs with less than 3 percent of total assets. CUs have few, if any branches or points of sale—not more than three and at times none. Even though no official policy exists, each CU has a clear area of operations where it does not compete with other CUs.

Total CU membership was 162,838 as at the end of March 2018, which implies a penetration rate of 42 percent of the entire population and is certainly one of the highest values globally. The four biggest CUs account for 87 percent of the total membership.

As noted, the CBB closed four CUs in 2017. These institutions had been technically insolvent for quite some time. All four were owned and used by employees and civil servants and offered salary payments and credit services only to employees of the same employer, or to civil servants. Their main problem was poor loan recovery from their members. Under these circumstances, the general public was insulated from the poor performance of these CUs. The remaining ten CUs seem mostly to follow a prudent banking approach and refrain from lending if they are not convinced of a shareholder’s credit-worthiness.

By the end of March 2018, total assets of the seven biggest CUs stood at BZD 957 million and loans at BZD 708 million, for an intermediation rate of 64 percent (ranging from 54 percent to 84 percent). Operating costs are also well under control, averaging 1.1 percent of total loans or 0.7 percent of total assets.

Base lending rates of the larger CUs are in the very narrow range of 10–12 percent per annum, and average lending rates in the equally narrow range of 10.0–11.8 percent. Average deposit rates are mostly low, usually 0.5–1.0 percent per annum, but one CU, serving the Mennonite community, offers 4.1 percent on average to attract funds.16

3.2 Agricultural and climate finance in Belize

Introduction. Agricultural lending is relatively well developed and important in Belize, which may be attributed to the size and good integration of some value chains, as well as to the stability of the country in general and the functioning of the judiciary. The prime rate approach has facilitated

15 Data as per 31 March 2018. 16 This CU also excels in terms of intermediation rate, loan concentration, and NPLs, which are the best in the sector,

as well as operating costs, which are the lowest in the sector.

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lending to larger companies and value chains. There is no indication that the agricultural sector has ever used climate finance, other than some grants to conduct experiments in the sugar cane sector.

Almost all lending is to individuals and corporate bodies, and almost no lending goes to groups with joint liability. When a prospective borrower applies for a loan, s/he makes every effort to increase the loan amount sought, as FIs tend to curtail loan amounts, first to reduce their risk and second because they anticipate borrowers’ desire to inflate their loans. When business gets tight, this approach may affect some clients’ cash flow and ability to repay loans.

For example, several agricultural subsectors have recently experienced downturns, such as the banana, shrimp, and citrus subsectors, the latter two because of disease or pest infestations. The sugar cane sector currently faces a significant decline in prices. In several cases, the financial sector has asked the CBB to approve loan restructuring. To date, all such requests have been granted to protect the real and financial sectors. In light of these experiences, many in the financial industry and government are convinced that loan loss provisioning rules for standard or commercial loans are not appropriate for agriculture, and have asked for those regulations to be relaxed to reduce the need for short-term provisioning by FIs.

Collateral issues. Banks and CUs often define a threshold for loan amounts, above which they require collateral.17 The main security requested by banks and CUs alike is mortgage on land and buildings. Collateral does not seem to be the prime constraint for financial inclusion in the rural/agricultural sector, although nobody likes to pledge the family house to a bank. The approach has worked well since the introduction of modern loan loss provisioning regulations and the full compliance of FIs with them. There is little to no use of accounts receivable or animals as collateral for loans, first because the instruments and approaches are not well known, and second because of the costs and the element of uncertainty. The sugar cane industry is the most developed value chain, and both banks and CUs are heavily engaged in financing individual farmers. This fully integrated subsector has created a good number of support institutions, from research to farmer organizations.

Commercial bank lending to the agricultural sector. Commercial banks are the main pillar of the financial sector and also provide the major share of loans to the agricultural sector, in relative and absolute terms. A few banks are highly interested in the agricultural sector and have some expertise, while the others are not involved at all. There are no incentives for banks or CUs to go beyond classical approaches and lending and try out new things.

Total lending of commercial banks to the agricultural, marine, forestry, and fishery sectors amounted to BZD 274.5 million, with the lion’s share going to the agricultural sector (BZD 240.4 million). The total proportion of lending to the agricultural sector in terms of total lending to the private sector was 13.6 percent, of which the agricultural sector absorbed 11.9 percent of the total. The main absorbers were the tertiary sector with 33.7 percent, the secondary sector with 30.7 percent, and personal loans with 21.8 percent. Over the past 20 years, the lowest proportion of loans to the agricultural sector in a quarter was 6.7 percent and the highest 14.1 percent, with

17 BZD 7,500 for CUs and BZD 15,000 for commercial banks.

15

an overall average of 8.8 percent. This value is comparatively high, particularly when the seasonal fluctuation in outstanding loans is taken into consideration.

Within the agricultural sector, most of the commercial bank loans went to the sugar sector (42 percent of the total), followed by bananas (25 percent), grains (18 percent), citrus (7 percent), and poultry (4 percent). If the phytosanitary constraints on shrimp production are removed in the near future and the subsector picks up, it will certainly also receive an important share of loans from local commercial banks.

Credit union lending to the agricultural sector. The involvement of CUs in agricultural finance varies, depending on opportunities as well as direction from CU management and boards. While some boards and management have a general interest in increasing lending to agriculture, the available resources and risks perceived in lending to smallholders prevent them from going further and deeper into financing for agriculture. Some CUs, with good knowledge of their clients and their clients’ objectives, have implemented advanced approaches to financing, especially related to value chains. Others appear to have excellent capacity to expand agricultural finance, driven by an intrinsic interest in serving producers as well as deep knowledge of the sector.

Total lending by CUs amounts to BZD 610.3 million,18 of which BZD 45.9 million (7.5 percent) went to the agricultural sector. CUs also finance smallholder farmers in the sugar cane and citrus subsectors. The biggest sectors supported by CU loans were consumers (30 percent of the total); home construction, including purchase of land (26 percent); small businesses (21 percent); and commercial transport (16 percent).

Loans to the agricultural sector mainly support production, with only a small share seemingly used to support processing, marketing, and trade. The large agribusiness sector is able to obtain any needed financing from outside the country at more favorable rates.

4. Strategies for financing CSA practices and risk mitigation

4.1 The Maximizing Finance for Development (MFD) concept in agriculture

In Belize as elsewhere, current levels of investment in agriculture (and food systems) are insufficient to achieve key development goals. From farm to fork, developing agricultural value chains is predominantly a private sector affair, meaning that agribusiness in a wider sense can and must play a central role in advancing the larger agricultural development agenda. It is both possible and essential to leverage private sector resources in pursuing the transformational opportunities offered by agriculture and food systems.

The Maximizing Finance for Development (MFD) approach seeks to crowd in private resources to help achieve these development goals by optimizing the use of scarce public resources to enable private sector investment and build inclusive linkages, promote good governance, and ensure environmental and social sustainability, among others. The central idea underlying the MFD approach is systematically to discern whether sustainable private sector solutions can substitute for public expenditure and to determine where the key enabling roles for the public sector are to 18 Data provided by the Belize Credit Union League.

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be found. To guide this process, a structured sequence of questions can be used to systematically assess entry points for public-sector interventions (see Figure 2).

Figure 2. Maximizing Finance for Development cascade

The questions posed at each stage of the MFD cascade depicted in Figure 2 are intended to clarify the respective roles of the public and private sectors in carrying out a given activity. The answers to the questions help to delineate the scope for policy reforms to shape incentives and crowd in private sector financing to support needed investments, as well as to identify areas in which public financing is likely to be needed to produce public goods and services necessary for sustainable development. Use of the MFD cascade can help identify the actions and activities in which national governments, the World Bank Group, and other development partners can have the largest impact.

To apply the MFD approach in a specific context, the first step is to define an activity precisely. Once the activity has been defined, the initial question is posed: “Is the private sector doing it?” The answers to this and subsequent questions in the MFD cascade help to identify areas in which the public and private sectors can contribute to the achievement of the activity, by playing their different roles. The answers to the questions are often non-binary; a “yes” answer may identify only part of the potential contribution of the private sector at that level, and movement to subsequent levels may be needed to ensure a complete assessment of all questions around MFD and identification of all the potential roles of the public and private sectors in accomplishing that

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activity. Once these roles are understood, the actual implementation of policy and regulatory changes and public investments need not be sequential. In many cases it will make sense to implement the various changes and investments them simultaneously, but that does not detract from the value of asking the questions sequentially.

In view of the benefits of the MFD approach for this assignment, it is applied in the sections that follow with respect to financing strategies for CSA practices and technologies.

4.2 Strategies for financing best bet CSA practices

4.2.1 Overall approach to financing of CSA practices

As the 24 CSA practices are experimental practices that have not been tested at a large scale over an extended period, some uncertainty remains about their impacts and their profitability, which is why they are termed “best-bet” practices here. But assuming that their impacts (and profitability) are confirmed over time, farmers will need resources to pay for both the initial investment costs and also the operating costs.

A key objective is for a high share of CSA practices to be financed by the private sector (both the farmer and the financial sector). Belize has limited public budgetary resources, and in principle, subsidies for private goods or benefit should be limited to essentials. CSA practices will be sustainable over the longer term only if they can be funded from private resources.

For farmers and the financial sector to become interested in financing investments in CSA practices, each practice must be:

1. technically feasible;

2. environmentally sustainable; and

3. financially viable.

Importance of marketing and prices. The most difficult of these conditions is that each CSA practices must be financially viable. Financial viability will depend in large part on the prices of the commodities being produced—which in turn depends on the existence of a market that gives the producer a minimum profit. In other words, the commodity must be produced and sold when it will be absorbed by a specific market, at a specific time, in line with specific quality and other standards, and at a price that makes production lucrative in the eyes of a producer.

At this stage, the 24 CSA practices appear to meet three of the five core conditions listed above, but there is a need to be cautious about the validity of rapid assessments such as the recent ex-ante economic and financial analyses of the practices. Definitive conclusions on the viability of these practices require wider and deeper data on each one, based on a process of testing and adjustment. Until then, a first pilot of these CSA practices is unlikely, and without such pilots, it is unlikely that larger numbers of farmers will regard them as standard agronomic and business practices to be applied.

In sum, additional ex-ante research and financial analysis are not needed at this stage. Instead, efforts should focus on deepening and refining a set of CSA practices, perhaps eventually extending beyond the initial 24, that are commercially viable and can be financed to a large extent

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by the equity of investors and local FIs. The first concept is rarely the most optimal, and adjustments are likely to be needed in terms of varietal selection, cultivation practices, inter-planting, and other variables to achieve an optimal balance of environmental and financial concerns, and labor, time, and input requirements. This objective could be achieved if (1) the level of support to CSA reaches a minimum threshold, and (2) the CSA-related efforts are combined with efforts to create more lucrative and more environmentally sound production systems in Belize, as discussed in more detail below.

4.2.2 Application of the MFD approach to financial services

Application of the MFD approach to the question of financing CSA practices leads to the MFD cascade shown in Figure 3. The analysis indicates that three principal measures show potential to expand the provision of credit to users of CSA: (1) a line of credit, (2) a guarantee mechanism, and (3) matching grants (MGs).

Figure 3. Applying the MFD approach to financial services

Issue 1:

Can the private sector finance CSAs?

Is the private sector already doing it?

Answer 1:

• The private sector could in in principle finance the CSAs, but neither farmers nor FIs are presently likely to do it.

• Neither farmers nor FIs are currently doing it

Issue 2:

Is this because of limited space for private sector activity?

Answer 2:

No

Issue 3:

Is this because of policy or regulatory gaps or weaknesses?

Answer 3:

No

Issue 4:

Can public investment crowd in private investment?

Answer 4:

Yes, through a range of time-bound measures, such as (1) a line of credit, (2) a guarantee mechanism or (3) matching grants in the financial sector, plus supplementary measures in the real sector and research and development

Feasibility and suitability of a line of credit. Commercial banks are sufficiently liquid and appear to need no additional finance to expand lending. In view of their low margins, good repayment rates, and the lack of other profitable investment opportunities, their primary concern is lending

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to creditworthy clients who are highly unlikely to default. Commercial banks also have sufficient term resources for term lending, and asset-liability management is not a constraint. Stimulating the risk appetite is the main issue to be addressed. In that case, a line of credit may be more likely to substitute for their current lending rather than create any additionality.

The situation is slightly different in the case of CUs. The resources available determine the amount of lending for most CUs, because the demand for credit exceeds supply. Unless CUs expand their deposit base or obtain external funds, it would be difficult for them to expand lending. The results from the recently closed IFAD/GoB-funded “Belize Rural Finance Programme” indicate that deposit mobilization was not the greatest strength of CUs under the project. The probability that they would start lending to a client for CSA activities by declining a loan to an existing customer and member probably ranges from very low to zero. Another factor to consider is the absence of sufficient funds for loans longer than 12 months, as most of CU resources are short term, with the exception of some funds deriving from external lines of credit (for specific purposes only). This issue will persist unless external funds with longer maturity are provided.

Feasibility and suitability of a guarantee mechanism. No guarantee mechanisms are in place in Belize at present. The Danish development agency Danida introduced a project-based guarantee system in the banana subsector more than 15 years ago, which apparently worked at the time, but the guarantees came to an end when the project ended.

A guarantee mechanism would ideally have a positive impact where creditworthy clients are excluded from financial services (specifically loans) if they cannot meet the banks’ collateral requirements. As mentioned, commercial banks and CUs both require mortgages on land and buildings as collateral for loans above a certain threshold (BZD 7,500–10,000). Most commercial farmers appear to be able to provide (albeit grudgingly) a mortgage, be it on the land they cultivate or the house where they live. The exceptions are the relatively poorer sections of society in southern Belize, especially the Maya communities, where land is chiefly owned by communities. These communities thus depend on loan policies that permit them to borrow without pledging land. The extent to which this situation prevents Maya communities from investing in their farms is not known. The local CUs are not very active in agricultural finance, and commercial banks are not very active in these regions, which makes it more difficult to assess financial inclusion there.

The potential benefits of a guarantee mechanism could be inhibited by the following constraints:

1. Given the heterogeneity of the agricultural sector, assessing the risks embedded in agricultural loans requires significant expertise. As a result, the operating costs of a guarantee mechanism would be substantial, requiring a relatively high guarantee fee.

2. A project-related guarantee system would not be sustainable, as guarantee underwriting would end with the project. The costs would be quite substantial, given the brief duration and effectiveness of the cover.

3. Should a national guarantee system be favored, significant agronomic and financial expertise would be needed, some of which may need to be recruited from outside Belize. With high operating costs (certainly above 2 percent of the guarantees extended), a relatively small commercial farming community, and the prevailing very low Treasury Bill

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yield rates, a guarantee scheme may not be sustainable, as the income from fees and interest earned on equity funds may not be higher than the operating costs, risks (losses from claims), and the compulsory minimum reserves to be created. The maximum leverage between equity funds of a guarantee company and the loans guaranteed might not exceed 1:3 or 1:4 after 5–6 years, even if the guarantee scheme performs well.

4. In the short and medium term, a guarantee system is likely to lead only to better collateral coverage for financial institutions, not to additional lending, as FIs would tend to simply add the external guarantees to their bouquet of requirements, thus making borrowing costlier, not easier. The only additionality that could be reasonably expected is related to access to finance for Maya communities.

5. A final issue is that a guarantee mechanism would absorb significant time and attention in a domain which is quite remote from the promotion of CSA, which reduces the likelihood of success.

For these reasons, the GoB would be well advised to be cautious before introducing a guarantee mechanism.

Feasibility and suitability of matching grants. Matching grants (MGs) are chiefly useful where:

• Private interventions or investments cannot be expected for whatever reason, at least not within a given period.

• Uncertainty about the desired investment needs to be overcome. • No crowding out of the private sector is expected. • A temporary solution is needed, not a permanent one. • A system of matching grant evaluation and approval, distribution of grant funds, and

monitoring of grant-funded activities could be established at a reasonable cost, with operating costs below about 10 percent of the grant volume.

Possible benefits of using MGs to promote the uptake of CSA practices in Belize could include:

• Improved knowledge about the technical practicability and profitability of CSA practices. • Accumulation of robust data about the costs and returns of CSA practices, which would

be useful and even necessary for scaling up those practices. • Lower prices for some goods and services as numbers of users increase, given that initially

goods have to be imported in small quantities, and that services for installation, maintenance, and support have to be developed.

• CSA practices that are fine-tuned to the point that farmers will adopt them without any subsidies or support other than knowledge.

Conditions for matching grants. The operations of MGs must be adapted to specific requirements, local circumstances and conditions, rules and regulations, and administrative practices. These conditions are particularly important to define clearly because MGs usually involve public as well as private financing. The following terms and conditions, which would need to be adjusted and fine-tuned, provide an initial indication of how a grant scheme for CSA in Belize might operate.

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The main justification for MGs in the case of CSA in Belize is the need to initiate the adoption of as many CSA practices on as much land as possible to obtain more detailed insight into their climate-smartness, feasibility, and viability—in other words, into the conditions that must be met to scale up those practices.

Eligibility criteria for beneficiaries would have to be properly defined, and may comprise:

• A farmer who is willing to adopt one of the technically defined CSA practices on her/his own farm, and capable of implementing the practice.

• The proposed investment meets the all conditions of feasibility, viability, marketing arrangements, and environmental sustainability.

• The proposed investment meets the conditions in terms of minimum and maximum investment per CSA category, which need to be defined.

• The willingness to contribute the defined minimum equity contribution. • The ability to finance the required investments, be it from own contributions or through

a loan from a FI. • The ability to finance the required operating costs, be it from own contributions or

through a loan from a FI. • The willingness to share (anonymously) all relevant and properly defined data on the

results of the investment with the agency that has supported the investment. • The willingness to engage in information sharing to help refine the CSA practices and

expand their uptake by other farmers.

Selection criteria also need to be properly defined, and may comprise:

• Suitability of the ecological environment for the intended CSA practice. • Being among the first adopters of the CSA practice. • Depth of experience with the crop or animal. • Reliability and robustness of the marketing arrangements. • Robustness of the prices paid for the commodity. • Level of profitability of the CSA practice. • Other innovative practices or modes of operations to be introduced. • Extent of equity funds contributed over and above the minimum thresholds required. • Surface cultivated or used for the CSA practice. • Combination of one CSA practice with others and other measures of environmental

protection.

Operational details. The following details may be considered in the final design:

• MGs should generally be used to support investments only, not operating costs. Exceptions can be made where: (1) the operating costs are significantly higher than under

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traditional, non-CSA practices and (2) these incremental operating costs would not be absorbed by the expected income.

• The grant amount would have to be determined in light of: (1) the incentive required to make farmers embark on a CSA practice; (2) the financing gap if the practice is not immediately profitable; and (3) the comfort level that will encourage FIs to finance a CSA investment.

• A farmer interested in adopting CSA would need to cover the investment costs beyond the amount covered by the MG. This equity contribution will be reduced if the farmer can secure financing from a local FI, but at the same time, no farmer interested in CSA will be forced to borrow from a FI.

• The equity contribution needs to be kept in a bank account. If a loan has been approved by a local bank or CU, the respective conditional letter of approval must be presented by the investor. Equity and MG would constitute the source of funding in all cases, eventually supplemented by a loan.

• An investor would have to pass two types of screening. Prospective investors will be screened by the GoB for compliance with the eligibility and selection criteria, and by a FI to evaluate the viability of the investment and cash flow generated. These processes are independent and parallel.

• If the screening finds that an investor meets all of these requirements, the GoB will transfer the amount of the approved MG into a trust account of the respective FI.

• Upon prompt and full repayment of the loan by the investor, the MG is debited to the trust account and transferred to the loan account, thereby bringing the loan balance to zero.

• Before full repayment, the MG also serves as unconditional first loss guarantee to the FI. The delay that would trigger the guarantee would have to be defined—for example, less than a cumulative delay of 30 days in the case of a one-year loan, and less than 60 days in the case of a two-year loan.

• If the guarantee is triggered, the MG amount will be debited to the trust account and transferred to the loan account of the borrower. No further guarantee would be provided. The FI would then decide whether to call back the loan and request full immediate repayment or extend the loan in accordance with its standard terms and conditions and/or the loan agreement.

• Upon full repayment of the loan, any amount recovered by the FI over and above the loan capital, be it from the payments of the borrower or by realizing collateral, would be transferred back to the GoB.

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• As the FI would receive liquidity in the form of the MG, the savings of the FI would be calculated on the basis of the yield rate of TBs for 360 days and passed on to the borrower.19

• The farmer must present evidence of having sufficient working capital to cover the operating costs; this capital could come from equity or a loan.

• Loan terms are determined by the FI in accordance with a cash flow projection. • Terms and conditions for loans are solely determined by the FIs without any external

interference. • Loans are granted by FIs on the basis of their own assessment of opportunities and risks,

and by using their own capital. • Where a loan would be refinanced by the GoB, the actual lending would be entirely at the

risk of the respective FI.

Determining the size of the MGs. The next task is to determine the size of MG for each CSA practice. A number of points may have to be taken into consideration:

• The extent of uncertainty about the technical feasibility and the financial viability of the investment.

• The depth of the knowledge gap on yields, germination rates, outputs, prices, market absorption, and profits of the concrete investment.

• The comfort gap of the financial sector: what size of MG would entice FIs to finance the CSA practices?

• The length of time during which subsidies will be provided. • The level of familiarity of farmers in Belize about the details of the different investment

types. • The availability of funds.

Under current circumstances, the subsidies paid out in the form of MGs could range between a high of 50 percent and a low of 10 percent. The level of support would be fixed for a certain period, say one year, and then adjusted on the basis of parameter changes. A change in the rate of support would have no retrospective effect; in other words, grant agreements fixing a MG percentage rate would not change if the support rate decreases or increases later.

Quantitative projection. Assuming that the average MG support is 25 percent over the investment amount, along with a conservative level of uptake over five years and the projected investment costs of the 24 CSA practices discussed previously, the total investments made would amount to BZD 58.5 million, with public sector support of BZD 9.0 million. Any changes in these parameters would entail changes in the investment and grant support amounts. Details were presented previously in Table 5.

19 Currently 2.25% per annum; this would lead to a reduction of the interest payable of 0.45% per annum. See https://www.centralbank.org.bz/rates-statistics/interest-rates/government-securities. Depending on the duration of the loans, a lower rate could be applied for the one-year loans.

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Figure 4 illustrates the flows of funds under a scenario in which a local bank or CU provides partial funding of the investments. For ease of understanding, it is assumed that both the equity contribution of the farmer and the MG amount to 25 percent of the cost of the investment, and that the balance of 50 percent is financed by a FI.

Figure 4. Flow of funds of equity, matching grant, and loan, and main actions

1. Farmer interested in CSA enquires about financial support

2. Farmer submits application for MG of $ 25 to GoB 3. Farmer submits application for loan of $ 50 to

preferred FI 4. Approval of MG by GoB to farmer and FI 5. Approval of loan by FI to farmer and GoB 6. Eventually arrangement with supplier(s) 7. Payment of equity of $ 25 by farmer into FI

account

8. Disbursement of MG of $ 25 to farmer into FI account 9. Extension of 1st loss guarantee of GoB to FI in the

amount of the MG ($ 25) 10. Delivery of goods and services to farmer 11. Disbursement of loan of $ 50 to farmer/ suppliers 12. Farmer provides information on investment to GoB 13. Repayment of loan of $ 50 to FI 14. Transfer of MG of $ 25 to loan account, bringing loan

balance to zero 15. FI informs farmer and GoB on full repayment by farmer

4.3 Complementary measures needed to support CSA practice

In parallel to the financing arrangements discussed previously, a number of complementary arrangements are either indispensable or highly desirable to support the adoption of CSA practices. These measures are shown in Table 6.

Government of Belize Farmer

Financial Institution Supplier(s)

1,2,12

4

4,8,9 15 5,11 3,6,7,13

6

11

6 10

25

Table 6. Complementary measures for supporting the adoption of climate-smart practices

Indispensable measures Desirable measures

1. Technical support, training and extension on CSA

2. Create awareness about CSA practices and the technical and financial support available to implement them

3. Technical support and technical assistance to FIs interested in cooperation

4. Research and development to deepen insights into CSA and need for subsidy

5. Publication and dissemination of insights

1. Parallel information campaign on desirable environmental protection measures

2. Research and development of new and more lucrative climate-smart investment opportunities

3. Deepening of dialogue with the financial and insurance sector on removing obstacles to enhance the flow of funds to the agricultural sector

4.3.1 Indispensable support arrangements

Technical support, training, and extension on CSA. A number of support measures will be needed to ensure successful uptake of CSA practices. Several persons interviewed recommended using the MAFFESDI Central Farm as a venue for locating demonstrations of CSA practices, along with two more locations, one in the North and one in the South. Use of three different sites would place the demonstrations close to potential adopters and allow more geographically targeted selection of CSA practices at each site. Another approach would be to work with model or master farmers; however, no information is available on the feasibility and cost of the latter approach. Farmer Field Schools (FFSs) could also serve to deepen knowledge of CSA practices, especially practices that require time to master and could not be taught easily in a 1–2-day training course at the MAFFESDI farms. Should FFS be considered, a light version would be desirable, reducing the time spent by farmers to the minimum needed. For each CSA practice, technical guidelines should be prepared in English and Spanish. Printed material should be complemented by remote virtual support (via phone, blog, Skype, WhatsApp, and so on), ideally supported with video clips.

Raising awareness about CSA practices. To arouse interest among potential adopters and increase knowledge about the technical and financial support available to support adoption, well-structured media campaigns could be launched once the packages have been prepared. Newspapers, TV, and radio are the relevant media here, probably along with technical blogs. The publicity campaigns could also help to raise awareness of CSA practices among the general public.

Technical support and technical assistance to FIs interested in cooperation. Since loan officers must be familiar with the technical innovations and financial aspects of a CSA promotion effort, a short training course for loan officers would be helpful. The course could be supported by comprehensive written assessment guidelines and appraisal templates that personnel in FIs can use to perform appraisals. These materials ideally would be made available to loan officers, loan committees, and credit risk committees of all participating or interested FIs, in addition to templates for analyzing the profitability of each crop and activity.

Research and development to deepen insights into CSA and need for subsidy. Because it is important to move to financial viability as soon as possible to enhance uptake and minimize public

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expenses, it will be important to continuously assess the viability of CSA practices through close monitoring and evaluation of experience on the ground and to refine the practices through adaptive research and development (R&D). R&D activities will help to reconfigure and refine the technical guidelines for CSAs. Complementary to the reconfiguration and refinement of the CSA guidelines, it will be necessary to update the economic and financial analysis so as to be able to track changes in the profitability of adopting CSA practices and recalculate the level of subsidies needed to ensure sufficiently wide adoption.

4.3.2 Desirable support arrangements

Parallel information campaign on desirable environmental protection measures. Belize has not embarked on structured campaigns to improve the ecological sustainability of agriculture. It would be highly useful to combine the introduction of CSA practices with a broader transformation of agriculture toward using and managing land and water more sustainably and stopping, or at least slowing, deforestation—particularly in view of the national motto, “Sub umbra floreo.”

Research and development of new CSA investment opportunities. Another valuable element of synergy could be derived from combining the introduction of CSA practices with an overall transformation of the agricultural sector toward more value addition and more remunerative crops for farmers. Many tools and human resources needed for R&D on CSA practices and more environmentally-friendly agriculture are identical to those required for R&D on more lucrative agriculture. The production of fruits and berries, coconuts, limes, cashews, honey, dairy products, medicinal plants, herbs, and other lucrative and value-added products should be assessed in terms of feasibility, viability, and environmental sustainability, in addition to the production of commodities sought by the local hotel and catering industry. Clearly marketing and marketing arrangements must be the points of departure for all such assessments. The synergies inherent in each dimension of the economy-ecology-marketing triangle will make agricultural investment portfolios more attractive and lead to significant increases in the use of sound environmental practices, which might not have been achieved in the absence of this wider approach.

Deepening the dialogue with the financial and insurance sector on removing obstacles to enhance the flow of funds to the agricultural sector. Some FIs have relatively high interest in lending to the agricultural sector, whether because of an intrinsic motivation of managers and owners or demands from good customers. MAFFESDI is highly interested in maintaining or even increasing the flow of credit to the agricultural sector, as no modernization or drive for efficiency is possible without credit. Yet FIs and MAFFESDI have no regular or even occasional institutional contact, although they appear keen to improve their understanding of each other and benefit from each side can offer. It is highly desirable to develop and deepen ties between MAFFESDI and FIs to develop a shared understanding of approaches and issues related to financing agricultural production, processing, trade, and export, with a view to enhancing financing flows (disbursements and repayments), reduce credit barriers, enhance risk assessment and risk mitigation, or introduce new forms of collateral. Another shared interest of FIs and MAFFESDI is to establish new value chains, beyond those in the sugar cane subsector and Mennonite communities. Banks clearly have an interest in knowing about good agricultural practices for the commodities they finance (outside the sugar cane, banana, citrus, and shrimp industries), and in

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getting occasionally technical assistance for the appraisal of their clients. The capacity of the Central Farm and of the 22 extension officers employed, and the increase of demonstration farms in the northern and southern zones, have also been mentioned as potential topics for dialogue. There is also interest in broadening the prevailing comparatively narrow collateral system to enhance lending to the agricultural sector by borrowing experience from around the world, such as the use of accounts receivable within value chains, electronic cattle inventory systems using radio-frequency identification (RFID) tags, movable property and other forms. It is recommended that MAFFESDI initiate dialogue with FIs on such topics of mutual interest, probably three to four times a year.

4.4 Strategies for risk management through insurance

4.4.1 Insurance sector in Belize

Overview.20 The insurance sector in Belize comprises nine insurance underwriters operating under the supervision of the Office of the Supervisor of Insurance and Private Pension (OSIPP). The umbrella organization for insurance companies is the Organization of Insurance Companies in Belize. In the comparatively conservative society of Belize, people do not easily subscribe to insurance where it is not compulsory, and it is said that the higher the educational status, age, and income of a person, the higher the tendency to seek insurance cover. Banks usually insist on insurance protection when they obtain a mortgage on buildings.

Gross premium income of the entire insurance industry in 2016 was BZD 146.4 million, which represented 1.97 percent of GDP at that time, representing an increase of 0.24 percent points over 2014. Total assets of the industry in the same year reached BZD 272.0 million, representing 3.7 percent of GDP. Gross premium income compares favorably with neighboring Guatemala (1.2 percent) but is lower than in Ecuador (2.1 percent), Columbia, and Argentina (2.8 percent) and much lower levels in than OECD countries.21 In 2017, the most important insurance cover (in terms of premiums received) was property (32 percent), followed by motor (21 percent), health (15 percent), and ordinary life (12 percent) insurance. It should be added that in Latin America, the penetration rates of both life and non-life sectors has traditionally been very low compared with other regions.22

Loss ratios. In the non-life sector, total premiums earned amounted to BZD 42.5 million in 2017, an increase of 19 percent over the 2014 figures. Over the same period, claims incurred increased by 60 percent, with an average loss ratio of 42.4 percent, as shown in Table 7. The payout rate in this category is slightly higher than the standard ratio of 30-35 percent.

20 Source of all data presented in this chapter: Office of the Supervisor of Insurance and Private Pension 21 https://data.oecd.org/insurance/insurance-spending.htm#indicator-chart 22 https://read.oecd-ilibrary.org/finance-and-investment/oecd-insurance-statistics-2016_ins_stats-2016-

en#page20

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Table 7. Payout vs. premium for the non-life sector

2014 2015 2016 2017

Net incurred claims 11.309.930 14.374.711 21.967.031 18.066.532

Net premiums earned 35.585.595 37.256.465 39.805.963 42.498.051

Loss ratio (net incurred claims/net earned premium) 31.8% 38.6% 55.2% 42.5%

Efficiency. In the non-life sector, the expense ratio, which is the total administrative and general expenses plus the net commissions earned over the net premiums earned, remained fairly stable over the past four years, between a high of 51.5 percent and a low of 48.6 percent, and an average of 50.2 percent, as shown in Table 8. As can be expected in a comparatively small country, where the opportunities for scale are limited, the administrative costs are higher than usual standards of 30-35 percent.

Table 8. Administrative cost vs. premium for the non-life sector

2014 2015 2016 2017

Management Expenses 22.245.523 22.667.946 26.635.930 26.488.458

Net Commissions (3.907.680) (4.558.168) (6.184.580) (5.503.880)

Net Premiums Earned 35.585.595 37.256.465 39.805.963 42.498.051

Expense ratio (Expenses + net commission/net earned premium) 51.5% 48.6% 51.4% 49.4%

In the life sector, the expense ratio fluctuated over the past four years between 44.8 percent and 24.3 percent, with average of 37.6 percent. This rate is closer to the standards for economies like Belize, and as expected much lower than in the ratio for the non-life sector.

Experience with agricultural insurance in Belize. In 2000, OSIPP invited insurance companies to look at the option of offering insurance cover for farmers. One company developed a product to protect farmers against the damages caused by hurricanes, and one large-scale farmer subscribed in 2001 to the product. In the same year, his farm was hit by a hurricane, and payments were triggered. As the insurance company lost a significant amount, it stopped offering the product, and all other underwriters refrained from developing or offering a similar product for the agricultural sector. As a result, Belize has remained without a proper agricultural insurance option. The Supervisor of the industry is convinced that a new effort should be made to assess the feasibility of covering the agricultural sector and that the industry is prepared to make a new start, but that any products and policies should initially be geared to small-scale farmers to avoid a repetition of the past experience.

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In summary, the insurance industry structure and products and financial trends in Belize are all encouraging. They support the establishment of a dialogue with the industry and their regulator on expanding insurance protection of the agriculture sector.

Regional insurance against catastrophic events. The GoB has subscribed to the regional Caribbean Catastrophic Risk Insurance Facility (CCRIF), which protects governments, although not individuals or citizens. In the past, the GoB subscribed annually to a policy protecting against hurricanes, earthquakes, and excess rainfall, but the cover has never been triggered. In one year, a hurricane hit two districts, but not Belize City, and the cover was only to be triggered by damages in this city, not in other parts of the country. This case raised the concern that CCRIF was developed mainly for small island states but not mainland countries such as Belize. The GoB is currently considering whether to stop subscribing to all options under CCRIF and seek to cover only damages arising from earthquakes and not tropical storms.

4.4.2 Assessment of insurance options

Multi-peril insurance has an enormous advantage over other insurance products, as it provides extensive or near-comprehensive coverage against many types of losses. Farmers value such coverage highly, because they get full protection against events against which they are unable to protect themselves. Lenders also appreciate such comprehensive coverage, as it reduces the risk of non-willful default of the borrower. Even so, multi-peril insurance products have major constraints:

• Damage assessment is difficult and very expensive. Experienced assessors are hard to find. • The cost of insurance cover is high. All existing systems are based on external subsidies

funded by governments, which may or may not be paid in the end. • The risk of moral hazard is significant, as many farmers are tempted to falsify claims or

present unjustified claims.

Constraints. A multi-peril insurance product is virtually impossible to introduce in Belize for a number of reasons, including:

• The in-country experience is near zero. • The number of potential subscribers is likely to be very small, below commercial viability. • There is no mechanism in sight through which clients could make payments (except

through an input supply system). • Margins in the main export crops and many others are relatively low. • Several of the main agricultural exports are highly affected by disease, including bananas,

shrimps and citrus. • There is likely to be a shortage of qualified damage assessors.

Index-based rainfall insurance and area/yield-based index insurance may be considered as alternatives to multi-peril products. A common feature of these types of insurance is that the negative event for which insurance protection is provided is triggered by a specific variable (amount of rainfall, number of days without rainfall, days at a certain temperature, or some other)

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that can be automatically measured and transmitted to the insurance underwriter. On the basis of a projection of the impacts of such events, the insurer pays out a pre-defined amount of money to the insured person, regardless of whether the person has experienced damages or not, and without any field verification. This approach avoids all problems associated with damage assessment, moral hazard, and adverse selection of clients, but it has some drawbacks. It requires high-quality and integer data to calculate premiums, and most index-based insurance in developing countries is expensive, subsidized (at least in the beginning), and not easily understood and appreciated by farmers, financiers, and insurance agents.

Constraints. An important question for Belize is whether sufficiently good long-term data are available to support the development of index-based insurance products. Rainfall has been measured by the GoB at least since independence in 1981, but the small number of weather stations initially provided reliable data on only about 1–2 percent of the national area. The number of weather stations has increased in two stages to almost 100, including some automated stations, but the quantity and quality of data produced by the national network may not yet be at the levels needed for the development of insurance products.

The difficulty of developing index-based insurance products based exclusively on locally-produced data could potentially be overcome by relying on remote sensing technology that allows for other types of more innovative insurance schemes based on other types of indexes. Belize is a member of the World Meteorological Organization, and the National Meteorological Service of Belize presents a good level of current meteorological data on its website.23 In order to make effective use of remote sensing data, however, it will be necessary to build local capacity to understand the new types of indices and to process the images necessary to operationalize them.24

Agricultural yield data pose another challenge. Official data on agricultural yields are not always reliable (this may soon change, as efforts are under way to improve agricultural data collection and deepen the statistical system). A positive consideration for implementing index insurance is that farmer associations and/or lending institutions can potentially serve as marketing and payment channels for insurance subscribers at relatively low cost, as the experience of one CU acting as an agent for an insurance company has already shown.25

Other challenges include:

• There is little in-country experience with this type of product. • The number of potential subscribers is probably small. • The margins in the main export crops are small.

23 See http://www.hydromet.gov.bz/. 24 In this regard, there would be an opportunity to work with FAO on the ASIS drought system (currently

implemented only in Nicaragua and Paraguay) and potentially with EMBRAPA Informatica on having a decision-support system for the decision-making process.

25 The CU passes on the remuneration as agent of the insurer, and members get a 15% discount on premiums.

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• Farmers’ perceptions of insurance are not favorable. Many consider that losing their production to a hurricane, drought, or flood and receiving some compensation from the state is better than paying premiums to insure against a disaster that may never occur.

• There is some probability of a mismatch between the premium amount that farmers must pay and the events for which they will be covered and the goods that will be protected. In other words, farmers will probably expect more coverage than they want to pay for.

4.4.3 Application of the MFD approach to insurance

The application of the MFD approach to development of insurance for the agricultural sector leads to the MFD cascade shown in Figure 5.

Figure 5. Applying the MFD approach to insurance services

Issue 1:

• Can the private sector underwrite agricultural insurance?

• Is the private sector already doing it?

Answer 1:

The private sector is capable of offering some limited protection of the agricultural sector, but presently is not doing so, in view of a failure about 17 years ago and a lack of knowledge of innovations in agricultural insurance.

Issue 2:

Is this because of limited space for private sector activity?

Answer 2:

No

Issue 3:

Is this because of policy or regulatory gaps or weaknesses?

Answer 3:

No, at first glance, but a deeper assessment is required

Issue 4:

Can public investment crowd in private investment for improved coverage of agricultural production risks?

Answer 4:

Yes, as regards partial coverage of risks

No, as regards catastrophic events

Options for crowding-in private sector:

• 1st assessment of the feasibility of index-based insurance

• If results are positive, support development of insurance products, including actuarial work and initial roll-out

Options for purely public financing:

Assess the justification for and feasibility and viability of a parallel mechanism of protection against catastrophic events, such as hurricanes

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It would be useful if discussions could be organized with the GoB (MAFFESDI, National Meteorological Service of Belize, and OSIPP) to clarify the most immediate issues. This dialogue could be occur by phone or video conference. A second step would be to undertake an initial scoping mission in Belize on the viability and feasibility of index-based insurance and, based on that assessment, determine the next steps.

4.5 Strategies for complementary disaster risk management

Need for a multi-dimensional strategy. Experience worldwide tells us that no single instrument can help a country to overcome shocks. Policy makers in Belize therefore need to be thinking about developing multi-dimensional risk financing strategies, identifying combinations of financing instruments (i.e., catastrophe funds, insurance, contingency funds, etc.) that provide an acceptable level of coverage at the lowest cost. It will be important to accept this “bottom line” recommendation as point of departure for a disaster risk management. The points below are therefore meant as ingredients to such strategy.

Before taking any decisions to continue or discontinue the CCRIF, a few steps should be considered. The first would be to await the outcome of a new mapping exercise of the insured countries. The CCRIF has in principle agreed that there are two distinct types of risk portfolios, the small island states and countries on the continent with much larger land masses. Until now, triggers for claims and payments have been defined more with a view to protect small island states rather than the other countries. It would be useful to engage in discussions with the CCRIF about the need for and urgency of this mapping exercise. If this exercise leads to wider coverage without a significant increase of the annual premiums payable by Belize, the GoB could decide which types of catastrophic events it wishes to cover, in view of the prevailing budgetary constraints.

As for a system that could supplement the CCRIF by assisting producers who are significantly affected by catastrophic events, a national fund against catastrophic events appears to be one of the more feasible instruments. The fund should probably be endowed from two different sources: first the GoB, and second the citizens of Belize. In view of the magnitude of the fund, a special tax would not be suitable (and in any event the number of taxpayers in Belize is insignificant). In addition, a contributory system, neither voluntary nor compulsory, appears feasible in terms of achieving a significant volume at reasonable collection costs and fairness and equality of contributions.

One option might be a small tax on agricultural and food exports and imports26 to build up the fund (say 0.3 percent of value).27 This tax would yield an income of BZD 1.55 million per year, assuming that the values remain constant. This amount may have to be supplemented by GoB funds. A special draw-down facility of the World Bank exists for the period between start and 26 Agricultural items and food imports in 2016 had a value of BZD 234.28 million and exports a value of BZD

281.60 million. The total thus amounted to BZD 515.88 million. See http://sib.org.bz/wp-content/uploads/AnnualReport_2017.pdf p. 15-16

27 For an overview of the levies on imports see Central Bank of Belize, Annual Report 2017, Table 5.2: Revenue Enhancement Measures for FY 2017/2018; https://www.centralbank.org.bz/docs/default-source/4.2.4-annual-reports/cbb-2017-annual-report.pdf?sfvrsn=2

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sufficient capital build-up. Note that the amount would not suffice to cover losses incurred by a major tropical storm, but would be a point of departure only.

If this option is pursued, arrangements and logistics for clear intervention mechanisms, definition of target groups and eventual beneficiaries, and sound management and supervision, among others, would need to be defined. It is of utmost importance to introduce clear and transparent decision-making processes. The annual audit should be conducted by a chartered accountant, not only by a government auditor/comptroller.

5. Advancing the CSA agenda: Next steps What actions are needed to advance the agenda on financing CSA in Belize? Building on the information presented in this report, the following actions could be considered:

On the side of the GoB, spearheaded by MAFFESDI:

• Sharing and discussing the report of this mission among stakeholders in Belize. • Initiating regular interaction and dialogue between the MAFFESDI and financial and

insurance sectors on areas of common interest as indicated in 4.3.2 above. • Deepening the discussion on protection of farmers against damages of catastrophic

tropical storms, reviewing the protection through the CCRIF and contributing to the new mapping exercise of member countries of the CCRIF.

• Initiate, first within the MAFFESDI, then in the cabinet, a discussion about the formulation of a concept note on the implementation of the CSA Prioritization Framework for Belize, and decide whether its implementation would require external support.

On the side of the World Bank:

• Finalizing the publications “Belize Climate-Smart Agriculture Country Profile” and “Belize Climate Smart Agriculture Prioritization Framework.”

• Assessing the feasibility for agricultural insurance, in particular index-based insurance mechanisms, by initiating a first virtual exchange on some major pre-conditions.

• Undertaking a second step and conducting a first appraisal mission on the feasibility of index-based insurance in the agricultural sector.

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