The Impact of Domestic Debt on Agricultural Output in Nigeria (1985-2014)

Abstract

This paper investigated the impact of domestic debt on agricultural output in Nigeria using annual time series data spanning 1985-2014.The study employed the Augmented Dickey-Fuller test, Johansen Co-integration test, Error Correction Method (ECM) and Granger causality test. Findings of the Johansen Co-integration test revealed that there exists a long-run relationship between agricultural output, domestic debt, public agricultural expenditure and interest rate. The results of the parsimonious ECM model showed that domestic debt has a significant positive impact on agricultural output, and public agricultural expenditure has an insignificant positive impact on agricultural output. However, interest rate has a significant negative impact on agricultural output in Nigeria. The R2 value (0.630968) and the statistically significant f-value (7.523083) indicated that domestic debt, public agricultural expenditure and interest rate are major and significant determinants of agricultural output growth in Nigeria. The error correction term revealed that about 32% of all lasts period’s disequilibrium in the model is removed in the current period. Also, the Granger Causality test revealed that causation flows from domestic debt, public agricultural expenditure and interest rate to agricultural output and not the other way round. It is therefore ascertained that domestic debt contributes significantly to agricultural output growth and is one mean through which the public can finance agricultural output growth in Nigeria. Public agricultural expenditure plays no significant role in enhancing the level of agricultural output while interest rate crowds out private investment in the agricultural sector and leads to a fall in agricultural output in Nigeria. Hence, the accumulation of domestic debt should be encouraged since it contributes to agricultural output growth in Nigeria and macroeconomic policies should be targeted towards maintaining a low rate of interest as it would contribute to agricultural output growth in the country.