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
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.
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
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.
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
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
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.
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) What effect(s) will monetary policy instruments have on
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?
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.
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
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.
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.