Chapter 33 Agricultural Investment Risk Relationship to National Domestic Production

Alex Ehimare Omankhanlen

Covenant University, Nigeria

ABSTRACT

This empirical case study investigated the uncertainty of agricultural investment schemes in Nigeria and their relationship to national domestic production.

INTRODUCTION

Nigeria has a developing economy with fertile agricultural conditions and a tropical climate (Johnston, 1970; Kibly, 1969) but its oil reserves propelled the country into becoming the most industrialized nation in the African continent (Ojo & Akanji, 1996). However, the oil reserves have an uncertain future since they are already becoming depleted.

In addition to investing in the oil reserve ex­traction, the Nigerian government have tried to accelerate the rate of agricultural development in a bid to transform the nation into a more stable developed economy. The economy held so much hope for attainment of such goals within a short period and this was even before the advent of oil as the main export commodity (Ukpong, 1993).

DOI: 10.4018/978-1-4666-6268-1.ch033

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Agriculture is the principal source of food and livelihood in Nigeria. This industry employs 70% of the nation’s work force and is a major source of livelihood for the majority of the population in Nigeria (Abayomi, 1997). Over the past two decades, agricultural yields have stayed the same or declined. Although there has been a recent rise in agricultural productivity, it is derived more from expanded planting areas for staple crops rather than from yield increases. Increasing and sustaining agricultural productivity should be a critical component of programs that seek to re­duce poverty and attain food security in Nigeria (Ukpong, 1993).

Notwithstanding the oil reserves, agriculture is still the most dominant sector, which contrib­utes to national domestic production. In spite of this Abayomi (1997) pointed out that private businesses are predominately unwilling to invest more into agricultural development, which is contrary to the government objectives, and puz­zling considering the publicly funded incentives which have been available.

The World Bank (2011) studied agricultural investment in developing nations and identified three actions, which countries like Nigeria should do to improve the economy:

1. Increase food production which would in­crease business income;

2. Make household food, water and energy production secure;

3. Restore and maintain the natural resources.

The World Bank (2011) claimed that nations such as Nigeria often fail to effectively develop their agricultural section to its full potential because they purchase rather than develop their imports, they do not use mechanization to facilitate agricultural production, and most significantly there is a lack of credit to stimulate development.

In Nigeria, the lack of credit to finance agri­cultural investment is a major problem. However, since the availability of adequate credit is central to the improvement for agricultural production in the economy, the Federal Government of Nigeria recently prioritized the agricultural sector, and directed commercial banks to through the Cen­tral Bank of Nigeria (CBN) to allocate a certain percentage of their loan funds to the agricultural sector (Ukpong, 1993).

In fact, to encourage the commercial banks to meet this target, the CBN introduced the Agricul­tural Credit Guarantee Scheme (ACGS) in 1977 to guarantee credit disbursed by commercial banks to the sector. The loan amount was raised and the guarantee rate was raised to 75% against default payment of loans (CBN 1981).

Statement of Problem

Before the 1970s, Nigeria’s biggest source of rev­enue was from agriculture. Nigeria was the world’s largest producer of palm products, producing 64% of the world’s palm kernel and 30% of the palm oil. Nigeria was also the second largest producer of peanuts, producing 40% of the world’s peanuts and 27% of the world’s peanut oil. In addition, Nigeria was among the top cocoa and cotton producers (Johnston, 1970).

This situation began to change drastically in the 1970s with the discovery of crude oil in Nigeria. Oil extraction led to the government’s neglect of Nigeria’s agricultural sector. Without government support of the sector, agricultural production suffered a serious decline, and Nigeria’s self­sufficiency level in food production dropped to 20% and unemployment to around 30%.

Due to a host of factors including low productiv­ity, poor market access, falling terms of trade, and restrictive trade regimes, Nigeria’s relative market share in the world market has been declining for decades. According to the World Bank (2011), Nigeria has suffered a loss in its world market for agricultural exports - 55% points for groundnuts, 27 points for cocoa, and 14 points for coffee.

Presently, agricultural production is mostly at the family and subsistence levels yet even this does not meet the food demand of Nigeria’s ever­growing population. Furthermore, farmers who have tried to organize and form cooperatives to boost production and purchasing power have not had the requisite skills and training to run these initiatives. As a result, most have failed. Farmers also often lack the proper education that would enable them to maximize profits. As a result, most goods are not processed but sold in their raw state, thus yielding low returns and high levels of post harvest losses (Abayomi, 1997).

The impact of this situation includes low qual­ity and quantity of food, with limited production, resulting in high food prices and malnutrition. There have also been wasteful agricultural meth­ods, negative attitudes toward agriculture, and urban migration. Since the 1970s, every effort the government has made to improve agricultural production has failed.

Today, ways to improve agricultural yields are hardly ever discussed. The purpose of this study is to examine and document the factors, which could reduce uncertainty and risk for investment into the agricultural sector, by showing a positive relationship between investment risk and national domestic production.

Study Objective

The main objective of the study is to empirically investigate the uncertainty surrounding agricul­tural investment in Nigeria. The specific objectives are as follows:

1. To analyse the risk factors for agricultural investment in Nigeria;

2. To highlight constraints for agricultural productivity in Nigeria;

3. To measure the cause-effect relationship of investment risk explanatory variables on national agricultural production, which include,

a. Commercial bank credit to the agricul­tural sector,

b. Government budget to the agricultural sector,

c. Government budget for agricultural credits guaranteed scheme fund.

This paper is a single case study of a developing country, Nigeria.

LITERATURE REVIEW

There is no doubt; agriculture is often the driv­ing force behind many sustainable and successful economies. It plays a myriad of roles in hunger and poverty alleviation, provision of raw mate­rial for industrialization, creation of employment and job opportunities, facilitates foreign trade and entrepreneurial growth, reduces the nation’s dependency on foreign goods, ensures a sustain­able economy with well nourished and healthy people, and serves as a clean alternative to energy provision (Johnston, 1970).

However, different policy drivers in different political administrations have invested enormous efforts and budgets on agricultural development programmes without clear goals and visible strate­gies. Thus, their plans have seldom worked over the years in Nigeria.

As noted previously, agriculture is the princi­pal source of food and livelihood in Nigeria, and employs nearly three-quarters of the nation’s work force. Over the past decades, agricultural yields have not significantly improved. Although there has been a recent rise in agricultural investment and productivity, it is derived more from expanded planting areas for staple crops than from yield increases. Increasing and sustaining agricultural investment and hence, productivity should be a critical component of programs that seek to trig­ger sustainable economic growth through the contribution of agriculture to real gross domestic product (Real GDP).

Despite the importance of agriculture such as production of food for population, provision of raw materials for industries and a source of employ­ment, agriculture has not contributed significantly to the development of the economy.

The greatest concern of many people in Ni­geria, including the national leaders, is the food insecurity problem that presents itself in the face of declined agricultural productivity and increased population pressure. This explains why New Partnership for Africa’s Development (NEPAD) in July 2003 resolved that agriculture should be made a top priority and budget allocations for this sector was raised to a minimum of 10% of total public expenditure within five years (World B ank, 2011). Hence, issues that relate to agricultural development are not treated without seriousness.

Role of Agriculture in Nigerian Economy

According to Anyanwu (1997), agriculture in­volves the cultivation of land, raising and rearing of animals for the purpose of production of food for man, feed for animals and raw materials for industries. It involves cropping, livestock, forestry, and fishing, processing and marketing of these agricultural products.

Abayomi (1997), like many other economists asserted that in most developing countries, agri­culture is both the main traditional pursuit and the key to sustained growth of the modern economy. She noted that economic growth has gone hand in hand with agricultural progress; stagnation in agriculture is the principal explanation for poor economic performance, while rising agricultural productivity has been the most important con­comitant of successful industrialization.

Among the roles conventionally ascribed to the agricultural sector in a growing economy are those of providing adequate food for an increasing population; supplying raw materials to a growing industrial sector; constituting the major source of employment; earning foreign exchange through commodity exports, and providing market for the products of the industrial sector.

Ogunfiditimi (1996) contended that until the late 1950’s that agriculture contributed over 60% of GDPP. Its percentage contribution however has fallen drastically in recent years due in part to the boom in petroleum industry. However, the oil boom notwithstanding, the agricultural sector still provides employment for over 70% of the Nigerian population.

Apart from provision of the means of livelihood to farmers, it creates job opportunities for people who serve the farming and agro - allied industries within the country. Ukpong (1993) reiterated that in view of the importance mentioned above most public policy makers, especially since indepen­dence in 1960, have expected the sector to ratify the bulk, if not all, of the food requirements of the country and to supply most of the agricultural raw materials needed by the manufacturing sector.

Furthermore, Reynolds (1975) stated that ag­ricultural development could promote economic development of the underdeveloped countries in four distinct ways:

• By increasing the supply of food available for domestic consumption and releasing the labour needed for industrial employment;

• By enlarging the size of the domestic mar­ket for the manufacturing sector;

• By increasing the supply of domestic sav­ings; and

• By providing the foreign exchange earned by agricultural exports.

Agriculture has been seen as a means of reduc­ing dependence on certain importation, containing food price increases, earning foreign exchange, absorbing many new entrants to the labour market and increasing farm incomes at times of severe unemployment and rural poverty. Agreeing with the above views, Johnston (1970) writes that the appraisal of agriculture contribution or role in the national economy can be made by using four primary criteria, namely:

• The proportion of the population engaged in agriculture.

• The share of agriculture in the Gross Domestic Product.

• The proportion of the nation’s resources (other than labour) devoted to or employed in agricultural production.

• The contribution of the agricultural sector to foreign trade.

Following these studies, Anyanwu (1997), determined that Nigerian agriculture has not been able to meet the food needs of the country. Rather, food production per capita has been declining. To complement the low domestically produced food supply; there has been a substantial rise in food imports. These have taken substantial portions of the much-needed foreign exchange for importing capital for development purposes. Available data revealed that average food imports have accounted for about 9.15% of total imports over the period between 1960 and 1993. Nigerian’s quick turn from a low food importing to a high food import­ing country with food bill accounting for 14.71% of 1991 ’s total import bill compared with 6.87% in 1970 was a sign of collapse of the agricultural sector.

Anyanwu (1997) noted that this situation does not bode well for the Nigerian economy especially when we realized that there were available agricul­tural resources that could be exploited to increase the local production of foodstuffs. With respect to employment, he noted that more than 80% of the rural population of Nigeria is engaged in one type of agricultural activity or the other. This roughly indicates the extent to which the agricultural sector absorbs the labour force in the country.

However, World Bank Report (2011) puts it that the agricultural sector employed 71% of the total labour force in Nigeria in 1960 and by 1977; this had dropped to 56%. It rose to 68% in 1980, fell to 55% in 1985 and further fell to 53% in 1986 and 57% annually from 1989 to 1992. Nonetheless, the fall in the proportion of labour force engaged in agriculture was also due to the structural changes in the economy where other sectors are assuming different dimensions and engaging more labour than they previously did (Ukpong, 1993).

During the course of economic development, a decreasing proportion of the nation labour force which will be employed in agricultural over time; this is inevitable so it is important that agricul­tural labour productivity increases in order to compensate for the out flow of labour, at a rate not less than that of labour migration less natural increases (World Bank 2011). In addition, it is important to expand non-agricultural employ­ment to absorb the migration of labour from the agricultural sector. It is necessary to point out that given the importance of labour in agriculture of most African nations including Nigeria, because without this labour absorptive capacity in the industrial sector, the rapid outflow of labour from the agricultural sector would generate social and economic problems (World Bank, 2011).

In fact, a partial consequence of a high labour out flow from agriculture has been a decline of agricultural production in Nigeria in recent years. While assessing the contribution of agriculture to GDP, Ogunfiditimi (1996) observed that until the Nigerian civil war of 1967-70, agriculture domi­nated Nigerian’s economy, contributing some 53% to GDP in 1965. By 1984, this percentage share had decreased by almost 50% to 30%.

The pattern of Nigerian’s economic structure changed dramatically during the era of indepen­dence. However, while agriculture’s percentage share of GDP between 1965 and 1984 diminished, the absolute value of agriculture’s contribution to GDP increased from $2.2 billion to $19.8 billion. This suggests that although there was a relative decline in agriculture, it may not necessarily have been absolute.

Nonetheless, it is difficult to say whether the rise was due to a real increase in the value of agricultural products or whether inflation in the agricultural sector was so high that it masked the stagnation that many believed was occurring. Stud­ies conducted in rural Nigeria reveal an average annual inflation rate of 30% in the agricultural sector for 1970-80. This is far higher than the average annual rate of inflation for the nation as a whole, which was 18.2% for 1970-78.

In his analysis, Ihimodu (1993, pp. 33) stated that “agriculture had often been described as the mainstay of the Nigerian economy, especially so before the oil boom of the 1970s.” Consequently, agriculture was expected to play a significant role in improving the development of the na­tional economy. He maintains that these roles are typical of the contribution normally made by the agricultural sector to the economics of developing countries. The agricultural policy for Nigeria, (Federal Ministry of Agriculture, 1987) outlined the traditional contribution expected of Nigerian agriculture. They include the provision of adequate food, a source of employment, foreign exchange, raw materials for domestic industries and the provision of a market for the product of the industrial sector. Therefore, it was logical to anticipate such an improvement in Nigeria.

The contribution of agriculture to the national food supply production could be measured indi­rectly via the volume as well as the value of food imports (Ihimodu, 1993). He also noted that a direct measure of food production is difficult because of lack of adequate statistical data. It has always been claimed that the agricultural sector supplied most of the food needs of the economy especially before and during the 1950s and 1960s.

In recent times however, there has been some concern that there exists a widening gap between domestic food supply and total food requirements. Some studies have shown that while the demand for food has been growing at about 3.5% per annum, food production has been growing only at about 2.5% per annum (Federal Ministry of Agriculture, 1987). This has led to a significant increase in food imports both in absolute terms as well as in relative to the total import bill. To a large extent, the absolute value of import had risen overtime, as had the proportion of food in the total import bill. Generally, before 1974 the food bill constituted less than 10% of total import.

Despite this, after 1974 food import increased above 10%, rising to about 18% on the average between 1984 and 1985. In 1984 specifically, food import constituted 21% of total national import bill. There appeared to be some decline in the share from about 1986 onwards. Thus, it is obvious that the agricultural sector has successfully played its role of food supplier in the economy until the 1980s when food import became intensified.

On the other hand, the raw material contribu­tion by the agricultural sector appeared to be the least satisfactory. This situation may have been caused partly as a result of historical develop­ment, as well as the technologies adopted in the industrial sector of the economy. The colonial pattern of development regarded the Nigerian economy basically as a source of raw materials for the British industries and therefore, all efforts were geared towards satisfying that requirement. This pattern, no doubt must have accounted for the initial slow pace of industrialization in Nigeria.

Moreover, the industries that were established depended mainly on imported inputs. One of the consequences of the dismal performance of the agricultural sector in this regard is the retardation of industrialization in the country. It should be clear, though, that the pattern of development, the orientation, adverse agricultural pricing policies, and bias of industrialization, rather than the capa­bility of the agricultural sector were responsible for this poor performance of the sector.

The potential of the agricultural sector to make a substantial market contribution depends on two major considerations. One is the purchasing power of the agricultural sector, which depends on the rate of modernization of both the economy and agriculture in particular. A high rate of agricultural modernization implies a fast rate of substitution of modern inputs such as tractors, improved seeds, fertilizer etc. for traditional implements like hoes, cutlasses and traditional seeds. On this count, the Nigerian agricultural sector has not performed satisfactorily.

There are two major factors contributing to the agricultural sector. These are capital and labour transfers from agriculture to the other sectors of the economy. Capital transfer is one of the major roles played by the agricultural sector in the Ni­gerian economy.

An objective on which the government was always silent has been the revenue transfer from the agricultural sector to other sectors. This has been occurring more frequently, without monitor­ing, since the agricultural marketing boards were abolished in 1986. Most of the accumulated profits of the marketing boards were converted by state governments to grants and loans.

The Nigerian agricultural sector was virtually the sole earner of the country’s foreign exchange before the oil boom, while only a very small pro­portion of the earnings were attributed to other sectors such as mining (the next largest). Agri­cultural products accounted for an over whelm­ing proportion of the total export earnings in the 1950s and early 1970s, again prior the oil boom. In the second half ofthe 1950s, agricultural export accounted for 86% of the total export earnings. By the first half of the 1970s, the proportion fell drastically to 26% between 1970 and 1974 and to an insignificant 3% in the last half of the 1980s.

It is obvious that the sector did play a very dominant role in mobilizing foreign exchange resources required for the development of the economy up to the early 1970s, when Nigeria hit the jackpot, so to say, in petroleum oil.

Agricultural Growth Factors

Under this heading, trends in input utilization, capital requirements, and the national agricultural production gap are researched as parameters to represent the growth of agriculture in Nigeria.

Input Utilization Trends

Three approaches are adopted to achieve self­sufficiency in food production. First, the intensive use of improved inputs such as fertilizers, seeds, and agrochemicals to control pests, diseases and weed. In Nigeria and elsewhere, improved farm cultural practices have been adopted in the past to complement the use of such improved inputs. Second is the expansion of total land area under cultivation and thirdly there is the combination of the two.

The expansion of land under cultivation in­volves enhancing the productive capacity of mar­ginal lands through the use of irrigation facilities and deforestation. However, this method is expen­sive. Consequently, the intensification of inputs is normally preferable as a means for boosting agricultural output. In Nigeria, massive resources have been channelled into the procurement and distribution of farm inputs. Following a report by Federal Ministry of Agriculture and Natural Resources, fertilizer consumption increased in the early 1980’s into the 1990’s and peaked in 1993, with a total consumption reaching 1,590 thousand metric tones. However, declined in 1994 to the lowest level of 357.8 thousand tonnes in 2001 (Ogunfiditimi 1996).

In conclusion, agriculture is arguably the most important sector in Nigeria in terms of employ­ment engaging about 70% of the labour force (Igbedion & Aderiye, 1994). Agricultural hold­ings are generally small and scattered, farming is subsistence characterized by simple tools and shifting cultivation. These small farms provide about 80% of the total food. The Nigerian climate from the tropical area of the coast to the arid area of the north makes it possible to produce virtu­ally all agricultural products that can be grown in the tropical and semi-tropical areas of the world.

Financing Uncertainty

In general, total credit to the agricultural sector depicted a rising trend from 1990 to 2001. Total credit, which stood at N722.9 million in 1980, increased to N6, 932.4 by 1990 andN50, 493.59 by 2001. (CBN, 1993)

Even so, the annual growth rate of credit to the sector was declining. In 1990, the public sector contributed 24.0% of the total credit while the private sector accounted for the balance of 76.0%. This trend continued until 1993 where the public sector accounted for about 28% of the total credit. Thereafter, the composition of total credit was reversed, with the share of the public sector fall­ing to 18.0, 14.0 and 3.0% in 1994, 1996, 1999 and 2000 respectively.

The diminishing trend was due to non-mobili- zation of savings by the specialized credit institu­tion, coupled with the reduction in government grants. Likewise, capital budgetary allocations to the sector, which stood at 11.5% of total capital expenditure in 1989, had declined to 6.7% by 1990. The downward trend continued to 2001 (CBN2001).

Agriculture Investment Uncertainty

Nto (1981) and CBN (1981) agreed that these problems include among others, natural hazards, like unfavourable climate - winds, which are unpredictable and some of which have no im­mediate solution and thus increased the risks of agricultural ventures. They agreed that the inelastic nature of land, relative scarcity and mobility of farm labour also contribute to the risky nature of agricultural project.

More so, they identified the high rate of perish­ing of agricultural products, poor and inadequate infrastructural facilities in rural areas where farm­ing is mainly carried out as factors which further scare away the would be labour from the farming communities and this has brought about the er­roneous belief that farming is a traditional rather than a form of business. Furthermore, to explain that the highly vulnerable nature of food stuff to fluctuations in prices often deter prospective creditors from extending credit to farmers because of the high risk involved.

Government Funding Uncertainty

The success of agricultural loan scheme hangs greatly on government policy and implementation. Garba (1991) argued that in Nigeria, government policies are inconsistent, often self-contradictory and hardly allowed to mature. For instance, while the importation of wheat, maize, rice etc were banned by government in the country, sugar, fish, fish product, salt, etc, importation were generously encouraged despite abundant resources to produce them here in the country.

The CBN summarizes the problems caused by the government to include, the inadequate provision and untimely release of funds in the national budget, lack of adequate pre - project studies, problems of infrastructure and market­ing, the inability to solve the problem of land tenure - despite the promulgation of the land use act in 1978.

Farmer Uncertainty Perspectives

Nto and CBN (1981) identified problems en­countered here to include, the deliberate miscon­Struction of the objectives of government credit initiated programmes. Most farmers according to them regard agricultural loans as a national cake, which is to be shared by all.

The issue of loan diversification by farm­ers and the problems of high level of illiteracy among farmers were also identified. So also are management problems leading to inefficient ap­plication of funds, which is due in part, to wrong selection of enterprise. Exaggerated assessment of the farmers’ credit needs and their reluctance to accept time assessment also poses a problem.

Financial Institution Uncertainty

The CBN summarizes obstacles associated with credit policy and credit delivery to include; the general inefficiency of the present mode of credit delivery. Specifically, the problems among oth­ers are delays in processing application for loans forms, granting of inadequate loan, inadequacy of relevant skilled staff, and drawing up amortiza­tion schedule.

Additional problems include the unjustifiable insistence on particular type of collateral, inabil­ity of existing financial institutions to reach the small farmers, inadequate interest shown towards agricultural lending, the question of interest rate chargeable on agricultural loans and the mutual distrust between the bankers and the borrowers.

Infrastructure Uncertainty

Basic infrastructure such as transportation, electricity, all season motor able roads, water, marketing and irrigation facilities; are needed to support agriculture. The provision of most of them is, however, capital-intensive.

It has been observed that capital expenditure ratio, which was consistently below 6.0% for most of the 1990’s was grossly below the Food and Agriculture Organisation recommended level of 25% of the annual budget for developing countries. Consequently, the resources regularly allocated to the agricultural sector have neither been inadequate not to meet the developmental requirements of the sector nor make adequate provisions for its infrastructure support facilities. These and other daunting challenges have continued to ensure low agricultural output, fluctuations in prices of commodities, and enormous wastage, especially during the harvest months.

Environmental Uncertainty

The Basic natural resources of soil, climate, and vegetation provide the needed environment for sustainable agricultural development. The soils are relatively poor and fragile in some parts of the country. In addition, poor husbandry practices, excessive and intensive rainfall, and other unfa­vourable climatic conditions combine to reduce the quality of otherwise productive soils.

Owing to poor vegetation cover, parts of the savannah region of Nigeria is susceptible to desertification, while humid and warm tropical rain forest conditions encourage the prevalence of crop pests and diseases. The cultural practice of bush burning and over-grazing may contribute to soil degradation, if not properly managed. The frequently reported cases of oil spillage in the Niger Delta area also affect the aquatic environ­ment. Furthermore, gas flaring has had a negative impact on soil temperature, thereby reducing the vital bioactives necessary for enhancing soil fertility (Ojo, 1993).

Business Uncertainty

The agricultural sector, like other sectors of the national economy, has had its fair share of poor resource management. Insufficient and∖or ineffi­cient human resources have continued to frustrate the attainment of sustainable agricultural develop­ment and demands urgent attention.

The challenge manifests itself in various forms, such as ineffective budgeting and control mechanism, and inefficient execution of agricul­tural projects. The opportunities for a high rate of capital formation and technological advancement in the sector will continue to be a mirage until the management constraints are resolved head on.

Land Use Policy Uncertainty

The value of output must exceed the value of inputs in a sustainable land use system in which there is a symbiotic relationship between the socio-economic and biophysical environment. Despite Nigeria’s large expanse of land and a long-standing Land Use Decree, Nigeria’s farm­ing system cannot sustain the growing population because of its concentration in smallholdings, which are not economically viable.

Institutional Reform Factors

Agriculture Universities

In the continuing attempt to build capacity to boost agricultural output, the Federal government established three Universities of Agriculture in Abeokuta, Umudike and Markurdi respectively to offer degree programmes in all disciplines of agriculture.

This initiative is the government holistic approach to solving the perennial problem of inadequate human resources at all levels of the agricultural sector.

Research Institutions

In order to improve the funding of Nigerian Agri­cultural research institutes, government obtained a World Bank loan for specified research activi­ties involving agricultural research institutes in the country.

However, the level of funding of research in the institutes and the universities of agriculture could not be sustained, largely on account of their ever-increasing number and personnel. Besides duplicating their functions, the institutes have continued to be dependent on the subventions from the Federal Government for virtually all their operations.

All in all, the impact of the reforms on the sector are yet to be felt as most of the institutes remain grossly under-funded, while the perennial problem of inadequate human resources in the sector still persists (Ojo & Akanji, 1996).

Launch of Nigeria Import-Export Bank

The Nigerian Government established the Nige­rian Export Promotion Council (NEPC) in 1986 and the Nigerian Export-Import Bank (NEXIM) in 1991. They were established essentially to provide incentives for exports, provide funds for trade and project finance; and render export advisory services.

However, the sustainability of the institutions has been jeopardized due to a combination of factors, including: low level of loans recovery, resulting from severe devaluations of the do­mestic currency and the non-implementation of institutionalized exports incentives, all of which have combined to discourage potential exporters.

Rural Development Programme

It has been estimated that over 60.0% of Nigeria’s population live in rural areas, with the majority of them being involved in agricultural activities. In an attempt to improve the quality of life of the rural people and thereby stem the tide of rapid rural-urban population drift as well as facilitate the promotion of sustained and orderly develop­ment of rural Nigeria, the Federal Government excised the responsibilities of rural development from the Ministry of Agriculture and transferred them to the Federal Ministry of Water Resources.

The government also established the National Agricultural Land Development Authority (NA- LDA) in 1991 to ensure the availability of closest land as well as reduce the burden of land prepa­ration for agricultural activity. NALDA has the mandate to execute a national agricultural land development programme designed to moderate the chronic problem of low utilization of abundant farmland. However, the performance of NALDA has been constrained by high cost of agricultural equipment maintenance and their incessant break­downs, as well as the lack of spare parts, all of which have affected negatively on farm operations and agricultural productivity.

PUBLIC POLICY FACTORS

Agriculture Credit Allocation

A potent policy guideline to stimulate agricultural production is the prescription of a minimum alloca­tion of commercial and merchant banks total loans and advances to agriculture, which consistently remained a priority sector.

The policy was expected to ensure adequate provision of credit to output growth.

From a figure of 4% in 1972, the sector alloca­tion of commercial banks’ loans and advances to the agricultural sector increased by 11 points to 15% in 1986. This figure was sustained until 1993 when it was increased to 18% between 1994 and 1996 (Babalola & Odoko, 1996).

However, in 1996, the CBN authorities em­barked on the process of phasing out mandatory bank credit allocation to the preferred sector, while an incentive package was to be introduced to encourage banks voluntary lending to the prior­ity sector. The system was abolished in October 1996 (CBN, 2001). This perhaps was in line with the deregulation of the financial sector, which has been embarked upon since 1987.

Shortfall revenues were deposited with the CBN as a penalty for non-compliance. Such deposit did not count as part of the banks required reserved as­sets and they are ultimately lent to the agricultural sector through the Nigerian Agricultural Rural and Cooperative development Bank (NARCDB).

Agricultural Credit Guarantee Scheme Fund

In order to complement the sectors prescriptions, the Federal Government in March 1997 established the Agricultural Credit Guarantee Scheme Fund (ACGSF) to induce commercial and merchant banks to increase lending to agriculture.

The scheme is under the management of the CBN with a Board of Directors responsible for policymaking. Under the scheme, banks loans to farmers are guaranteed 75% against default in payment. When a default occurs, the Fund pays lending bank from the security pledged by the farmer. The payment is made from a Fund set up by the Federal government (60%) and the CBN (40%) with an authorized capital of N100m.

As at December 1990, a total of 122,246 projects with loan amounts totalling N765.44m had been guaranteed. From the outcome of the operation of the scheme, the enabling Decree No. 20 of 1977 had been amended by Decree No. 18 of 1988 thereby making it responsive to the changing characteristics of the operating environ­ment. In particular, the amended decree formally provided a waiver of pledging of tangible security for loans of N5,000 and above (Federal Ministry of Agriculture, 1987).

Agricultural Marketing Promotions

Before the abolition of the Commodity Boards System in 1986, the CBN provided funds to the six Commodity Boards (cocoa, rubber, palm produce, cotton, groundnut and grains) for the purchase of produce for export.

The transitional periods that followed the Boards dissolution also saw the CBN extending financing facilities to the state governments for the purchase of grains which were reported to be in excess of immediate requirements - in order to trigger price stabilization effects.

A total of about N84.2 million was provided to all the states for this purpose in 1985/86 season. It should be mentioned that presently, commod­ity marketing/export is now liberalized, mainly a private sector affair, with financing from the commercial and merchant banks as well as other financial institutions (Ojo, 1993).

National Agriculture Production Constraints

Studies in the literature have identified a number of sector-wide constraints, which impede agricultural productivity in Nigeria.

These include: poor agricultural pricing poli­cies, low fertilizer use, low access to agricultural credit, land tenure insecurity, land degradation, poverty and gender issues, low and unstable in­vestment in agricultural research, and poor market access and marketing efficiency (Ojo, 1993; Baba- lola & Odoko, 1996). These are discussed below.

Low Pricing and Low Fertilizer Use

Fertilizer use is promoted mainly by the fertilizer subsidy policy in Nigeria. Input subsidies have been a part of Nigeria’s agricultural price policy since independence, and in spite of economic reforms in Nigeria, fertilizer subsidies have re­mained. In addition, under these sustained and high input subsidy programs, investments in core public goods such as research and extension, which also aim to boost productivity, are limited.

Although improved crop varieties exist, low fertilizer use is a serious constraint to agricultural productivity growth, averaging 10 to15 kilograms per hectare. An important factor is low and un­stable domestic production. There has been no domestic production of fertilizer since the early 2000s, because NAFCON, the dominant fertilizer producer in Nigeria, has been shut down.

Other issues, which affect domestic supply of fertilizers, include high transport costs from port to inland destinations, poor distribution infra­structure, the absence of capital for private sector participation in distribution, significant business risks facing fertilizer importers, and inconsisten­cies in government policies.

Low Access to Agricultural Credit

Access to agricultural credit has been positively linked to agricultural productivity in several studies. Yet this vital input has eluded smallholder farmers in Nigeria. B anks with large loan funds are generally difficult for smallholder farmers to access.

Problems with collateral and high interest rates appear to frequently screen out most potential rural smallholder beneficiaries. In addition, agricultural loans are often short-term with fixed repayment periods, a loan structure that is not suitable for annual cropping or livestock production.

Land Tenure Insecurity and

Land Degradation

An important institutional constraint is the absence of a clear title to land. Group ownership of land in Nigeria has been associated with such problems as limited tenure security, restrictions on farm­ers’ mobility, and the inevitable fragmentation of holdings among future heirs. It may also limit access to formal credit, since the farmer cannot use land as collateral.

This reduces incentives to invest in land quality maintenance or improvement. Because poor farm­ers cannot afford alternative farmlands, and do not have customary access to lands not inherited, they remain on depleted lands and further degrade these resources. Thus, poverty and custom may constrain farmers’ ability and willingness to mitigate land degradation, leading to declining productivity.

Poverty and Gender Factors

Poverty is a constraint to agricultural productivity. When farmers cannot afford yield-enhancing inputs, low productivity and food insecurity can follow.

Gender imbalances also constrain productiv­ity. In spite of their significant role in agricultural production in many parts of Nigeria, women have varying and relatively limited rights to farm­land, and lower access to extension services and credit. These constraints limit their agricultural productivity.

Low Unstable Agriculture

Research Investment

When research is poorly funded, agricultural technologies cannot be improved, and there will be no downstream farm income increase, rural employment generation, reduction in food prices, establishment of agro-based industries, and economic growth. In short, the absence of new technologies in agriculture will slow the growth of agricultural productivity and the reduction of rural poverty.

Public research and development (R&D) spending in Nigeria has been low and unstable since independence, and the government budget process for funding agricultural research is com­plex. Private sector involvement in agricultural research has remained negligible to date.

Poor Market Access and Low Marketing Efficiency

Agricultural marketing efficiency in Nigeria is dismally low. Transport costs are high due to poor road conditions, limiting access to inputs, credit, and output markets, and reducing the transmission of key market information.

METHODS

This paper is a single explanatory case study fol­lowing the principles of Yin (2009). The researcher held a post-positivist philosophy since quantitative data type evidence (descriptive statistics) were col­lected from archives to implement an explanatory analysis strategy using the hypothesis testing and general analytics research methods (Strang, 2013).

The unit of analysis was the cause-effect of national factors on the agriculture national pro­duction, therefore the level of analysis was the country as a whole. The primary level of analysis focus was on the agriculture sector stakeholders. The data was available in the archives, which are publicly accessible, so there were no participants.

The formal research method was general econometric analytics with hypothesis testing, which included ANOVA and Ordinary Least Squares regression techniques. The econometric method was the best approach since the analysis strategy was cause-effect and the factors were economic and numerical. ANOVA and regression techniques are commonly used to test hypotheses (Strang, 2009).

Research Hypotheses

The research work was guided by the following hypotheses:

H1: There is no significant relationship between commercial banks’ credits to agriculture and agricultural contribution to real gross domestic product (Real GDP).

H2: There is no significant relationship between government’s budget to agriculture and ag­ricultural contribution to real gross domestic product (Real GDP).

H3: There is no significant relationship between agricultural credits guaranteed scheme fund and agricultural contribution to real gross domestic product (Real GDP).

In this study, two types of test are conducted: a test of the hypothesized cause-effect model significance (F-test) and a test for the statistical significance of each predictor (t-test). The tests were conducted at the 5% significance level.

In a given regression equation with k regres­sors for estimator’s test of significance, the null hypotheses is:

H₀: α_i = 0, and the alternative hypothesis is H₁: α ≠ 0.

i

For a decision the observed F-ratio, Fs, is compared with the theoretical F-ratio, F₀₀₅, which has V₁ = k- 1, V_{2 =} N-K degrees of freedom; N is the sample size and K is the total number of parameters estimated. The decision rules are:

1. If Fs > F₀₀₅, Reject H₀ - the regressors have a significant influence on the dependent variable;

2. If Fs < F₀₀₅, Accept H₀ - the regressors have an insignificant influence on the dependent variable.

Furthermore, two-tailed tests are conducted by comparing the observed t-ratio, t, with the theoretical t-ratio, t ₍₀₀₂₅₎ that has degrees of free­dom N-K. The null and alternative hypotheses are respectively, H₀: α_i = 0 and H₁: α_i ≠ 0.

The decision rules are:

1. IfZt₅Z>Zt(_{0 25)}/, Rej ect H₀ - α_i is not equal to zero and with regressor influence, the dependent variables vary significantly;

2. IfZt_sZbgcolor=white>1992 6,978.90 924.5 88,031.8 89,345.4 1993 10,753.00 2,835.30 80,845.8 90,596.5 1994 17,757.7 3,719.10 103,186.0 92,833.0 1995 25,278.70 6,927.70 164,162.1 96,220.7 1996 33,264.10 5,574 225,502.5 100,216.2 1997 27,939.30 7,929.60 242,038.2 104,514.0 1998 27,180.70 11,840.40 215,697.2 108,814.1 1999 31,045.7 38,259.80 246,082.5 114,570.7 2000 41,028.9 10,596.40 361,450.4 117,945.1 2001 55,846.1 64,961.90 728,545.4 122,522.3 2002 59,849.7 44,803.80 1,051,589.8 190,133.4 2003 62,102.8 16,045.20 1,164,460.4 203,409.9