Impact of Weather Index Insurance on Household Demand for Fertilizer in Tigray Region

Agriculture is a risky business. And Ethiopia is one of the few countries in the world that has been ravaged by extreme drought for a number of years and stared its renaissance and development recently. According to Wondifraw Zerihun et al. 2014 on their document regarding African Economic Outlook, in 2012/13 fiscal year, Ethiopia’s economy grew by 9.7%, the tenth year in a row of robust growth. In 2012, Ethiopia was the twelfth fastest growing economy in the world. Average annual real GDP growth rate for the last decade was 10.9%. Agriculture, which accounts for 42.7% of GDP, grew by 7.1, in order to accelerate this economic growth and minimize the weather related agricultural shocks index insurance program is being developed in Ethiopia. Hence the study aimed to investigate the impact of index insurance on farmers demand for fertilizer by using panel data of HARITA project of 2010/11 household survey in Tigray region. The study hypothesized that index insurance provision induces farmers to increase fertilizer demand which is profitable, but risky. To achieve the objectives of the study both descriptive and econometric techniques were used. The study employed random effects model with difference- in- difference estimator to see the impact of index insurance on fertilizer demand. Amount of fertilizer used was the dependent variable. Results of the random effect model showed that weather index insurance has positive significance (at 10% level) impact on fertilizer demand. The sign of the variable indicates that insurance purchaser’s fertilizer demand is more than that of non-purchasers. And purchasing index insurance leads to increase demand for fertilizer by 33 percent. Therefore, the estimated coefficient of the variable was positive sign as expected. Based on the result, the study recommends that weather index insurance program should expand in all the drought prone areas of this region, then they will become confident to adopt or increase fertilizer use, through this productive capacity and living standard, the rural society will improve over time. Finally, this study is left open for further research as index insurance is at its early stage in the study area, so there should be continuous follow up and research on this area.