Forecast Based Financing for Precision Agriculture in Indonesia

Abstract

As a developing nation, Indonesia’s economy relies heavily on agriculture. Despite being the largest food producer in Southeast Asia, the Indonesian government is primarily concerned with ensuring domestic food security. Consequently, the Indonesian government is actively working to enhance agricultural infrastructure and capabilities. However, this objective faces various emerging challenges, such as the uncertainties and risks associated with extreme weather events and climate fluctuations. To address these challenges, the Government of Indonesia is exploring an innovative approach known as Climate Smart Agriculture (CSA). This CSA concept not only aims to enhance agricultural facilities but also provides support to farmers through prediction-based financing, incorporating index-based insurance and predictive indices, particularly in relation to weather events associated with the El Niño Southern Oscillation (ENSO). This research endeavors to introduce the concept of forecast-based financing, which combines index-based insurance and predictive indices to safeguard Indonesia’s agricultural activities. In essence, index-based insurance offers a distinct and valuable alternative to conventional insurance products, especially in Indonesia, where administrative capacity is limited, credit options are scarce, and relief efforts for past disasters have experienced delays. Index-based insurance has the potential to significantly bolster community resilience.