The significance of agriculture in bringing about economic growth and development of a nation cannot be underestimated, the reason why a nation possesses sustainable food security, is because it produces enough food to feed her citizens and even export these goods to other needy countries thereby generating foreign exchange which in turn increases the national income in the long-run. The agricultural sector serves all other sectors in the economy especially the industrial sector.
The problem facing the Nigerian agricultural economy is inadequate capital and credit for start-up, investment and expansion. Monetary policy through its influence on the financial sector of the economy plays a major role in making credit available to the agricultural sector. Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy. It can be described as the art of controlling the direction and movement of credit facilities in pursuance of stable price and economy growth in an economy (CBN, 1992).
Monetary policy in the Nigerian context refers to the actions of the Central Bank of Nigeria to regulate the money supply which could be through discretional 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 (Iyoha, 2002).
The Essay on The Different Types of Unemployment in the Economy and Policies
Describe the different types of unemployment in the economy and explain the government policies used to address them Australia suffers from different types of unemployment in the economy, which is undesirable since Australia aims to achieve full employment; a major macroeconomic objective of the Australian Government. The main forms of unemployment which the Australian economy suffers from are ...
The Central Bank of Nigeria (CBN) derives its mandate from the CBN Act of 1958. Section one of the CBN Decree No. 4 of 1991, stipulates that the principal objects of the Bank shall be to issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency, promote monetary stability and a sound financial system in Nigeria, and act as banker and financial adviser to the Federal Government (CBN, 2006).
Therefore the central bank is the principal monetary authority. Agriculture in the context of the economy is tied with the various sectors and is essential for generating broad based growth necessary for development.
Agriculture is fundamental to the sustenance of life and is the bedrock of economic development, especially in the provision of adequate and nutritious food vital for human development, the sector is a catalyst and major source of raw materials for the industrial sector and provides most of the staple food consumed by the 120 million Nigerians. Although developments in the oil sector have dominated Nigeria’s economic scene since the mid-1970s, the country remains basically agricultural. More than 70 percent of its population depends on agriculture, which contributes roughly 25 percent of GDP and 60 percent of non-oil exports.
Monetary policy facilitates the establishment of agricultural businesses through availability of credit and finance for start-up, investments, and expansion. The CBN controls the availability of credit through monetary policy instruments. These instruments affect agricultural output through agricultural banks and other financial institutions. Therefore, in our study of agricultural output monetary policy is a very important factor. 1. 2 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.
The Term Paper on Input Output Economics Total Sector Table
Table of Contents Aim of the study / paper II Introduction III The Beginning of Input-Output Economics IV The Leontief Paradox V The Input-Output Model Today VI Calculation of the Input-Output Table Multipliers VII Computer Program for the Inverse of a Matrix VIII Regional Input-Output Analysis VIII I The Use of Input-Output Analysis with Regard to the Environment IX Conclusion X Bibliography List ...
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. . 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. 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 ) 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 guarantees scheme fund and money supply to enhance agricultural crop output? 3) Is there a long-run relationship between real exchange rates, monetary policy rate, and 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 ratios, prime lending rate, cash reserve ratio, money supply, ACGSF and agricultural output.
The Essay on Agricultural pricing policies and distributional issues
The actual cause of food insecurity across the globe has been a longstanding debate among the social, economic, political, and scientific fronts of the society. It is a common assertion that the cause of food insecurity revolves in ineffective agricultural pricing policies and distribution issues (Case, etl, 2008). On the contrary, some individuals have blamed the problem to natural causes such as ...
H1: there is a relationship between liquidity ratios, 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. . 9 Data Sources Data for this study is 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.
CHAPTER TWO LITERATURE REVIEW AND THEORETICAL FRAMEWORK 2. 1 Introduction Nigeria is endowed with rich agricultural resources but the agricultural sector suffers stunted growth, more than fifty per cent of the country’s agricultural land lie fallow, and the remaining per cent of cultivated agricultural land is handled by smallholders and traditional farmers who use udimentary production techniques, having poor access to modern inputs with resultant low yields, inadequate credit facilities resulting in poor infrastructural facilities, inadequate access to markets leading to low income, land and environmental degradation bringing about low production, and inadequate research and extension services discouraging expansion and innovation. The study on how the government through monetary policy instruments and variables affect agricultural output is necessary for accelerated growth in the sector because the development of the sector rests on its access to credit.
The Essay on How far were Mao’s agricultural policies responsible for the scale of the famine?
Mao’s agricultural policies could certainly be seen as responsible for the scale of the famine or at least as a huge factor contributing towards it. Other factors, such as the conspiracy of silence, bad weather and withholding information by peasants and government officials were also partly responsible for the scale of the famine; however Mao’s policies played the biggest role in causing the ...
These instruments that affect agricultural output could be in the form of moral suasions, directives, prime lending rate, liquidity ratio, cash reserve ratio, reserve requirement and money supply among others. This chapter starts by researching the historical background of agriculture and monetary policy in Nigeria, a theoretical framework for the variables used, followed by a review of current literature. 2. 2 Monetary Policy and Agriculture in Nigeria
The Government has instituted various policies to achieve its aims of increasing agricultural output by making credit available through a commercial bill financing scheme; regional commodity boards (later called national commodity boards); an export financing and rediscount facility (1987); the Nigerian Agricultural Cooperative and Rural Development Bank Ltd; community banks, People’s Bank; the Agricultural Credit Guarantee Scheme Fund (ACGSF); and the Small and Medium Enterprises Equity Investment Scheme among others.
Among others. These policies have contributed to improving the livelihoods of farmers and entrepreneurs. (Olaitan, 2006).
Also, a number of strategies have been articulated and implemented in a bid to improve on agricultural output, notably the River Basin Development Authority, integrated rural development programmes, national accelerated food production programme, Operation Feed the Nation, and green revolution and agricultural development programmes.
The Essay on Effective Financial Policies and Procedures
Medical practices establish financial policies and procedures to control patient billing and the ability to collect money for services they provide. Successful billing practices start with thorough financial policies and procedures which explain patients’ payment responsibilities in terms that are easily understood. An effective medical office financial policy is one that both staff members and ...
These programmes have combined various price and non-price incentives in attempts to restructure the agricultural sector, increase efficiency and raise production (Iyoha and Oriakhi, 2002).
In the pre-SAP era, government philosophy of agricultural development was characterized by minimum direct government intervention in agriculture, Government efforts were merely supportive of the activities of these farmers and government efforts largely took the form of agricultural research, extension and export crop marketing, and pricing activities.
Operation Feed the Nation (1976-79) and the Green Revolution Programme (1979-83) were also launched during this phase. The Operation Feed the Nation (OFN) campaign, which was launched by both Federal and State military governments in 1976, had the objectives of mobilizing the country towards self-sufficiency and self-reliance in food through increased food production, encouraging citizens who hitherto relied on buying food to grow their own. The OFN programme was later integrated into the Green Revolution programme launched by the civilian government of the Second Republic.
Two important initiatives that were part of these programmes were the setting up of the Nigerian Agricultural and Co-operative Bank (NACB) and the Agricultural Credit Guarantee Scheme Fund (ACGSF).
Their main objective was the provision of adequate finance to farmers at affordable terms. According to Manyong et al (2003), monetary policies that were of relevance to agriculture during the period before SAP (Structural Adjustment Policy) centered mainly on those designed to direct credit to the agricultural sector on concessionary terms.
The Central Bank of Nigeria stipulated minimum percentages of commercial and merchant bank loans that should go to the agricultural sector, the launching of a Rural Banking Scheme in 1977 under which designated commercial banks were required to open specified numbers of rural branches in different parts of the country and with at least 40 per cent of the total deposit in these rural banks lent to borrowers within those rural areas.
Agricultural Credit Guarantee Scheme Fund (ACGSF) was launched in 1977 to reduce the risk borne by commercial banks in extending credit to farmers under this scheme, the Central Bank of Nigeria guaranteed up to about 75 per cent of the value of the principal and interest on loans granted to farmers by any commercial bank up to some stipulated maximum amounts for individuals and corporate bodies, as a matter of policy, the naira was allowed to appreciate in this period.
The Essay on European Agricultural Policy
European Common Agricultural Policy (CAP) isthe set of regulations and practices endorsed by the EU to bestow a common and integrated policy on agriculture which proved a capacity to accommodate and alter in the face of new challenges. Its primary aims are: increasing agricultural productivity with the help of technological progression, stabilizing markets for agricultural products, ensuring ...
In the period, three exchange rate systems were adopted. The fixed rate system was adapted from 1960 to 1972, the managed floating system was adapted from 1973 to 1978, while the pegged system (i. e. pegged to a currency basket) was adapted from 1979 to 1985 (Iwayemi 1995).
In the period between 1986 and 1994 which is the SAP era, the structural adjustment program had been ssigned the objectives of restructuring and diversifying the economy’s production base, rationalizing consumption patterns, and reducing the economy’s dependence on petroleum exports and commodity imports, expanding non-oil exports, reducing the import content of locally produced goods, attaining self-sufficiency in food and raw material production within the shortest time possible, rationalizing the country’s monetary and fiscal policies, liberalizing the country’s external trade and payments systems and adopting appropriate measures to give the private sector a larger role in the domestic economy, increase the reliance of the economy on market forces, and reduce administrative control of the economy by Government. Clearly, most of the objectives depended critically on agriculture for their achievement. Hence, it might be assumed that agriculture was the cornerstone of the structural adjustment program.
As far as Nigeria was concerned, and with particular reference to the country’s agricultural sector adjustment process, the economic philosophy underlying the structural adjustment program had as its key elements the principles that agriculture was essentially a private-sector business and the role of Government must be largely facilitating and supportive of private sector initiative. The agricultural economy should be as free of government administrative control as possible and market forces must be allowed to play a leading role in directing the economy; the agricultural economy should be more inward looking and self-reliant by depending more on local resources while also ensuring self-sufficiency in food production and the supply of raw materials to industries; the agricultural economy should serve as a primary avenue for the diversification of exports.
The agricultural policy for Nigeria was launched in 1988; the agricultural policy document contained the SAP package as it related to the agricultural sector. The overall policy objective was to achieve self-sustaining growth in all the agricultural subsectors and the realization of structural transformation for socioeconomic development of the rural areas. Specifically, policy aimed to attain self-sufficiency in basic food commodities, increase production of agricultural raw materials, increase production and processing of export crops, and diversify the country’s export base. The post SAP era (1994-date) includes the New Agricultural Policy established in 2001 which is an attempt to overcome the pitfalls of the past policies. It has the overall goal of attaining elf-sustaining growth in all subsectors of agriculture, the structural transformation necessary for the overall socioeconomic development of the country, and the improvement of the quality of life of Nigerians its policies are being pursued within the framework of NEEDS (National Economic Empowerment and Development Strategy).
NEEDS was formulated with the objective of reducing poverty, generating employment and creating wealth. In 2003, credit delivery to real sector was encouraged through the Small and Medium Industries Equity Investment Scheme (SMIES) and an incentive of lower Cash Reserve Requirement (CRR) regime was prescribed for those banks that increased their credit allocation to the real sector by 20 per cent or more. Moreover, the Bank provided guarantees for agricultural loans under the Agricultural Credit Guarantee Scheme (ACGS).
As part of the comprehensive reform in the financial system and in line with its developmental role, the CBN launched the National Micro Finance Policy in 2006. The policy was propelled by the need to reduce poverty, generate employment, and stimulate economic growth through the provision of credit and other financial services on a sustainable basis to the economically active poor, who are not adequately catered for by the existing formal system. The main objectives of the policy are to make financial services accessible to a large segment of the potentially productive Nigerian population which otherwise would have little or no access to financial services e. g. ural farmers, to promote synergy and mainstreaming of the informal subsector into the national financial system. An Agricultural Credit Support Scheme, hereafter referred to as ACSS, has been established through the initiative of the Federal Government and the Central Bank of Nigeria with the active support and participation of the Bankers Committee. The purpose of the ACSS is to develop the agricultural sector of the Nigerian economy by providing credit facilities to farmers at single digit interest rate. This is to enable farmers exploit the untapped potentials of the sector with a view to reducing the cost of agricultural product ion, and increase output on a sustainable basis.
These efforts are expected to lead to fall in prices of agricultural produce, especially food items, thereby leading to reduction in inflation rate, generate surplus for export, diversify the revenue base and increased foreign exchange earnings for the country. 2. 3 Theoretical Framework This can also be referred to as the Analytical framework of this project, this will provide a basis for our empirical analysis. This section will be examining the theories that relate to the research questions and hypothesis in terms of the impact of monetary policy on agricultural output. 2. 4. 1 Supply-Leading and Demand-Following Hypothesis The “finance-led growth” hypothesis postulates the “supply-leading” relationship between financial and economic developments.
It is argued that the existence of financial sector, as well-functioning financial intermediations in channeling the limited resources from surplus units to deficit units, would provide efficient allocation resources thereby leading the other economic sectors in their growth process. Indeed, a number of studies have argued that the development of financial sector has significantly promoted economic development (Schumpeter, 1912; Levine, 1997).
In contrast, the “growth-led finance” hypothesis states that a high economic growth may create demand for certain financial instruments and arrangements and the financial markets are effectively response to these demands and changes.
In other words, this hypothes issuggests a “demand following” relationship between financial and economic developments. The impact of economic growth on the financial development has been documented inRobinson (1952) and Romer (1990), among others. According to Patrick (1966), typical statements indicate that the financial system somehow accommodates growth when it is efficient or restricts growth of real per capita output if it is inefficient therefore ineffective and unable to mobilize funds to the deficit sectors of the economy. For example, It seems to be the case that where enterprise leads finance follows. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.
We may term as “demand-following” the phenomenon in which the creation of modern Financial institutions, their financial assets and liabilities, and related financial services is in response to the demand for these services by investors and savers in the real economy. In this case, the evolutionary development of the financial system is a continuing consequence of the pervasive, sweeping process of economic development. The emerging financial system is shaped both by changes in objective opportunities the economic environment, the institutional framework-and by changes in subjective responses-individual motivations, attitudes, tastes, preferences.
The nature of the demand for financial services depends upon the growth of real output and upon the commercialization and monetization of agriculture and other traditional subsistence sectors. Patrick advocated that in the earliest stages of economic development proactive government interventions in the form of institution building, suppressed interest rates and directed credit policies were necessary to provide the financial impetus necessary for economic development. Through the supply-leading thesis, Patrick urged that financial institutions play a leading role in promoting growth by ensuring the availability of low cost credit to potential investors.
Consequently, it was prudent to build institutions well in advance of demand for their services, and interventionist policies put in place to make finance a catalyst in real sector development. Patrick, however, acknowledged a demand-following thesis when he argued that the financial sector expands as a consequence to the demand created from growth within the real economy and is thus dependant on stimulation from market sources (Gockel, 2002).
According to Woo (1986), Patrick identified two possible patterns in the relationship between financial development and the economy. In the first, growth induces an expansion of the financial system. According to this view, called “demand-following,” the lack of financial growth is a manifestation of the lack of demand for financial services.
As the real side of the economy develops say improvement in agricultural output, its demands for various new financial services materialize, and these are met rather passively from the financial side. In the second pattern the expansion of the financial system precedes the demand for its services. Channeling scarce re-sources from (small) savers to (large) investors according to relative rates of return, the financial sector precedes and induces real growth. The deliberate establishment and promotion of financial institutions in many less developed countries (LDCs) might reflect this belief in the “supply-leading” relationship between the two developments.
When there is an increase in production in the real economy say agricultural sector, demand for financial intermediation will tend to increase this is a demand-following situation and when there is availability of credit facilities as a result of government intervention in the financial sector through the manipulation of monetary policy instruments say a reduction in cash reserve requirement of agricultural banks in Nigeria or prime lending rate to the agribusinesses and maybe financial development in the economy as a whole, agricultural output will increase due to availability of credit for startup, investment in agriculture and expansion of agribusinesses, this is a supply-leading scenario. 2. 4. 2 The Monetary Transmission Mechanism Monetary transmission mechanism is the mechanism through which changes in money supply affects the decisions of firms, households, financial intermediaries, investors and ultimately alters the level of economic activities and prices it can be thought of as encompassing the various ways in which monetary policy shocks propagate through the economy ( Kuttner, 2003).
To examine the effect of monetary policy on agricultural output in Nigeria, it is essential to understand the channel through which monetary policy transcends to affect output and prices in the economy. According to Kuttner (2003), there are four channels through which monetary policy transcends into the economy namely: interest rate, exchange rate, bank lending rate, and the wealth channel. But in this study we will be laying emphasis on the first three channels. The interest rate channel is the primary mechanism at work in conventional macroeconomic models. The basic idea is straightforward: given some degree of price stickiness, an increase in nominal interest rates, for example, translates into an increase in the real rate of interest and the user cost of capital.
These changes in turn lead to a postponement in consumption or a reduction in investment spending. The exchange rate channel is an important element in conventional open-economy macroeconomic models. The chain of transmission here runs from interest rates to the exchange rate via the uncovered interest rate parity condition relating interest rate differentials to expected exchange rate movements. Thus, an increase in the domestic interest rate, relative to foreign rates, would lead to a stronger currency and a reduction both in net exports and in the overall level of aggregate demand. The bank lending channel and the balance sheet channel, also allow the effects of monetary policy actions to propagate through the real economy.
According to this lending view, banks play a special role in the economy not just by bank deposits that contribute to the broad monetary aggregates, but also by holding bank loans for which few close substitutes exist. An open market operation that leads first to a contraction in the supply of money and then to a contraction in bank deposits requires banks that are especially dependent on deposits to cut back on their lending and firms that are especially dependent on bank loans to cut back on their investment spending. Financial market imperfections confronting individual banks and firms thereby contribute, in the aggregate, to the decline in output and employment that follows a monetary tightening. 2. Review of Current Literature In Less Developed countries like Nigeria markets and financial institutions are highly distorted, often externally dependent and spatially fragmented. Nigeria lacks transparency (full disclosure of the quality of loan portfolio).
Nigeria is operating a dual monetary system: a small and often externally controlled or influenced financial institution, catering to the financial needs of the middle-and upper-class local and foreign businesses in both the agricultural and industrial sectors serving the needs of the wealthy industrial elites while neglecting the requirement of the relatively poor and the agricultural economy.
Monetary policy in developed countries grossly simplifies a complex process, it does point out two important aspects that developing countries such as Nigeria lacks: the existence of highly organized, economically interdependent, and efficiently functioning money and credit markets. There is minimum interference in the flow of financial resources in and out of saving banks, micro finance banks, commercial banks, and other nationally regulated public and private financial intermediaries. There tends to be consistency and relative uniformity of interest rates in different sectors of the economy and all regions of the country. Financial intermediaries are thus, able to efficiently allocate and mobilize surplus private savings to the deficit sectors of the economy (Todaro, 2003).
If developing countries such as Nigeria fails in the task of developing the banking facilities, saving institutions, reorganization of agricultural and industrial credit, and a sound central banking the agricultural economy which is a vital and sensitive sector would either go slow, even stagnate and this will invariably compel it to switch over its economic system to overall planning and allocation of resources through direct state control (Jinghan 2005).
The role of Agriculture remains significant in the Nigerian economy despite the strategic importance of oil. According to Our Planet (2006), the importance of the agricultural sector includes, providing adequate and affordable food for increasing populations, supplying raw materials to growing and diversifying domestic industrial sectors, releasing labour for the growing industrial sector, enlarging the size of an effective market for the products of the domestic industrial sector, providing employment and livelihoods, and alleviating poverty, for a large percentage of the rural population.
And finally, agriculture earns and saves foreign exchange and accumulates domestic savings for investment and capital formation, because the more prosperous the agricultural and rural sector, the more people can save money, paving the way for a thriving banking sector that can finance further industrial development without relying unnecessarily on foreign debt. If agriculture is this important in the economy factors that will help accelerate growth in the sector must be considered, such as access to finance, which is the problem of most less developed countries. The monetary policy of the Nigerian economy will help propel this cause as its policies have great influence on the financial sector of the country.
Changes in the interest rate will have an effect on a farmer’s decision to borrow credit and thus on the farm production and inventory decisions. If government conducts a contractionary monetary policy that is, reduces the money supply which will increase the interest rate the agricultural sector will be affected in two ways, first a higher interest rate will increase the cost of borrowing for production loans which in turn raises the cost of production and thereby eventually reduces agricultural output, at the same time the higher interest rate will raise the storage cost of commodity reserves and cause farmers to reduce inventories, thereby decreasing the demand for stock inventories ( Devadoss & Meyers 1986).
According to Kristinek & Anderson (2002), Edward Schuh (1974) argued that the overvalued currency causes the decline in the agricultural exports due to their relative expense in other countries, as it leads to depressed prices and lower farm profits, causing an undervaluation of farm resources and oversupply of output. Schuh’s view was that while many variables affect agriculture, the exchange rate plays a role in all aspects of agriculture. CHAPTER THREE RESEARCH METHODOLOGY 4. 1 Introduction This chapter seeks to highlight the method used to carry out an empirical research on the effect of monetary policy on agricultural output in Nigeria, and also the specification of the model, description of variables, method of data presentation and analysis, and sources of data and limitations of the method. 4. 1 Model Specification The main focus of this study to determine the extent to which monetary policy have influenced agricultural output in Nigeria.
From our Analytical Framework and Literature review a model is hereby specified in a functional form as follows: AGRUT = f (REER, MPR, ACGSF, FPI) …………………… ……………………… (1) Where: AGRUT – Agriculture output; REER – Real Exchange Rate; MPR – Monetary Policy Rate; ACGSF -Agricultural Credit Guarantee Scheme Fund; FPI – Foreign Private Investment. In an explicit form, it is specified as: AGRUT = ? 0 + ? 1REER + ? 2MPR+ ? 3ACGSF+ ? 4FPI + Ut …. …………………. (2) Where: ut is the error term that is assumed to be normally distributed with the mean of zero and constant variance; ? 0 = Constant term/intercept; ? 1; ? 2; ? 3; ? 4= Slope coefficient. 4. Description of Variables and A priori Expectation The Agricultural Output (AGRUT) variable captures the output of major agricultural commodities in terms of crops such as melon, groundnut, benniseed, coconuts, sheabutter, soyabeans, cottonseed, palm kernel, palm oil, groundnut oil, coffee, rubber, sugarcane, palmwine, tobacco and cocoa which contributes nearly sixty per cent of the total income generated from agricultural production in Nigeria. The AGRUT is used as the variable depending on other monetary policy variables to give a clearer empirical analysis of the topic under research. The data used to represent this variable is an annual time series secondary data from the period 1980 to 2006 obtained from the Central Bank of Nigeria; Statistical Bulletin (2006), volume 17.
The Real Exchange Rate (REER) variable measures of between two currencies specifies how much one currency is worth in terms of the other this is the nominal exchange rate adjusted for inflation, it is the value of a foreign nation’s currency in terms of the home nation’s currency. The balance of payments can be in deficit or in surplus and each of these affect the monetary base, and hence the money supply in one direction or the other. By selling or buying foreign exchange, the Central Bank ensures that the exchange rate is at levels that do not affect domestic money supply in undesired direction, through the balance of payments and the real exchange rate. The real exchange rate when misaligned affects the current account balance because of its impact on external competitiveness. An increase in exchange rate (i. e. depreciation in the value of the naira) leads to an increase in agricultural output. Therefore the a priori expectation states that there is a positive relationship between AGRUT and REER. A priori expectation states that there is a positive relationship between FPI and AGRUT. The data used to represent this variable is an annual time series secondary data from the period 1980 to 2006 obtained from the Central Bank of Nigeria; Statistical Bulletin (2006), volume 17. The monetary policy rate (MPR) variable represents the minimum rate at which the Central Bank is willing to grant credit to a bank that has need for cash. It was formerly called the minimum rediscount rate (MRR).
The Central Bank lends to financially sound Deposit Money Banks at a most favorable rate of interest, called the minimum rediscount rate (MRR).
The MRR sets the floor for the interest rate regime in the money market (the nominal anchor rate) and thereby affects the supply of credit, the supply of savings (which affects the supply of reserves and monetary aggregate) and the supply of investment (which affects full employment and GDP).
An increase in interest rates leads to a fall in agricultural output as capital for agribusinesses are limited or not available for investors and agribusiness owners to expand or even start up. There is a negative or inverse relationship between interest rates and agricultural output this makes our a priori expectation to be negative.
The data used to represent this variable is an annual time series secondary data from the period 1980 to 2006 obtained from the Central Bank of Nigeria; Statistical Bulletin (2006), volume 17. The Agricultural Credit Guarantee Scheme Fund (ACGSF) variable represents the total amount of credit made available to different states in the country. The scheme is established by the Central Bank Of Nigeria to take care of credit availability for agribusinesses and to improve agricultural output in the country. A priori expectation for this variable is a positive relationship between ACGSF and AGRUT. The data used to represent this variable is an annual time series secondary data from the period 1980 to 2006 obtained from the Central Bank of Nigeria; Statistical Bulletin (2006), volume 17.
The Foreign Private Investment (FPI) variable captures the foreign capital inflow into the agricultural sector for the period under review, this helps to know the value of agriculture in Nigeria in terms of its attractiveness to foreign investors, this variable determines the agricultural output in the economy to a large extent and it is closely linked to monetary policy variables affects the flow of capital in the economy also, the value of foreign private investment in agriculture is a function of the value of the Nigerian currency and prices, if the currency appreciates FPI in agriculture will be low because prices of goods in Nigeria will be relatively higher making the country less competitive.
If there is inflation due to high supply of money FPI will be low as a result of lack of confidence of foreign investors in the economy. Therefore the level of FPI in our study is a monetary policy variable because it shows the level of price stability due changes in the supply of money and the value of the currency. A priori expectation states that there is a positive relationship between FPI and AGRUT. The data used to represent this variable is an annual time series secondary data from the period 1980 to 2006 obtained from the Central Bank of Nigeria; Statistical Bulletin (2006), volume 17. The variables used for our descriptive statistical analysis are explained as follows: The Prime Lending Rate (PLR) variable represents the interest rate used by banks.
The term originally indicated the rate of interest at which banks lends to favored customers that is those with high credibility. The effect of a reduced or increased MPR ought to lead to reduced lending rate. Therefore a priori expectation states that as PLR (prime lending rate) increases AGRUT (agricultural output) will reduce. The data used to represent this variable is an annual time series secondary data from the period 1982 to 2006, obtained from the United Nations Statistical Database. The Cash Reserve Requirement (CRR) variable specifies the minimum reserve each bank must hold with the CBN in relation to their customers’ deposits. By reducing CRR the CBN is allowing the banks to keep more funds, which they can grant as credit to their customers.
Therefore a priori expectation states that as CRR (cash reserve requirement) increases AGRUT (agricultural output) will also increase. The data used to represent this variable is an annual time series secondary data from the period 1982 to 2006, obtained from the Central Bank of Nigeria; Statistical Bulletin (2006), volume 17. Money Supply (M2) is broad money. It measures the total volume of money supply in the economy and is defined as narrow money plus savings and time deposits with banks including foreign denominated deposits. There is excess money supply when the amount of money in circulation is higher than the level of total output of the economy.
When money supply exceeds the level the economy can efficiently absorb, it dislodges the stability of the price system, leading to inflation or higher prices of goods. Therefore a priori expectation states that as M2(money supply) increases AGRUT (agricultural output) will reduce because there will be inflation and less demand for agricultural commodities both at home and abroad because prices will rise and the value of the currency will appreciate leading to low foreign private investment and capital inflows and therefore, low agricultural output. The data used to represent this variable is an annual time series secondary data from the period 1982 to 2006 obtained from the Central Bank of Nigeria; Statistical Bulletin (2006), volume 17. 4. 3 Method of Data Analysis and Presentation.
A Descriptive Statistical Analysis method making use of averages, growth rates and graphs was employed to capture the effect of some selected monetary policy instruments due to their importance in facilitating the provision of credit to farmers and agricultural businesses. The average with five years interval from the year 1982-2006, represented as follows, 1982-1986; 1987-1991; 1992-1996; 1997-2001; 2002-2006 respectively. The focus will be on the analysis of levels and trends in key variables of interest to provide insight into their pattern of movement over time. A unit root test preceeds our empirical analysis using Augmented Dickey-Fuller (ADF) , If a time series is nonstationary, we can study its behavior for only the time period under consideration, each set of time series data will therefore be for a particular episode.
We test for unit root because the nonstationarity of a time series data makes it impossible to generalize it to other time periods therefore for the purpose of forecasting, such nonstationary time series may be of little practical value. The Johansen cointegration analysis is used to test for cointegration. According to Asfaha and Jooste (2007), Fedderke (2001) opined that the Johansen technique for cointegration test is more popular than other techniques for cointegration testing, such as the Engle and Granger and autoregressive distributed lag (ARDL) techniques. One of the reasons for its popularity is that it allows one to determine the number of cointegrating relationships present in the data.
Therefore, in this study, the Johansen approach was used to estimate the cointegrating relationships between the dependent variables and the explanatory variables. In evaluation, the maximal eigenvalue and trace statistics were generated to determine the number of cointegration vectors (r) present in the data. The trace statistic is a joint test where the null is that the number of cointegrating vectors is less than or equal to r against an unspecified or general alternative that there are more than r. The maximum eigen statistic conducts a separate test on each eigenvalue and has as its null hypothesis that the number of cointegrating vectors is r against an alternative of r+1.
Asfaha and Jooste (2007), Fedderke (2001) opined that Monte Carlo studies suggests trace statistic to be more robust to both skewness and excess kurtosis in residuals than the maximal Eigen value test, but the maximum Eigen value test will be used to identify the number of cointegrating equations in our cointegration test using the Johansen vector autoregressive model, this is due to the fact that the trace test is liable to deviate from normality. This implies that the maximum Eigen value test is more likely to give a normal result regarding the number of cointegrating equations in the model that would converge towards the long run equilibrium path. A vector error correction estimate is closely followed by the cointegration test.
Vector Error Correction Method (VECM) is applied to make sure all errors generated within the model arising from the dynamics of the model under the cointegration test at each interval are corrected in subsequent intervals. This method was first used by Sargan (1964), designed to account for errors. Due to the event of a unique cointegrating vector or equation, a VECM is appropriate to simultaneously depict the long and short run evolution of the system and correct for disequilibrium in the cointegrating relationship. If the variables are stationary then the VAR can be estimated, in which case any shock to the stationary variables will be temporary.
If the variables are nonstationary and not cointegrated, then they have to be transformed into stationary variables by differencing, before the VAR can be estimated. A Cointegrated non-stationary variable(s) require the inclusion of a vector of cointegrating residuals (adjustment matrix) in the VAR with differenced variables. This is known as a vector error correction model (VECM) (Robinson 1998).
Specifying this model in a Vector Error Correction Model (VECM) form we have: ?wt = ? wt-k + ? 1? wt-1 + ? 2? wt-2 + ? 3? wt-3 + ? 4? wt-4+ ? 5? wt-5 +ut …………………(3) Where wt = [AGRUTt ,EXRt, INTRt, ACGSFt, FPIt] is a (5x 1) vector containing the three I(1) variables and one I(0), ? i = (j=1k? j)-Ig , and ? =(i=1k? i)-Ig. Where k = 2 which is the number of Lags ;? s matrix of the long-run parameters, ? i are vectors of the short run parameters, and ut is the white noise stochastic term. This VAR contains g-variables in 1st difference term on the LHS, and k-1 lags of the dependent variables (differences) on the RHS, each with a ? coefficient matrix attached to it. The test for cointegration between the ws is calculated by looking at the rank of the ? matrix via its eigenvalues. ? = ?? `, where matrix ? represents the speed of adjustment to disequilibrium and ? is a matrix which represents up to (n-1) cointegrating relationships between the non-stationary variables. The study will also be verified using he relevant appropriate test instruments such as the sign expectation which refers to what theory says about a particular economic relation. It is usually captured by the sign (whether positive or negative) and size of the parameter estimate. Parameters in the model are expected to have sign and sizes that conform to economic theory, if they do, they are accepted. On the order hand, if they do not conform to a priori specification we either reject them and we therefore have a reason to believe that the principles of economic theory do not hold. In estimating our VECM it is required that the sign will be negative showing that there is convergence of the variables to the same long run equilibrium path following every period of disequilibrium.
The T- test will be used to determine the statistical significance of the parameter estimates. The t-statistic is used to check for the significance of the variable. In estimating our VECM, before any variable can be called significant, the rule of thumb expects that the absolute value of the t-statistic must not be less than two (2).
CHAPTER FOUR ESTIMATION AND RESULTS 4. 1 Introduction This chapter examines the empirical data on monetary policy and its effect on agricultural output in Nigeria. We begin by doing a descriptive analysis on the impact of monetary policy instruments such as the agricultural credit guarantee scheme fund, prime lending rate, cash reserve requirement, and money supply, on agriculture.
The Augmented Dickey-Fuller (ADF) is used to test for unit root so as to avoid the generation of spurious regressions that arise from time series data analysis, followed by the Johansen cointegration test and vector error correction model (VECM) respectively. 4. 2 Descriptive Analysis of Monetary Policy Instruments and Agricultural output. Table 1: Average of AGRUT and Monetary Policy Instruments (1982-2006) YEAR| AGRUT| ACGSF| PLR| CRR| M2| 1982-1986| 8167. 6| 2518. 2| 9. 8| 5. 2| 21254. 9| 1987-1991| 10604. 6| 25596. 6| 19. 2| 2. 44| 54010. 6| 1992-1996| 11858. 4| 18369. 8| 23. 4| 5. 88| 256722| 1997-2001| 14537. 4| 60383. 4| 20| 9. 68| 801408| 2002-2006| 17644. 7| 34957| 20| 8. 3| 2429874| Source: computed by the researcher with data obtained from CBN statistical bulletin and the UN.
From table 1 we see that the average value of agricultural output from the year 1982-1986 is the lowest , compared to the other averages, this period represents the pre-SAP and the SAP era, where the performance of the agricultural sector during this period was undermined mainly by disincentives created by the over valuation of the naira exchange rate and the sharp increases in foreign exchange earnings which resulted from rising oil revenues and consequently aided large food imports, an increased inflow of petro-naira which encouraged increased wages in the public sector also drained labour from the rural areas, thereby depriving the agricultural sector of the much needed manpower for its labour intensive activities. The average value of the period of 1987 to 1991 which represents the SAP period is shows an increasing value of AGRUT, caused by government policies through the structural adjustment programme to aid production in the agricultural sector. As a reflection of the increase in agricultural output and the trade liberalization policy of SAP, the value of agricultural exports rose on the average by 52. 0 per cent while its share in total exports stood at 3. 1 per cent. The profitability of some agricultural enterprises increased considerably resulting in expansion in their scale of operation.
The period between 1992-1996; and 1997-2001, represents the SAP period as well as the post-SAP period where government became more aware of the agricultural sector, the growth in the output of agricultural products during this period was slower, as aggregate output rose on the average by 3. 6 per cent. In year 2001, a new Nigerian agricultural policy was launched. The successful implementation of the agricultural policy rests upon the existence of appropriate macroeconomic policies that provide the enabling environment for agriculture to grow in equilibrium with other sectors. The growth also exceeded the target of 6. 0 per cent for the agricultural sector under the NEEDS programme.
In the period between 2002-2006 the CBN launched the National Micro Finance Policy in 2006. The main objectives of the policy are to make financial services accessible to a large segment of the potentially productive Nigerian population including rural farmers this also helped to boost and increase AGRUT as shown in table 1. The average of the agricultural credit guarantee scheme fund shows a 2518. 2 value in the period 1982-1986, the average value of the period 1987-1991 increased by a value of 23078. 4, also, in the period of 1992-1996, there was a decrease in ACGSF by an average value of 7226. 8 and the period of 1997-2001 the average value of ACGSF increased by a value of 42013. , the period of 2002-2006, the average value of the ACGSF reduced again by a whooping sum of 25426. 4 . The trend here shows a high level of fluctuation in the provision of credit by the ACGSF due to macroeconomic instability inherent in the economy as a whole. Table 2: % growth rate of the average values of AGRUT and Monetary Policy Instruments (1987-2006) YEAR| GRAGRUT| GRACGSF| GRPLR| GRCRR| GRM2| 1987-1991| 22. 98| 90. 16| 48. 95| -113| 60. 64| 1992-1996| 10. 57| -39. 34| 17. 94| 58. 5| 78. 96| 1997-2001| 18. 43| 69. 53| -17| 39. 3| 67. 97| 2002-2006| 17. 61| -72. 73| 0| -16. 6| 67| Source: computed by the researcher with data obtained from CBN statistical bulletin and the UN.
Table 2 shows the growth rate of the average values of agricultural output, the agricultural credit guarantee scheme fund, prime lending rate, cash reserve requirement, and money supply, from the period of 1987-1991; 1992-1996; 1997-2001; and 2002-2006 respectively, with a five year interval at each period. The table above shows that as the growth rate of the ACGSF value of the periods 1987-1991 and 2002-2006 respectively decreases, the growth rate of the agricultural output also falls and as it increases in periods1992-1996; and 1997-2001; respectively, the growth rate of the agricultural output in this period also rises. This will be further explained in graph 1 below. The table 2 also shows that as the growth rate of the prime lending rate in the period 1997-2001is negative, the growth rate of the AGRUT (agricultural output) in this period increases by a greater value. This will be further explained in graph 2 below.
The relationship between the growth rate of the average values of the dependent variable AGRUT (agricultural output) and a monetary policy instrument CRR (cash reserve requirement) shows that as the cash reserve requirement growth rate yields a negative value, agricultural output increases in the period 1987-1991, in the period 1992-1996, CRR increases and AGRUT falls, in the period 1997-2001, CRR falls but AGRUT increases. This analysis tallies with a priori expectation because there is an inverse relationship between the two variables. The table also shows the relationship between the growth rate of the average values of the dependent variable AGRUT (agricultural output) and a monetary policy instrument M2(money supply), as money supply falls which is shown in periods1992-1996 agricultural output increases and when money supply decreases, the agricultural output falls.
This analysis is consistent with a priori expectation because there is an inverse relationship between the two variables. Table 3: % Growth rate of the average values of AGRUT and ACGSF (1987-2006) YEAR| 1987-1991| 1992-1996| 1997-2001| 2002-2006| GRACGSF| 90. 16| -39. 34| 69. 53| -72. 73| GRAGRUT| 22. 98| 10. 57| 18. 43| 17. 61| Source: computed by the researcher with data obtained from CBN statistical bulletin and the UN. Graph 1: Relationship between the Growth rate of AGRUT and ACGSF (1987-2006) Graph 1 show the relationship between the growth rate of the average values of the dependent variable AGRUT (agricultural output) and a monetary policy instrument ACGSF (agricultural credit guarantee scheme fund) obtained in table 3.
The graph shows that as the agricultural credit guarantee scheme fund growth rate yields a negative value, agricultural output falls in the period 1992-1996, while in the period 1997-2001, ACGSF increases and AGRUT increases although not at the same proportion and in the period between 2002-2006 when ACGSF falls by a higher proportion AGRUT also decreases slightly. This analysis is consistent with a priori expectation because there is a positive relationship between the two variables. Table 4:% Growth rate of the average values of AGRUT and PLR (1987-2006) YEAR| 1987-1991| 1992-1996| 1997-2001| 2002-2006| GRPLR| 48. 95| 17. 94| -17| 0| GRAGRUT| 22. 98| 10. 57| 18. 43| 17. 61| Source: computed by the researcher with data obtained from CBN statistical bulletin and the UN. Graph 2: Relationship between the Growth rate of AGRUT and PLR (1987-2006)
Graph 2 shows the relationship between the growth rate of the average values of the dependent variable AGRUT (agricultural output) and a monetary policy instrument prime lending rate (PLR) for the period between 1987-2006 obtained in table 4. The graph shows that in the period 1997-2001 as the prime lending rate fall AGRUT increases. This analysis is consistent with a priori expectation because there is an inverse relationship between the two variables. 4. 3 Empirical Analysis of The Effect of selected Monetary Policy variables on Agricultural Output In this section, we analyze and discuss the results obtained from the data analysis. Our empirical analysis is based on the use of econometric methods. A unit root test using ADF using E-views 3 software for computation.
A descriptive statistical analysis using averages, growth rates of averages and graphs to depict the effect of selected monetary policy instruments such as changes in money supply, cash reserve requirement, and prime lending rate on agricultural output and discovered that changes in these instruments find their way into the agricultural sector by affecting output overtime. Furthermore, the Johansen vector autoregressive model was also used to test for cointegration and a long-run relationship between the monetary policy variables. And the vector error correction method was used to find out the long-run equilibrium relationship of our model. 5. 2 Findings
In our descriptive analysis we discovered that as the agricultural credit guarantee scheme influences agricultural output positively, this is due to the fact that an increase in the number of credits guaranteed, will lead to an increase in agricultural output over time, the prime lending rate affects agricultural output negatively because the higher the lending rate, the lower the numbers of credits issued in the long-run. The cash reserve ratio is also analyzed and we discovered that a high cash reserve ratio, will reduce the availability of credit, also as money supply increases, agricultural output will fall in the long-run due to inflation and a low demand for commodities.
In our empirical analysis using econometrics, the result of a long-run relationship between the monetary variables in the model and agricultural output generated from our cointegration test allowed us to go further with an error correction using Vector Error Correction Model to correct errors in successive periods generated within the current period. The results showed that about 56% of errors generated within this period in the model are corrected in subsequent period this shows that there is a long-run equilibrium relationship between the agricultural credit guarantee scheme fund, foreign private investment in agriculture and agricultural output in Nigeria which implies that there is convergence of the variables to the same long run equilibrium path following every period of disequilibrium.
Foreign Private Investment in Agriculture comes into the model because of it high sensitivity to changes in monetary policy variables such as money supply which affects the value of the currency and the general price level in the economy which are indicators potential investors look at when investing in Nigeria, this variable is also important because increase in agricultural output also depends on it. Comparing our findings we see that both methods (descriptive and econometric) provides uniform answers, our descriptive analysis concludes that monetary policy instruments cause specific changes in agricultural output overtime and our empirical analysis with the Johansen cointegration analysis and vector error correction model respectively shows there is a long-run equilibrium relationship between the monetary policy variables (ACGSF, and foreign private investment) and agricultural output. 5. 3 Conclusions This study has investigated the effect of monetary policy on the agricultural output in Nigeria.
Literature was reviewed a descriptive statistical analysis was used to identify and document the relationship between agricultural output and some selected monetary policy instruments and the Johansen multivariate cointegration method was used followed by the vector error correction model. From the study, using the descriptive statistical analysis, we find that changes in monetary policy instruments cause changes agricultural output and from our empirical analysis using econometric methods there is a long-run equilibrium relationship between the monetary policy variables (ACGSF, and foreign private investment) and agricultural output. 5. 4. 1 Limitations of Studies
Poor quality of data is a major constraint on agricultural practices in the rural areas, and also inadequate documentation and data on the agricultural policies implemented and monetary instruments used by the Nigerian government in previous years. Inadequate reliable data renders econometric analysis difficult. It is hoped that this problem will be ameliorated with the computerization of the financial system and the introduction of a transparent fiscal regime and corruption-free governance. 5. 4. 2 Suggestions for Further Studies This study has surveyed some literature on the effect of monetary policy on the growth of agricultural output in Nigeria. We also found out that monetary policy, if effectively used through financial intermediaries and financial development in the economy can lead to the growth of agricultural output.
This study still recommends that a broader and more extensive study or investigation is require and pertinent as growth and development in these sectors will bring about improvement in the standard of living and lead to economic growth in the long run, and instead of a monocultural economy, a good study an research will bring about awareness for increased development of other sectors apart from the oil sector of which overdependence of the economy on income generated from production and export of crude oil has made the financial crisis suffered by trading partners of the country Nigeria to be greatly felt in the economy In terms of reduced availability of foreign exchange. Therefore, a research is needed, one that covers both the agricultural sector in terms of other products apart from crops which this project is limited to and also all non-oil goods produced and exported in the country and how monetary policy channels, that is, both the direct and the indirect instruments will cause changes in these areas to weed out the inefficient ones so that concentration can be planned on the efficient ones.
