THE EFFECT OF MONETARY POLICY ON AGRICULTURAL OUTPUT IN NIGERIA

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THE EFFECT OF MONETARY POLICY ON AGRICULTURAL OUTPUT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

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 Central Bank of Nigeria (CBN) derives its mandate from the CBN Act of 1958. Section one of the CBN Decree No. 24 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. 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.

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