  Since 1986, Government of Botswana has been running an Agricultural Credit
Guarantee Scheme for dry-land arable farming. The scheme purports to assist
dry-land crop farmers who have taken loans with participating banks or lending
institutions to help them meet their debt obligations in case of crop failure
due to drought, floods, frost or hailstorm. Nonetheless, to date, the scheme
has focused solely on drought. The scheme has placed an unsustainable financial
burden on Government because it is not based on sound actuarial principles.
This paper argues that the level of Government subsidies should take into
account the gains made by farmers during non-drought years. It is an attempt to
circumvent the challenges of correlated climate risks and recommends a quasi
self-financing mechanism, assuming that the major driver of crop yield failure
is drought. Moreover, it provides a novel subsidy and premium rate setting
method.
