Effect of financial development on agricultural output growth in Ghana

This study examines the effect of financial development on agricultural output growth, using autoregressive distributed lag model (ARDL) as the estimation strategy. The ARDL results suggest that the effect of financial development on agricultural output growth is positive and significant in both long run and short run. Specifically, our empirical analysis confirms that credit to the private sector is favourable for agricultural-output growth while net domestic credit and ratio of liquid liabilities to GDP are unfavourable for agricultural-output growth. However, three financial development indexes exert a positive impact on agricultural output, implying that an efficient financial market promotes agricultural growth. Hence, policies aimed at ensuring that the financial sector is well-developed can boost the growth of the agricultural sector. However, much effort, resources, and attention should be given to credit to the private sector.Agriculture plays a major role in Ghana’s economy from the perspective of food production, productivity, source of employment, and ultimately as means of ending extreme poverty. The agricultural sector employs more than 50% of Ghanaians and contributes nearly 25% of the nation’s GDP growth. According to World Bank (2018), the main export crop, cocoa, accounts for 20 to 25% of total foreign exchange earnings in Ghana. Therefore, the growth of the agricultural sector should be of keen interest to policymakers, government, and international bodies. However, implementing policies to promote agricultural growth requires sound empirical evidence. To contribute to literature as well as provide insight to policymakers, government, and international organizations, we examine the effect of financial development on agricultural output growth, utilizing different measures of financial development. Generally, the study finds that financial development promotes agricultural growth in the long run. This finding suggests that policies aimed at promoting and ensuring a strong linkage between the financial and the agricultural sectors can foster the growth of the agricultural sector.