Agriculture sector is the backbone of Pakistan's economy. It accounts for 20.9% of the GDP and absorb 43.7% of labour force (GOP, 2014-15). This sector provides raw materials to agro-based industries and it is also source of country’s export earnings. In Pakistan, the agriculture sector growth rate was 2.7% in 2013-2014 which was slightly increased to 2.9% in the year of 2014-15 as given in Table 1 (at constant factor cost), (Statistical Supplement, and 2014-15). The growth of agriculture sector in Pakistan always was poor in all aspects such as productivity, production, consumption and exports compared to developed countries. However, the agricultural growth of Pakistan is facing several problems like severe water shortage, along with soil erosion, lack of mechanization, natural calamities and rising price of inputs such as seeds fertilizers, pesticides etc. Therefore, this growth has required the use of fertilizers, improved seed varieties, better irrigation, and modern equipment, which in turn has required the credit availability to the farmers. 68%  population living  in  rural areas and mostly rural population is engaged in agricultural activities.Agricultural farming requires capital like other business for its farm operations. Timely availability of credit leads to adoption of improved seeds, fertilizers and modern technologies which increase the agricultural productivity and the growth rate. Therefore, agriculture credit is an essential element for modernization in agriculture.  In the past few decades, the need of credit in agriculture sector rapidly increased because of rise in use of fertilizer, pesticides, high yield variety seeds and mechanization and rise in their prices. In Pakistan, there are two sources of credit: informal and formal. Informal sources of credit include friends, relatives, commission agent, input supplier, shopkeeper, landlords, employer, traders and private money lenders and the formal credit sources consists of financial institutions like Zarai Taraqiati Bank limited, (ZTBL) previously known as Agricultural Development Bank of Pakistan (ADBP), However, ZTBL was established in 1961 through merger of Development Finance Corporation and Agricultural Development Bank of Pakistan. ZTBL is an important source for supply of credit to agriculture sector in Pakistan.  ZTBL provides short - term, medium- term and long-term credits for farm and non-farm activities. The bank provides five types of loan such as Development loan, Production Loan, Agri-business loans, and off farm income to farmers generating activities loans (Chandio et al., 2015). On the other hand, Commercial banks such as National Bank Limited (NBP), United Bank Limited (UBL), Allied Bank Limited (ABL), Muslim Commercial Bank (MCB), Habib Bank Limited (HBL), and co-operative societies. However, all financial institutions have been playing vital role in the provision of agriculture credit for the last two decades. These sources provide loans for the production and development purposes for increasing the production and productivity of this sector. The share of these institutions is increasing day-by-day as described in Table 2. Therefore, the share of commercial banks has increased over time and they are the largest contribution in this sector followed by ZTBL (GOP, 2013-14). In Pakistan, Small farmers, landlord farmers and non-farm population in agriculture sector they are facing rigorous problem of lacking in capital. After green revolution, and technological changes in agriculture sector, the requirement of credit has rapidly increased to purchase inputs. However, small farmers and share croppers usually face complicate procedure and collateral problems in availing credit. These impediments had hardly hit the tenants and share croppers who did not own land.  Despite these problems, financial institutions have been playing positive and significant role to enhance technological change in agriculture sector. After considering the importance of agricultural credit the study focused on the impact of formal credit on agricultural output (value added) of Pakistan: an econometric analysis. Furthermore, the layout of the study is as follows: First is the literature review followed by the methodology. Thereafter, the results and discussion are presented followed by the conclusion and recommendations.

 

 

 

Data source

 

This study was designed to cover a period of 20 years (1996-2015). A time series data was used for this study. Data used in this study were collected from Economic survey of Pakistan (2014-15). The main objective of this study is to investigate the impact of formal credit on agricultural output (value added.) through econometric analysis.

 

Model specification

 

Conventionally, agricultural output function depends upon the inputs such as land, labour, capital and other inputs like as water, fertilizer, pesticides etc. However, in this study agricultural output (value added) was used as dependent variable and output was assumed to be a function of availability of credit and all those inputs which were purchased with the help of credit such as seeds, fertilizers, tractors and tube wells. But, instead of taking seeds, fertilizers, tractors and tube wells, only credit was taken as this was used to purchase all these inputs.

 

Model estimation

 

The study was conducted in the year 2015 by using an econometric analysis to assess the impact of formal credit on agricultural value added in Pakistan .Secondary data ranging from 1996 to 2015 on the above variables has been taken from Economic Survey of Pakistan (Statistical Supplement, 2014-15) .In modern approach Augmented Dickey Fuller test (Dickey and Fuller, 1979, 1981) and Phillips-Perron (PP,1988) test was applied to check the stationarity of the data and the Akaike Information Criterion (AIC) was used to select the optimum ADF lag. Variables, which were non-stationary at level, were again checked to assure the stationary after taking first difference and second difference.  Furthermore, to empirically estimate the long run relationship we employed the multivariate co integration technique (Johansen-Juselius). To investigate the impact of credit on agricultural output (value added), the method of Ordinary Least Square (OLS) was used and the following model was estimated inducting agricultural credit as explanatory variable while agricultural output as dependent variable.

 

Lnagriop = β₀ + β₁Lncr +µ     (1)

 

Where, Lnagriop = Natural logarithm agricultural output (value added) measured in terms of million rupees;

Lncr =   Natural logarithm of credit disbursement from all institutions in million rupees;

µ= error term

 

The problem of autocorrelation has been solved by using Durbin two-step methods. At first step, the following model was estimated to find out the value of ρ^ (that is, coefficient of Lnagriop-1, which is β₁ here).

 

Lnagri = β₀ + β₁Lnagriop-1 + β₂Lncr + β₃Lncr-1      (2)

 

At second step, Lnagriop* has been regressed on Lncr*

 

Where

Lnagri* = Lnagriop - ρ^ Lnagriop-1

Lncr* = Lncr - ρ^ Lncr-1

 

A statistical package Eview has been used for deriving the results.

 

 

Since all the series were at the same order, the dataset was appropriate for further analysis. The dependent and independent variables are stationary at the first difference. The results from the Johansen Co-integration analysis were present in Table 4 where the Eigen value and trace statistics examine the null hypothesis of no co-integration against the alternative of co-integration. Therefore, analysis of annual data from 1996 to 2015 appears to support the proposition that there exists a stable long run relationship among the dependent variable agricultural output (value added) and independent variable formal Credit. The values of the trace statistic were greater than relevant critical values which showed that the existence of 2 co-integration equation (s) at 5% statistically significant level.

 

 

Regression analysis

 

Table 5 presents the result of the regression analysis using Ordinary Least Square (OLS) method. The empirical regression results indicate that formal credit is statistically significant at both 1 and 5% probability level. However, the coefficient value of formal credit showed that   1%   increase   in  credit,  agricultural  output  (value added) will increase at 0.86%. These results are in line with the earlier studies by Feder et al. (1991), Khander and Faruqee (1999), Nazli (2001), Olagunj (2007), Bashir et al.(2008,2009) and Chandio et al.(2015).The high value of R² was 0.77 which indicated that about 77% of total change in agricultural output (value added) by independent variable formal credit.

 

 

Durbin-Watson value (0.96) suggests positive serial autocorrelation. To take away the autocorrelation, Durbin-two step method is estimated. The results of Durbin-two step method are given in Tables 6 and 7. In the first step, the estimated value of ρ^ is 0.588329. In the second step, putting this value in the transformed model, gave the Durbin-Watson value equal to 1.92, which is closer to 2 showing no problem of autocorrelation.

 

 

 

 

 

 

 

 

 

On the basis of above study it can be concluded that credit itself cannot play any direct role in increasing the agricultural output rather indirectly supports in the growth and development of agriculture sector through purchasing modern inputs. Therefore, the following recommendations are suggested:

 

1. The procedure of credit should be make simple and

easy it could be a good opportunity for small farmers and

credit should be provided in kinds as compare to cash.

2. Small farmers and small tenant usually facing the financial problems and they are not  able to purchase high yield variety seed, sufficient fertilizer, pesticide and modern equipment, therefore specially ZTBL and Commercial banks should supply credit on flexible terms and conditions to small framers and small tenant.

 

3. Financial institution should provide information through electronic media and print media about agricultural credit in farming communities so they have an easy way to access to the financial services.

 

4. The government of Pakistan through the ministry of Agriculture should collaborate with financial institutions and other stakeholders, should lunch crop insurance scheme for farmers as compensation in case of crop failure by flood, draught, pest attack, and heavy rains because during 2010-11 and 2015 small farmers and tenant faced this kind of problems, thereby will help the farmers to sustain their livelihood.

 

5. Government of Pakistan should support small farmers through credit schemes on affordable interest rate and subsidize on agricultural inputs such as fertilizers, seeds and pesticide. It will help in raising farm productivity and the standard of living of the small farmers.

The author is thankful to Mr. Jiang Yuansheng, Deputy

Dean, Faculty of Economics and Management, Sichuan Agricultural University and Mr.  Feng Wei, Assistant Professor Faculty of Economics and Management, Sichuan Agricultural University, Wenjiang Chengdu Sichuan 611130, China, for his support, suggestions, and co-operation during the research work.

The authors have not declared any conflict of interest.