THE IMPACT OF FINANCIAL POLICY ON NIGERIAN AGRICULTURAL PRODUCTIVITY AND OUTPUT

CHAPTER ONE

INTRODUCTION

Background of the Study: It is impossible to overstate the significance of agriculture in the process of bringing about economic growth and development of a nation. The reason why a nation possesses sustainable food security is because it produces enough food to feed its citizens and even exports these goods to other needy countries, thereby generating foreign exchange, which in turn increases the national income over the course of time. According to Oke(2019), the agriculture sector of the economy provides services to all of the other sectors, but particularly the industrial sector. The lack of available cash and credit for new ventures, investments, and expansions is the primary issue confronting the agriculture sector of the Nigerian economy. Because of the impact that monetary policy has on the financial sector of the economy, it plays a significant part in determining the amount of credit that is made accessible to the agricultural sector.

Onyeiwu (2015) established that monetary policy is the set of coordinated actions that central banks take in order to control an economy's money supply, interest rates, and overall value of currency. It is possible to define it as the art of directing the direction and movement of credit facilities in an economy with the goal of maintaining stable prices while also promoting economic growth (CBN, 1992). In the context of Nigeria, the term "monetary policy" refers to the actions taken by the Central Bank of Nigeria to regulate the money supply. These actions may be carried out with discretionary monetary policy instruments such as the open market operation (OMO), discount rate, reserve requirement, moral suasion, direct control of banking system credit, and direct regulation of interest rate. In addition, monetary policy may be carried out through moral suasion. The CBN Act of 1958 gives the Central Bank of Nigeria (CBN) the authority to carry out its mission. According to the first section of the CBN Decree No. 24 of 1991, the principal objectives of the Bank shall be to issue legal tender currency in Nigeria; to maintain external reserves to safeguard the international value of the legal tender currency; to promote monetary stability and a sound financial system in Nigeria; and to act as banker and financial adviser to the Federal Government (CBN, 2006). As a result, the central bank is the primary monetary authority.

On the other hand, Agriculture, in the framework of the economy, is intertwined with the many sectors, and it is crucial for creating the kind of broad-based growth that is required for development. To buttress further Saygin & Evren (2017), agriculture is fundamental to the maintenance of life and is the bedrock of economic development, particularly in the provision of adequate and nutritious food that is essential for human development. The sector is a catalyst and major source of raw materials for the industrial sector, and it provides the majority of the staple foods that are consumed by Nigeria's 120 million people. Despite the fact that improvements in the oil sector have been the primary driver of Nigeria's economy ever since the middle of the 1970s, the country's primary industry is still agriculture. Agriculture is the primary source of income for more than 70 percent of the country's population, and it accounts for around 25 percent of GDP and 60 percent of non-oil exports.

Therefore the availability of credit and capital for start-up, investment, and growth purposes is made possible by monetary policy, which in turn makes the development of agricultural enterprises easier. Onyeiwu (2015) asserts that through the use of several instruments of monetary policy, the CBN maintains control over the supply of credit. The production of agriculture is influenced by these tools in a variety of ways, including through agricultural banks and other financial organizations. Because of this, we consider monetary policy to be a highly significant element in our analysis of agricultural production.

​​​​​​​Statement Of The Problem

Before the rapid rise in oil export revenue, Nigeria was a major exporter of agricultural produce, especially cocoa, groundnuts, cotton, palm oil, palm kernel, and rubber. Since then however both the volume and the range of agricultural exports has declined sharply and agricultural imports have increased dramatically. In addition, Nigeria no longer produces sufficient food for the country's large and rapidly growing population. The average annual rate of real output growth for food crops fell to about 2 percent a year during the 1970s. Between 1970 and 1975, however, the output of export crops dropped 17percent, the food import bill rose more than 10-fold in 1970-1980. Onyeiwu (2015) in his study observed Low agricultural output has a negative effect on the economy as a whole, there is a low production of goods for food and raw materials for industries. A major challenge facing Nigeria is the inability to capture the financial services requirements of farmers and agribusiness owners who constitute about 70 percent of the population. Farmers need access to capital to purchase land and equipment and to invest in the development of new products, services, production technologies and marketing strategies. Yet banks are often reluctant to lend money to farmers for agricultural enterprises due to the lack of creditability and collateral.Therefore there is need for a research in order to effect necessary changes because activities of the monetary authorities through monetary policy affect the financial institutions and credit availability to the agricultural sector in no small measure this will further affect agricultural output positively.

1.3 Scope of Study

This research seeks to study agricultural output and the how monetary policy affects it.  The study shall be made using secondary time series data, for a span of 26 years that is from 1980 to 2006 which is sufficient and suitable for conducting a research, making new findings and relevant recommendations.

1.4 Objectives of Study

The main objectives of this research are as follows:

1) To identify the monetary policy instruments used to support the agricultural sector.

2)  To examine the impact of  prime lending rate, cash reserve ratio, agricultural credit guarantee scheme fund and  money supply on agricultural output.

3)  To find out if there is a long-run relationship between certain monetary channels and variables such as real exchange rates, monetary policy rate, private investments in agriculture, agricultural credit guarantee scheme fund, and agricultural output.

1.5 Significance of Study

Most researches on the Nigerian agricultural sector has not been specific enough in terms of laying emphasis on credit availability in relation to monetary policy and the actions of the Central Bank of Nigeria as it affects the rural farmer and agricultural businesses, which affect the total agricultural output in the economy.

This research is specific, it emphasizes the effect of the  government’s actions through monetary policy on agricultural output, which will immensely contribute to current knowledge on the topic under research.

1.6 Research Questions

1)  What effect(s) will monetary policy instruments have on  agricultural output?

2)  How can we use liquidity ratio, prime lending rate, cash reserve ratio, agricultural credit guarantee scheme fund and  money supply to enhance agricultural crop output?

3)  Is there a long-run relationship between  real exchange rates, monetary policy rate, private investments in agriculture, agricultural credit guarantee scheme fund, and agricultural output?

1.7  Hypothesis of the Study

Ho:  there is no relationship between liquidity ratio, prime lending rate, cash reserve ratio, money supply, ACGSF and agricultural output.

H1: there is a relationship between liquidity ratio, prime lending rate, cash reserve ratio, money supply, ACGSF and agricultural output.

Ho: there is no long-run relationship between real exchange rate, MPR, investment, ACGSF and agricultural output.

H1: there is a long-run relationship between real exchange rate, MPR, investment, ACGSF and agricultural output.

1.8 Methodology of the Study

A Descriptive Statistical Analysis as well as an Econometric Analysis using the Johansen cointegration test and a vector error correction method (VECM)  were the methods employed to carry out an investigation on the subject matter.

1.9 Data Sources

Data for this study is be obtained from CBN Annual Report, Statement of Accounts (2006), Statistical Bulletin (2006) volume 16 and the United Nations Statistical Database.

1.10 Outline of Chapters

This study is divided into five chapters where chapter one is the introduction, chapter two is made up of literature review and theoretical framework, chapter three consists of the research methodology, chapter four carries out the data interpretation and analysis, and finally chapter five gives a summary, findings and conclusion and ends with a recommendation.