An Empirical Investigation on Impact of Interest Rates on Agricultural Investment in Nigeria

Updated: Apr 5, 2018



Mike Ozemhoka Asekome, Ph.D., Ehiagwina Stephen Ikojie


Senior Lecturer, Department of Economics, Banking and Finance, Benson Idahosa University, Benin City, masekome@biu.edu.ng

Department of Economics, Banking and Finance, Benson Idahosa University, Benin City, stephenikojie@yahoo.com


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DOI: http://dx.doi.org/10.31014/aior.1992.01.01.7 


ABSTRACT

The main thrust of this study is to examine the impact of interest rate on agricultural investment in Nigeria for the period 1980–2015. In a bid to finding the nexus between interest rate and agricultural investment in Nigeria, the study relied on agricultural investment, lending interest rate, deposit interest rate and agricultural output as variables. The study employed the ARMA Least Square technique to determine the impact of interest rate on agricultural investment in Nigeria. The empirical findings showed that deposit interest rate and agricultural output have a positive impact on agricultural investment, growth, and development while lending interest rate impacts negatively on agricultural investment in Nigeria. Based on the findings, the study recommends that government and various stakeholders in the agricultural sector should improve on the macroeconomic policies such as interest rates, inflation, the income level that could impact on the level of investment that would contribute positively to agricultural development in Nigeria.



INTRODUCTION

Over the years, investing in agricultural production has been a critical factor in the growth and development of the agricultural sector and by extension economic growth. Its importance cannot be overemphasized. Investment is the engine of economic activity and the primary cause of economic growth accounting for the change in capital stock during a period. It is the accumulation of newly produced physical entities, such as factories, machinery, houses and goods inventories. Consequently, unlike capital, investment is a flow term and not a stock term. This means that investment is measured over a period of time. Investment plays a very important role in economic growth in a country. Countries rely on investment to solve economic problems such as poverty, unemployment, etc. (Muhammad 2004). As such determinants of the level of investment become paramount in an economy.

One of the most topical issues in Nigeria today is that of agricultural development, investment, and its sustainability. Agriculture is important because it provides food and employment for the populace, raw materials for industries, and market for industrial goods. Eboh, Ujah, and Nzeh (2009), observed that the contemporary economic significance of agricultural sector is even more remarkable. They opined that in the past half a decade, the impressive growth rate of the nation's economy had been driven by the non-oil sector, particularly the agricultural sector. This, in other words, according to them means that the growth rate of the overall economy is to a large extent dependent on the growth rate in agriculture GDP.


The relationship between financial reform, development, agricultural development and investment and economic growth has been the subject of a growing literature in both developed and developing countries (World Bank, 2008). To enhance the development of the financial system in the economy, interest rate reform, a policy under the financial sector liberalisation was formulated. The expectation of this reform was that it would encourage domestic savings and make loanable funds available in the banking institutions. Obute, Adyorough, and Itodo (2012) defined interest rate deregulation as an economic term used to refer to a situation whereby forces of demand and supply are allowed to determine the value of interest rates rather than its value being administered directly by monetary authorities. Interest rate policy in Nigeria is a major instrument of monetary policy with regards to the role it plays in the mobilization of financial resources aimed at promoting investment, economic growth, and development. The interest rate is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender. It can also be seen as the return being paid to the provider of financial resources and thus an important economic price.


The Agricultural sector, one of the sources of economic growth, has been looked unto to pave the way for economic development because of its potentials. The realization of this fact led the Nigerian government to embark on several agricultural development programmes, many of which, unfortunately, failed (Manyong et al. 2005; and Ogungbile, 2008). Among these agricultural programmes is the establishment of the Nigerian Agricultural Credit Guarantee Scheme Fund (ACGSF) in 1977 aimed at mobilizing funds from the banking sector for rural development by guaranteeing loans through the commercial banks for investment in agriculture, thereby minimizing the risks involved in financing the sector. The fluctuations in the financial sector appeared inseparable from the performance of the ACGSF in meeting up with its goals of mobilizing adequate credit for the agricultural sector (Onoja, Onu, and Ajodo-Ohiemi, 2012).


According to Anna (2012) and Singhania (2011), the interest rate is determining factor in return on investment. Thus investor will channel their investments from low-interest rates to higher interest rate because it provides an incentive to investors looking for higher returns. Therefore high-interest rate can lead to increased agricultural investment. The transmission mechanism between interest rate and investment is a bidirectional relationship. High-interest lending could deter agriculture investors from sourcing fund from the financial sector, but low-interest rate will spur the agricultural investment prospects. On the other hand, high deposit interest rate will encourage savings thereby making loanable funds available for investment. Conversely, low deposit interest rate will dissuade the public from savings thereby reducing the availability of investible fund.



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