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THE IMPACT OF MONETARY POLICY ON AGRICULTURAL SECTORS PERFORMANCE IN NIGERIA.

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 Dec 31, 2020 |  09:38 pm |  656

Abstract.

The study investigates THE IMPACT OF MONETARY POLICY ON AGRICULTURAL SECTORS PERFORMANCE IN NIGERIA FROM THE PERIOD 1986 TO 2017. The study adopted Ordinary   Least Squares Model to analyze the data. The variables used include GDP from agricultural output(GDPA), Money Supply (MS), Exchange. Rate (EXCR), Interest rate(INTR), Operational agricultural credit guarantee scheme (ACGSF), Average total Rain fall (ATR), Distribution of commercial banks loan and agriculture, forestry, fishery (LARG). The research concludes that there exist a significant relationship between monetary policy and agricultural sector performance in Nigeria. The Government should increase the budgetary allocation to agricultural sector in a consistent manner due of the primary and vital importance it plays in the national economy, hoping that with proper monitoring of fund, it would contribute more significantly to the economy of the country. In addition an effective utilization of these allocated funds is also advocated and all areas of wastage blocked.    

 The study thus recommend that the INTR, ACGS, and ATR were non-significant in agricultural development in Nigeria. According to empirical literature, in the care of interest rate, entrepreneur find the interest rate too high to borrow from financial market and money loose value with the existence of high inflation also with fluctuation in interest rate.


 

Abstract.

The study investigates The Impact of Monetary policy on Agricultural Sectors Performance in Nigeria from the period 1986 to 2017. The study adopted Ordinary   Least Squares Model to analyze the data. The variables used include GDP from agricultural output(GDPA), Money Supply (MS), Exchange. Rate (EXCR), Interest rate(INTR), Operational agricultural credit guarantee scheme (ACGSF), Average total Rain fall (ATR), Distribution of commercial banks loan and agriculture, forestry, fishery (LARG). The research concludes that there exist a significant relationship between monetary policy and agricultural sector performance in Nigeria. The Government should increase the budgetary allocation to agricultural sector in a consistent manner due of the primary and vital importance it plays in the national economy, hoping that with proper monitoring of fund, it would contribute more significantly to the economy of the country. In addition an effective utilization of these allocated funds is also advocated and all areas of wastage blocked.     

 The study thus recommend that the INTR, ACGS, and ATR were non-significant in agricultural development in Nigeria. According to empirical literature, in the care of interest rate, entrepreneur find the interest rate too high to borrow from financial market and money loose value with the existence of high inflation also with fluctuation in interest rate.


CHAPTER ONE

INTRODUCTION

1.1       Background of Study

Since the inception of modern economy, the attainment of a high level of economic growth and development has always been set as the core of economic policy making in most countries of the world, be it in the developed or developing economies. In Nigeria, for instance, planners since independence have made series of painstaking and conscious efforts to set macro-economic goals with the view of achieving high level of economic development through the formulation and implementation of national development plans. The objectives of these policies have risen from one plan to other portraying changing in the economic environment and circumstances.

The major macro-economic policies that have been hitherto employed by the government and monetary authorities (i.e. Central Bank of Nigeria), to consummate the objectives of these plans is principally monetary policies. Although, the policy has been more often than not employed, it should be pin-pointed that monetary policy formulation and execution is easily the most important activity of the Central Bank today because of the impact of this activity on economic development and welfare.

Money or credit is an indispensable and inevitable variable in any economy that cuts across every sector – agricultural, industrial, commerce and so on. It is money or credit that forms the basis of monetary policy. Therefore, monetary policy can be defined as a tool of effective changes in the cost and direction of flow of credit in an economy. Monetary policy is the process by which the monetary authority of a country, typically the Central Bank or Currency board, controls either the cost of very short-term borrowing or the monetary base, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, employment creation, output growth and sustainable development. While the objectives of monetary policy include price stability, full employment and economic growth, targets of monetary policy refer to the variables such as supply of money or bank credit, interest rates which are sought to be changed through the monetary policy instruments such as open market operation and selective credit control etc. so as to attain the laid out objectives (Ahuja 2013).  

Contractionary or expansionary depending on existing circumstances, the success of monetary policy in an economy depends on the operating economic environment, the institutional framework adopted and implementation with a view that there is a stable relationship between the quantity of money in an economy and her economic activities with the prime aim being to make sure that money supply is in consonance with the growth level of the economy without committing errors (Nzotta & Okereke 2009).    The manipulation of monetary policy through money supply and interest rate is done by the CBN as the monetary authorities of a country through the use of monetary policy instrument which include Minimum Rediscount Rate, Open Markets Operations (OMO); Cash Reserve Requirements, Liquidity Ratio, among others. Depending on the aim, the central bank reduces or increases the minimum discount rate if the aim is to increase or reduce liquidity and investment, with the commercial banks in turn, increasing or reducing the interest rate charged to borrowers so as to attract borrowing at low interest rate or wade them off. Open Market Operation also involves the buying and selling of treasury bills, treasury certificates, commercial papers etc. by the CBN so as to determine the level of money in circulation. The reserve requirement also known as the reserve ratio requires commercial banks to put a certain fraction of their reserves behind their demand and time deposit liabilities. This can be manipulated to reduce the ability of commercial bank to make loans to the public by simply increasing the ratio and enhancing their lending position by reducing the rate (Jhingan 1997).

However, the agricultural sector which used to be the backbone of the Nigerian economy in the 1960s was neglected and consequently in share of total domestic output dropped from nearly 60% in 1960s to about 35% by 1970, with the huge earnings from crude oil export, while non-oil exports became virtually extract. The government became the prime mover of the economy through direct participation in basic production of goods and services as well as provision of infrastructure, while efforts are intensified in using other public instrument basically monetary policies to activate the speedy growth of the agricultural sector (Ezeugoh 1987). The sector suffered neglect with the sector’s contribution to GDP declining to 35% in 2014 from 65.7% in 1957 leading to food insecurity and increased level of poverty in the country with the poverty level standing at 33.1% in 2013 (NBS 2014).

The qualitative instruments are tools not directed towards the quality or use of credit, but are used for discriminating between different uses of credit. They include special deposits, interest ceilings, stabilisation securities, selective credit controls; direct credit controls. They are guidelines or administrative order given by the central bank to guide the activities of commercial banks while moral Suasion involves the use of friendly but persuasive instructions by the central bank to persuade commercial banks to adopt a particular policy and operate in a particular direction for the realization of specified government objectives (Gbosi 2005). Monetary policy thus becomes an indispensable and inevitable variable in any economy that it cuts across every sector, agricultural sector inclusive.  

The agricultural sector is seen as one of the major sectors in the economy and a key determinant of long run economic development in Nigeria with the sector contributing to development of an economy through production of goods, foreign exchange and exports. In the global world, the contribution of agriculture in food production has been worsening and resulted in food price hikes in 2007 and 2008 (Enoma 2010). This prompted the inclusion of food security in the G-8 Summit in Japan in 2008 and led to the creation of Global Agriculture and Food Security Programme (GAFSP), with countries encouraged to release surplus food stocks, remove export restrictions and raise $22 billion over three years for agricultural investment (Timothy and Sophia 2012).

Due to the failing agricultural sector, the Nigerian government became directly involved in boosting the agricultural sector, with several large scale agricultural projects and programmes launched and established while concessionary interest rate structure was employed with direct cheap credit to agricultural sector. Despite these efforts of government in boosting the performance of the sector, the sector is still not witnessing significant development.

1.2       Statement of Research Problem

Of recent, the agricultural sector in Nigeria has not been able to fulfil its traditional role of feeding the population, meeting the raw materials needs of industries, as well as providing substantial export earnings for the economy. Indeed, the contribution of the sector to Gross Domestic Product (GDP) has been falling, not necessarily because a strong industrial sector is displacing agriculture but as a result of low productivity. The largely subsistence agricultural sector has failed to keep up with rapid population growth.

Nigeria is Africa’s most populous country and the country, once a net exporter of food, now imports food. Emerging problems which constrained the full realization of the potentials in the agricultural sector include: inadequacies in the supply and delivery of farm inputs, shortage of working capital, low level of technology, diseases and pest infestation, poor post-harvest processing and shortage, technology, environmental hazards, labour and land use constraints. Most of these problems could be solved with the appropriate monetary policy.

The need to correct the existing structural distortions in Nigerian agricultural sector and put the economy on the path of sustainable growth is therefore compelling. This raises the question of what monetary policy to adopt to develop the agricultural sector in order to realize the potentials of the sector. This is the main thrust of this study.

1.3       Objectives of the Study

The objectives of the study include:

1.   To assess the impact of monetary policies in determining the performance level of agriculture in Nigeria for the period 1986 to 2017.

2.   To evaluate the performance of the agricultural sector in Nigeria over the years.

3.   To examine the nature of the relationship that exists among some monetary policy instruments and agricultural sector growth in Nigeria.

1.4       Research Questions

The study aims at answering the following questions;

1.   What is the impact of monetary policies in determining the performance level of agriculture in Nigeria for the period?

2.   What is the relationship between interest rate and the agricultural sector in Nigeria?

3.   What is the relationship between monetary policy and agricultural sector growth in Nigeria?

1.5       Research Hypotheses

The following hypotheses were tested;

H01: Monetary policy has no impact on agricultural performance in Nigeria.

H02: Interest rate has no relationship on agricultural performance in Nigeria.

H03:  Monetary policy has no relationship agricultural sector growth in Nigeria

1.6       Significance of the Study

This research is expected to add to the existing works that dealt with the role of monetary policy in specific productive sectors of the Nigerian economy. Amongst those that are expected to benefit from this study are the policy makers at both the federal level and the state level, who are keen to know the role public policy plays in agricultural development in Nigeria. Although this work may be most significant to the above group, the various public ministries, especially the Federal (or State) ministry of agriculture should obtain the findings of the study relevant, since they are responsible for creating impressions upon which the policy makers (whom they are also part of) base their policies. This work is also expected to benefit my fellow researchers who may be interested in knowing what literature already has on the role monetary policy plays in agricultural development in Nigeria.

1.7       Scope and Limitation

The economy is a large component with lots of diverse and sometimes complex parts. However, this study will only focus on some macroeconomic variables such as monetary policy and agricultural productivity. This study will cover all the facets that make up the monetary policy, but shall empirically investigate the effect of the major ones. The empirical investigation of monetary policy and agricultural sector performance in Nigeria shall be restricted to the period between 1986 and 2017.

This study shall contain five chapters, the first chapter shall contain the background of the study, the statement of the research problem, the objectives of the study, the research questions etc. that would guide the study. Chapter two summarizes the opinions of different authors on the subject matter. Chapter three states the methodology adopted in the study. Chapter four focuses on the presentation and interpretation of the regression results. The last chapter, which is chapter five, presents the summary of the findings, conclusion and appropriate recommendations.

 

REFERENCES

Abdulrahman, B.M.A. (2010). The Role of Monetary Policy on Economic Activity in Sudan: An Empirical Investigation, 1990-2004. Journal of Human Science, Issue 44. 

Afolabi L. (1998). “Monetary Economics” Perry Barr Ltd Lagos, 1st Revised    Edition.

Ahuja, H.L. (2013). “Modern Economics”, S. Chand Higher Academic, 17th       Revised Edition.

Ajakaiye, Olu and Bayo, Akinbinu (2000). Strategic Issues in Nigerian    Development in a Globalizing and Liberating World; Ibadan.

Anyanwu J.C.(1993). Monetary Economics: Theory Policy and Institution,       Hybrid Publishers Limited Onitsha.

Anyanwu, J.C. (1997). The Structure of the Nigerian Economy (1960 – 1977). Onitsha: Joanee Education Publishers Ltd.

Busari, D.T., Omoke, P.C., & Adesoye, B. (2006). Monetary Policy and Macroeconomic Stabilization under Alternative exchange rate regime evidence from Nigeria.  

CBN (2006). Statistical Bulletin. Abuja, Nigeria: Central Bank of Nigeria.

CBN (2012). Statistical Bulletin. Abuja, Nigeria: Central Bank of Nigeria.

CBN (2013). Statistical Bulletin. Abuja, Nigeria: Central Bank of Nigeria.

Ditimi, A., Nwosa P.I. & Olaiya, S.A. (2011). An Appraisal of Monetary Policy and its Effect on Macro Economic Stabilization in Nigeria. Journal of Emerging Trends in Economics and Management Sciences (JETEMS), 2 (3): 232-237. 

Ehinomen C. & Akorah C. C. (2013). The Impact of Monetary Policy on Agricultural Development in Nigeria (1970-2010), IOSR Journal Humanities and Social Science (JHSS) ISSN: 2279-0837, ISBN: 2279-0845.      Volume 5, Issue 5 (Nov. - Dec. 2012), PP 13-25.

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