The Effect Of Monetary Policy On Agricultutral Output In Nigeria

The Effect Of Monetary Policy On Agricultutral Output In Nigeria

Chapiter 1

Introduction

Background Information for the Study

A nation has sustainable food security because it produces enough food to feed its citizens and even exports these goods to other underdeveloped nations, generating foreign exchange that, in turn, raises the national income over time. The importance of agriculture in a country’s economic growth and development cannot be understated. All other economic sectors, particularly the industrial sector, are supported by the agriculture sector. Inadequate funding and credit are a challenge for Nigeria’s agricultural industry in terms of starting out, making investments, and growing. Credit is largely made available to the agriculture sector thanks to monetary policy’s impact on the financial sector of the economy.

A collection of actions intended to control the price, supply, and quantity of money in an economy is referred to as monetary policy. It can be characterized as the skill of managing credit facility movement and direction in order to maintain stable prices and economic growth (CBN, 1992). In the context of Nigeria, monetary policy refers to the actions taken by the Central Bank of Nigeria to control the money supply, including the open market operation (OMO), discount rate, reserve requirement, moral persuasion, direct control of banking system credit, and direct interest rate regulation (Iyoha, 2002).

The CBN Act of 1958 gives the Central Bank of Nigeria (CBN) its authority. According to Section One of CBN Decree No. 24 of 1991, the Bank’s primary goals are to issue legal tender currency in Nigeria, maintain external reserves to protect the legal tender currency’s value abroad, advance monetary stability and a stable financial system in Nigeria, and serve as a banker and financial adviser to the Federal Government (CBN, 2006). Therefore, the main monetary authority is the central bank.

Agriculture is linked to all other economic sectors and is crucial for producing the broad-based growth required for development. The agricultural sector is a catalyst and a major source of raw materials for the industrial sector, and it provides the majority of the staple foods consumed by the 120 million Nigerians. 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. Nigeria’s economic situation has been dominated by advancements in the oil industry since the middle of the 1970s, yet the nation is still primarily agrarian. Its population is more than 70% dependent on agriculture, which accounts for around 25% of GDP and 60% of non-oil exports.

The availability of credit and financing for start-up, investments, and expansion is made possible by monetary policy, which makes it easier for agricultural businesses to be established. Through tools of monetary policy, the CBN manages credit availability. Through agricultural banks and other financial institutions, these instruments have an impact on agricultural output. Therefore, monetary policy is a key issue in our research of agricultural output.

1.2 Description Of The Issue

Nigeria was a significant exporter of agricultural goods before the quick increase in income from oil exports, particularly cocoa, groundnuts, cotton, palm oil, palm kernel, and rubber. Agricultural imports have expanded significantly since that time, whereas both the number and variety of agricultural exports have considerably decreased.

Nigeria no longer produces enough food to feed its sizable and quickly expanding population. During the 1970s, the real annual growth rate of food crop output decreased to around 2%. However, the volume of export crops decreased by 17% between 1970 and 1975, and the cost of importing food increased more than 10-fold between 1970 and 1980.

The economy as a whole suffers from low agricultural output since fewer items for food production and raw materials for industry are produced. The incapacity of Nigeria to meet the financial services needs of farmers and business owners, who make up around 70% of the population, is a significant problem. Farmers require financial resources to invest in the creation of new goods, services, production techniques, and marketing plans as well as to buy land and equipment. Banks, however, frequently hesitate to provide financing to farmers for agricultural ventures due to a lack of collateral and creditworthiness.

Therefore, research is required to make the necessary changes because the activities of the monetary authorities through monetary policy have a significant impact on financial institutions and the availability of credit to the agricultural sector, which will further positively impact agricultural output.

1.3 Study’s Purpose

The goal of this study is to understand how monetary policy impacts agricultural output. The investigation will be conducted utilizing secondary time series data over the 26-year period between 1980 and 2006, which is sufficient and appropriate for performing a research study, coming to novel conclusions, and offering pertinent recommendations.

1.4 Study Objectives

These are the major aims of this investigation:

1) To list the tools that monetary policy uses to assist the agriculture sector.

2) To assess how the money supply, cash reserve ratio, agricultural credit guarantee scheme fund, and prime lending rate affect agricultural output.

3) To determine whether certain monetary channels and variables such real exchange rates, the rate of monetary policy, private investments in agriculture, the fund for agricultural loan guarantee schemes, and agricultural output have a long-term link.

1.5 Importance of the Study

The majority of studies on the Nigerian agricultural industry have not been sufficiently detailed in terms of emphasizing credit availability in relation to monetary policy and the actions of the Central Bank of Nigeria as it affects rural farmers and agricultural businesses, which affects the economy’s total agricultural output.

This study is focused and stresses how monetary policy decisions by the government affect agricultural output, which will significantly advance our understanding of the subject.

1.6 Research Prompts

1) How will changes in monetary policy affect agricultural output?

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

3) Are real exchange rates, the rate of monetary policy, private investments in agriculture, the fund for agricultural loan guarantee schemes, and agricultural output correlated over the long term?

1.7 The Study’s Hypothesis

Ho: There is no correlation between the production of agriculture and the liquidity ratio, prime lending rate, cash reserve ratio, money supply, or ACGSF.

H1: There is a connection between the cash reserve ratio, the prime lending rate, the money supply, the ACGSF, and agricultural output.

Ho: There is no long-term correlation between agricultural output, real exchange rate, MPR, investment, or ACGSF.

H1: The real exchange rate, MPR, investment, ACGSF, and agricultural output have a long-term link.

1.8 The Study’s Methodology

The techniques used to conduct a study on the subject were descriptive statistical analysis, econometric analysis, and the Johansen cointegration test and vector error correction method (VECM).

1.9 Sources of Data

The CBN Annual Report, Statement of Accounts (2006), Volume 16 of the Statistical Bulletin (2006), and the United Nations Statistical Database served as the sources of data for this study.