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MONETARY AND FISCAL POLICY DYNAMICS AND THEIR EFFECTS ON FARM CREDIT AND AGRICULTURAL OUTPUT IN NIGERIA (1983-2014)
ABSTRACT
The study analysed the monetary and fiscal policy dynamics and their effects on farm credit and agricultural output in Nigeria between the years (1983-2014). The specific objectives of the study were to analyse the effect of fiscal policy on agricultural output during military and democratic eras (1983-1999) and (1999-2014), analyse the effects of monetary policy on agricultural output, analyse the effects of monetary policy on farm credit (1983-1999) and (1999-2014), analysed the effects of fiscal policy on farm credit within the same period. The study further analysed the effects of policy mix on farm credit as well as analysed the effects of policy mix on agricultural output (1983-2014). The data for this study were mainly time series data collected from Central Bank of Nigeria (CBN), CBN statistical bulletin of various years, National Bureau of statistics various years and index mundi. The data were analysed using graphical trend analysis, ordinary least square multiple regression; Chow F-test, Augmented – dickey fuller unit root, co-integration (max-Eigen value and trace) tests were used to test the results of the analysed data. The results of the data analysed showed that fiscal policy had positive effect on agricultural output especially during the democratic period while it (fiscal policy) had negative effects on agricultural output in the military era. The study also showed that monetary policy had positive effect on agricultural output apart from inflation during democratic era. The results further showed that policy mix apart from inflation had a more favourable effects on agricultural output. The result also showed that policy mix had a positive effect on farm credit. The mean agricultural output in military era (1983-1999) was 354.78 metrics tonnes while the mean agricultural output during the democratic era was 991.51 metrics tonnes. This showed that democratic era recorded higher agricultural output. The study further showed that the mean amount of loan disbursed in military era (1983-1999) was one hundred and fifteen million, four hundred and six thousand naira while the mean loan disbursed in democratic era (1999-2014) was four billion two hundred and twenty five thousand naira (4,296,226.89). The maximum loan disbursed during democratic era was ten billion naira. The result further showed that the coefficient of cointegration for loan disbursement was positive. The study also showed that Agricultural Credit Guarantee Scheme Fund (AGGSF) had a positive relationship with policy mix except inflation. This suggests that farmers were sensitive to borrowing during inflation in democratic era. The result of the Chow-F-tests conducted for all the hypotheses showed that there were significant structural changes and effects of policy mix, monetary policy and fiscal policy on both agricultural output and credit The result of the Augmented-dickey fuller test showed that at level, only exchange rate was stationary at 5% but at difference, almost all the variables were stationary at 5%. The result of the co-integration showed that at 5% critical value, inflation (X1) showed the presence of co-integration since the maximum Eigen value rank statistics (114.7472) was greater than critical (55.728). The maximum Eigen value for interest (X2), money supply (X3) exchange rate (X4) budgetary allocation to Agric Sector (X5) were higher than the critical values. This means agricultural output had long run relationship with monetary and fiscal policy. The results of the multiple regression analysis showed that majority of the fiscal and monetary policy measure were positively related to various agricultural outputs especially in democratic era. All policy mix were positively related to agricultural output (crops) except inflation. The coefficient of multiple determination (R2) showed that in all (R2), variations in the dependent variables were adequately and jointly explained by the independent variables. This means that in all twenty three (23) regression cases more that 70% of the variation in the dependent variables were explained by the independent. Only about 30% was not explained. The f – values also showed that the models were significant. The study recommended that the Agricultural Credit Guaranteed Scheme Fund (AGGSF) be strengthened to carry out more lending, that policy mix be encouraged instead of single monetary or fiscal policy alone. Democratic institutions be strengthened since Agricultural output was seen to have done better during democratic era than in military era.
Keywords: Monetary, Fiscal, Policy, Farm Credit, Output, Dynamics
TABLE OF CONTENTS
Content
Page
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Table of Contents vi
List of Tables xii
List of Figures xv
Abstract xvi
CHAPTER ONE: INTRODUCTION 1
1.1 Background of the Study 1
1.2 Problem Statement 4
1.3 Objectives of the Study 8
1.4 Research Hypotheses 8
1.5 Justification for the Study 9
CHAPTER TWO: LITERATURE REVIEW 12
2.1 Conceptual Framework 12
2.1.1 Monetary Policy 12
2.1.2 Fiscal Policy 12
2.1.3 Dynamics 14
2.1.4 Stabilization Policy 15
2.1.5 Discretionary Fiscal Policy 15
2.1.6 Farm Credit 16
2.1.7 Agricultural output 17
2.2 Theoretical Framework 18
2.2.1 The Quantity Theory of money 18
2.2.2 Keynesian Theory of the Influence of Monetary Policy 20
2.2.3 Keynes Fiscal Policy Theory 21
2.2.4 The Neo-classical Exogenous Growth Theory 23
2.2.5 Theory of Inflation as a Monetary Phenomenon 24
2.2.6. Cost-Push Inflation Theory 24
2.2.7 Market Power Theory of Inflation 25
2.2.8 Demand-Composition Theory 25
2.3 Analytical Framework 26
2.3.1. Ordinary least square regression (OLSR) 26
2.3.2 Simple Linear Regression Model 27
2.3.3 Multiple Regression 28
2.3.4 Coefficient of Multiple Determination (R2) 28
2.3.5 F- Test 29
2.3.6. Relationship between R2 and F- Test 29
2.3.7 Functional Form Models 30
2.3.8 Linear Function 30
2.3.9 Double log Function 30
2.3.10 Semi log Function 30
2.3.11 Exponential Function 31
2.3.12 Stationarity (long run relationship) 31
2.3.13 Testing for Stationary 32
2.3.14 Augmented Dickey Fuller (ADF) Unit Root Test 32
2.3.15 Johansen Stationarity Test 33
2.3.16 Error Correction Model
33
2.3.17 Durbin – Watson d Test 35
2.4 Empirical Literature 36
2.4.1 Monetary and fiscal policy and Economic Growth 36
2.4.2 Effect of Monetary Policy on the Economy 38
2.4.4 Fiscal Policy and Economic Growth in Nigeria 40
2.4.5 Sources and Allocation of Farm Credit 43
2.4.6 Determinants of Farm Credit Repayment and Acquisition 45
2.4.7 Agricultural output and Estimates of Different Measures of Efficiency 48
2.4.8. Agricultural Credit and Output 49
2.4.9 Public Expenditure and its Effect on Agricultural output in Nigeria 51
2.4.10 Employment in Agricultural Sector 54
2.4.11 Fiscal Policy, Unemployment and output. 56
2.4.12 Changes in Fiscal Policy and Agricultural Output 56
2.4.13 Fiscal Policy, Market Failures and Output 57
2.4.14 Effect of Fiscal and Monetary Policy on Agricultural Output 58
2.4.15 Loan Disbursement Trend to Agricultural Sector 59
2.4.16 Problems of Fiscal and Monetary Policies in Nigeria 61
2.4.17 Effect of Monetary and Fiscal Policies on Demand for Farm Credit
62
2.4.18 Budgetary Allocation to Agric Sector 63
2.4.19 Effectiveness of Monetary and fiscal policies 64
CHAPTER THREE: METHODOLOGY 67
3.1 Study Area 67
3.2 Sources of Data 69
3.3 Method of Data Collection 70
3.4 Method of Data Analysis 70
3.5 Test of Hypotheses 84
CHAPTER FOUR: RESULTS AND DISCUSSION 88
4.1 Effects of fiscal policy on Agricultural output such as crop, livestock, fishery and forestry during military and democratic periods (1983-1999) 88 and (1999-2014)
4.1.1 Effects of fiscal policy on agricultural output (Crops) in military era
(1983-1999) . 88
4.1.2 Effects of fiscal policy on agricultural output (crops) in democratic era
(1999-2014). 90
4.1.3 Effects of fiscal policy on fishery output during military (1983-1999) 94
4.1.4 Effects of fiscal policy on fishery output during democratic era (1999-2014) 96
4.1.5 Effects of fiscal policy on livestock output in Nigeria during military era
(1983-1999 99
4.1.6 Effects of fiscal policy on livestock output in Nigeria during
democratic era (1999-2014) 100
4.1.7 Effects of fiscal policy on forestry output in military era in Nigeria(1983-1999 104
4.1.8 Effects of fiscal policy on forestry output in Nigeria in democratic era(1999-2014) 106
4.2 Effects of monetary policy measures on crop output in metric tonnes. during military and democratic periods(1983-1999) and(199-2014) 110
4.2.1 Effects of monetary policy measures on crop output in Nigeria during
military era. 1983 to 1999 107
4.2.2 Effects of monetary policy measures on agricultural output(crop) in
Nigeria during democratic era. 1999 to 2014 111
4.2.3 Effects of monetary policy measures on livestock output in Nigeria
during military era. 1983 to1999. 113
4.2.4 Effects of monetary policy on livestock output in democratic era(1999-2014). 117
4.2.5 Effects of Monetary policy on fishery output in Nigeria in military
era(1983-1999. 121
4.2.6 Effects of monetary policy on fishery output in Nigeria in democratic
output(1999-2014) 123
4.2.7 Effects of monetary policy on forestry output in Nigeria during
military era in Nigeria 1983-1999. 128
4.2.8 Effects of monetary policy on forestry output in Nigeria during
democratic era in Nigeria (1999-2014) 130
4.3 Effects of monetary policy on Farm Credit in military era
– 1999) and democratic era (1999-2014). 134
4.3.1 The effects of monetary policy on farm credit during military era in
Nigeria(1983-1999. 134
4.3.2 The effects of monetary policy on farm credit during
democratic era in Nigeria(1999-2014) 136
4.4. Effect of Fiscal policy on Farm credit demand in military era
(1983-1999) and dem0cratic era 1999 – 2014 141
4.4.1. Determine the effects of fiscal policy on farm credit during
military era in Nigeria(1983-1999) 141
4.5 Effects of policy mix(stabilization policy) on Agricultural output in
Nigeria (1983-2014) 146
4.5.1 Effect of policy mix on Agricultural output (Aggregate) in Nigeria
(1983 – 2014) 147
4.6 Effects of policy mix on Farm credit (Agricultural credit
Guarantee Scheme funds) (ACGSF) 151
4.7 Trend of various agricultural output in military and democratic eras 159
4.7.1 Trend of various agricultural output in military era (1983-1999) 159
4.7.2 Trend of various agricultural output in democratic era (1999-2014) 160
4.7.3 Trend of various livestock output in military era (1983-1999) 163
4.7.4 Trend of various livestock output in democratic era (1999-2014) 164
4.7.5 Trend of various fishery output in military era (1983-1999) 166
4.7.6 Trend of various forestry output in military era (1983-1999) 168
4.7.7 Trend of various forestry output in democratic era (1999-2014) 171
4.8 Test of Hypotheses 175
CHAPTER FIVE{ SUMMARY, CONCLUSION AND RECOMMENDATIONS 182
5.1 Summary 182
5.2 Conclusion 186
5.3 Recommendations 186
REFERENCES 189
APPENDIX 1
APPENDIX 2
APPENDIX 3
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Monetary and fiscal policy dynamics is concerned with the changes in money supply and credit as well as changes in taxes and debt financing (Sanni, Amusa & Abeyangi, 2013). They are policy measures undertaken by the government and the Central Bank of Nigeria to influence the cost, availability and the use of money and credit as well as taxation and borrowing. The conduct of monetary and fiscal policy have changed in substantial ways over the past three decades and the possibility of shift or changes in policy mix has spurred so many empirical researches attempting to document and measure the implication of these dynamics with regards to economic growth and development. Bovin(2009) stated that there has been a serious debate on the superiority of one policy over the other, but some empirical findings have showed that both can produce better result when used together. In terms of dynamics, however, there have been two major changes in the pursuit of monetary policy in Nigeria since the inception of the Central
Bank of Nigeria (CBN).
These changes occurred before and after 1986 Structural Adjustment Programme (SAP). The first phase (1959-1986) placed emphasis on direct monetary control, while second phase (1986-date) relies on market mechanism or market based control (Bolaji, 2014). The era of direct control was a remarkable period in monetary management in Nigeria because it coincided with several structural changes in the economy, from agriculture to petroleum, the execution of the civil war, the boom and crash of the 1970s and early 1980’s and then the introduction of Structural Adjustment Programme (SAP) during the military era (Chuku, 2010). The economic principle that guided the monetary policy before 1986 was characterized by the dominance of oil sector, increased public sector and over dependence on the external sector. The post SAP era ushered in a new monetary policy implementation as well as fiscal policy with market-friendly technique. It was designed to achieve fiscal balance and balance of payment viability by altering and restructuring the production and consumption pattern of the economy. Eliminating price distortion, reducing heavy dependence on crude oil export. Agricultural product importation as well as enhancing non-oil base. Before 1999, the Nigerian government introduced series of macroeconomic policies (monetary and fiscal policies), which were aimed at improving the performance of the agricultural sector. Among these policies were; selective credit control, agricultural production subsidies, exchange rate, interest rate management. etc.
In terms of monetary policy dynamics, the Structural Adjustment Programme made it possible for interest rate to be deregulated and indirect monetary policy was adopted, this made the agricultural sector compete for funding with the other sectors of the economy. This singular move brought about the cancellation of sectoral credit allocation policy under the allocation policy of the federal government. Under this monetary policy, the share capital of the Agricultural Credit Guaranteed Scheme Fund (ACGSF), established in 1977 was increased from N199 million to N3.0 billion in 2001 (Charles, Mordi, &
Banji, 2010). With the formation of the Nigerian Agricultural Cooperative and Rural
Development Bank (NACRDB) in 2000, from the former Nigeria Agricultural Bank in 1973, the sum of N234.3 billion was granted to the agricultural sector as credit as part of the comprehensive reform in the financial system of the Central Bank of Nigeria (CBN). The CBN launched the National Micro Finance Policy ( NMFP,2011) with the main objective of making credit available and accessible to a large segment of the potentially productive Nigerians with special focus on the rural farmers.
Also, the Agricultural Credit Support Scheme (ACSS) was later established through the initiative of the Federal Government and the Central Bank of Nigeria with active support and participation of bankers committee. The purpose of ACSS is to develop the agricultural sector of the Nigerian economy by providing facilities to farmers at single interest rate, with a view to enhancing production and increasing agricultural output (CBN 2010). Government may wish to change its monetary or fiscal policies for political, economic or technological reasons; however, these policies may be changed at anytime Government feels or believes that such change or changes will help guide positively its economic direction to achieve greater results. If there is unemployment or inflation, the government through the Central Bank of Nigeria can adopt expansionary or contractionary policy depending on which problem they want to solve (Ahuja, 2009). Monetary and fiscal policies are changed when earlier or previous applications proved ineffective. Samuelson and Naudheus (2010) argued that the liquidity trap in the 1990s and 2000s was a famous example of monetary policy failure, since it fell short of its protective impact.
Government spending, especially in countries where agricultural output is high, is geared towards farm income stabilization scheme such as price support – by mobilizing funds to buys and stocks farm produce when there is surplus and when their prices are faillng and sells these product to the public during period of scarcity and rising prices. This tends to stabilize both the income of farmers and general price level in the agricultural sector. Despite this monetary and fiscal policy application, the output of the agricultural sector is still showing abysmal performance. Though, within the last three years(2011 to 2014) import bills of the federal government dropped considerably (ATA, 2011) but previously, the agricultural performance was abysmal. This was evidenced in the agricultural share of the gross domestic product. For example, between 2007 and 2011 there was a reduction in the agricultural share of GDP from 42% to 32% (Muftaudeen & Abdulahi, 2014).
1.2 PROBLEM STATEMENT
There has been a divergent opinion on the effect of fiscal and monetary policy on economic growth, especially in developed countries, these policies have not sufficiently and adequately yielded any positive impact on Nigeria’s economic growth (Kaseem et al, 2013), several nations have used these policies to achieve economic growth and development Here in Nigeria, there is hardly any evidence to show if these policies have led to increase or decrease in rate of inflation, real income of farmers, interest rate, exchange rate and money supply. There is hardly any evidence or evidences to link the variations in agricultural outputs to variations in monetary and fiscal. The lack of monetary and fiscal discipline among the three tiers of government in Nigeria is also responsible for the slow agricultural growth (Odewunmi, 2013). As a result of these and other factors, macroeconomics in-balance has emerged. A review of these macroeconomic policies showed that inflation has accelerated to double digit level, despite the monetary policy put in place.
Government has the responsibility of preventing economic depression by proper use of fiscal and monetary policies as well as close regulation of the financial system. Recently, government has become concerned with financing economic policies which boost longterm economic growth, the intent of fiscal policy is essentially to stimulate economic and social development by pursuing a policy stand that ensures a sense of balance between taxation and expenditure and borrowing that is consistent with sustainable growth (Zhattau, 2013).
The agricultural sector had not performed to its desired level because of several decades of neglect from successive Nigeria government, in creating appropriate macroeconomic policies that will cushion the effects of internal and external macroeconomic shocks on farmers’ incentive to produce in other to fortify the Nigeria agriculture have not yielded the required results in the sector (Udensi et al, 2012). In recent time, the upward trend in agricultural output was however, largely derived from the expansion of cultivated land and not due to management of monetary and fiscal policy which are not sustainable. Secondly, this upward trend in agricultural output due to the increase or expansion of cultivated land have not been able to trickle down to the poorest of the poor and has neither helped the country tackle the problem of unemployment nor achieve the goal of food security because it is not sustainable (Shenggen et al., 2008). Therefore in order to achieve desired social and economic development in Nigeria through agriculture, evidence based effects of macroeconomic policy objectives are needed.
Too much of taxation and debt is also of a great consequence to the economy. Government depends on tax (fiscal policy) to raise revenue to increase investment or expenditure. Government expenditure if not well patterned can create monetary policy problem. This problem may arise from inflation due to increased aggregate publicexpenditure to crowding-out due to high interest rate as a result of increased government borrowing. Over the years, it has been observed that increased in government expenditure has had no effect on agricultural output in Nigeria. This however, has been attributed to the used of primitive tools and implement by farm operators result to low output irrespective of huge budgetary allocation to the sector (Awe, 2013). Available researches have shown that agricultural output have been constrained by a lot of factors such as poor agricultural pricing policies, low fertilizer use, low access to agricultural credit, land tenure insecurity, land degradation, unstable investment in agriculture (Dayo et al, 2013). Other studies have also shown that agriculture is determined by other secondary factors such as age of the farmer, level of education, years of farming, farm size and input use (Obasi, Ukoha & Ukewuibe, 2013).
Due to lack of firm monetary and fiscal policies, there has been inadequate access by farmers to farm credit, low farm income, increase in inflation. Improper management of monetary and fiscal policies have resulted in so much debts that have no bearing with agricultural production, multiplicity of taxes, increase in interest rate that has made it difficult for farmers to access farm credit for increase agricultural production, there has been increase in exchange rate that has made it difficult to import agricultural inputs. On the bases of these problems, the following research questions were raised
What are the effects of fiscal policies on agricultural output in Nigeria from 1983 to 2014?
What are the effects of monetary policies on agricultural output in Nigeria from 1983 to 2014
What are the effects of fiscal policies on supply of farm credit in Nigeria from 1983 to 2014?
What are the effects of monetary policy on supply of farm credit from 1983 to
2014?
What is the trend of farm credit disbursement in Nigeria from 1983 to 2014?
What are the effects of policy mix on farm credit supply?
What are the effects of policy mix on Agricultural output in Nigeria from 1983 to
2014?
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to analyze the monetary and fiscal policy dynamics and their effects on agricultural output and farm credit in Nigeria (1983-2014),
The specific objectives are to;
determine the effects of fiscal policy on agricultural output during the two periods
(1983-1999) and period of (1999 and 2014).
determine the effects of monetary policy on level of agricultural output during the two periods(1983-1999) and(1999-2014)
determine the effects of monetary policy on the supply of farm credit for the period (1983-1999) and the period of (1999-2014)
determine the effects fiscal policy on farm credit demand for the period (1983-
1999) and the period of (1999-2014).
assess the trend of loan disbursement to the agricultural sector (agricultural credit) through Agricultural Credit Guaranteed Scheme Funds (ACGSF) during the period of (1983 – 1999) and (1999-2014)
assess the trend of various agricultural output within the same periods mentioned in objective v .
examine the effect of policy mix on farm credit (1983-2014)
determine the effects of policy mix on agricultural output (1983-2014)
1.4 RESEARCH HYPOTHESES
There is no significant difference between the effect of structural changes in monetary policy on agricultural output during the periods of 1983-1999 and 1999 and 2014 democratic era ii There is no significant difference between the effect of structural changes in fiscal policy on agricultural output during the period 1983-1999 and 1999-2015 iii There is no significant difference between the effect of structural changes in monetary policy on farm credit during 1983 – 1999 and 1999-2014.
iv Fiscal policy does not significantly affect demand for farm credit
1.5 JUSTIFICATION OF THE STUDY
The determinants of aggregate agricultural output in the Nigerian economy are not just credit facilities, level of education,(literacy level), labour, capital inputs, increase farm size, fertilizer, years of farming, extension contact etc as put forward by (Obasi et al,2013), (Obasi, Ohajianya & Ibekwe, 2013), but the determinants of aggregate agricultural output first depend on monetary and fiscal policy. The average citizen understands that every developed country of the world relies on effectiveness of monetary and fiscal policy to increase output and that monetary policy variable such as money supply, interest rate and inflation should be managed properly to respond to real market signals (Nicholas, 2011).
It is common thought that an increase in the supply of money can affect the growth rate of an economy or the Gross Domestic Product (GDP). Available research has also shown that a number of constraints are responsible for low agricultural output, these constraints include; poor agricultural pricing policies, low access to agricultural credit, land tenure insecurity, land degradation, property and gender issue, low investment in agriculture, low or poor marketing efficiency (IFPRN, 2013). None of these researches has actually carried out an depth study on the effect of monetary and fiscal policy on farm credit and agricultural output. Low output in Nigeria over the years compared to leading countries such as Malaysia, Thailand, Indonesia and Brazil might have been largely due to poor fiscal policy such as inadequate government expenditure on agriculture. Nigeria has spent close to 10 billion dollar (1.6 Trillion naira) annual export opportunity from cocoa, groundnuts, palm oil, cotton. This has also made food imports to grow at an unsustainable rate of 11% per annum. Nigeria is the second largest importer of rice with about N356 billion annually, Nigeria also import sugar amounting to N217 billion per annum (Nicholas, 2011).
Monetary and fiscal policy if well applied can raise agricultural output which will in-turn raise employment level, raise living standards, raise real income level (Saari, 2006), due to proper fiscal policy and increased spending on agricultural sector, Thailand became one of the countries with lowest unemployment through its significant investment in the agricultural sector. Therefore, the findings from this study will be useful for policy making. This means that this study will be of significant importance to public policy makers in Nigeria. More so, the conceptual, theoretical and empirical literature in this research work will be vital to researchers, undergraduate and graduate students. The finding from this study will seek to find out why monetary and fiscal policies have brought or have not brought the desired change in the agricultural sector in Nigeria. This study attempted to investigate the effects of monetary and fiscal policy dynamics on farm credit and agricultural output and to estimate the effect of changes in policy mix on agricultural output and demand for farm credit.
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