International Journal of Research and Innovation in Social Science (IJRISS) | Volume IV, Issue VII, July 2020 | ISSN 2454–6186

Impact of Monetary Policy on the Performance of Agricultural Sector in Kenya

Steven Owino Adongo^1*, Samuel Otieno John², Philip Zeph³ & Ruth Nehema Muyima^{4
1, 2,4}Department of Agricultural Economics and Resource Management, Moi University-Kenya
³School of Business and Economics (Accounting), Maseno university-Kenya
*Corresponding Author

Abstract: The agricultural sector is the bedrock of Kenyan economy and exhibit a potential is employment creation, poverty reduction and increasing food security. This study purposed to examine the impacts of monetary policy on the Agricultural sector gross domestic product in Kenya. Using the annual data for the period of 1981 to 2019, the study conducted empirical analysis to determine the relationship between monetary policy and agricultural domestic product using OLS regression model. The monetary policy instruments that were selected are broad money supply (M2), Central Bank Rates (CBR), Cash Reserve Ratio (CRR) and Exchange Rate (ER). Both ADF and Philip-Perron unit root tests were done to confirm if the variables were stationary and Johansen Co-integration test was done to confirm short and long run relationships. The empirical findings revealed that broad money supply has a positive influence on agricultural GDP while exchange rate displayed a negative impact on the performance agricultural sector. Government’s increase of budgetary allocation to support agriculture and monetary policy commission commitment to maintain exchange rate volatility are necessary to realize full potential of agricultural sector.

Keywords: Monetary policy, Agricultural performance, OLS, CBR, CRR, Exchange Rates, Money Supply

I. INTRODUCTION

Agricultural sector in Kenya combines crop production, fisheries, livestock production and forestry. Agriculture has been and still remains to be the mainstay of the Kenyan economy. It has significant contribution in rural employments and rural incomes, alleviation of poverty, food security and in international trade (Government of Kenya, 2019b). The contributions from the agricultural sector in Kenya accounts directly to an estimate of 26 percent of the Gross Domestic Product (GDP) and also accounts indirectly for about 27 percent through other relations in manufacturing sector, distribution and other several linked sectors. Agriculture contributes 65 per cent of the total exports from Kenya, 18 percent of formal employments and 60 percent of the total employment. The sector is characterized by smallholder production with farm size ranging between 02 and 0.3 hectares accounting for 78 percent and 70 percent of agricultural production and commercial production respectively (Kenya National Bureau of Statistics, 2019).