Financial Inflows and Agricultural Value Addition in Nigeria:

The Credit Paradox and the FDI Promise

Abstract

Agriculture is central to Nigeria's economy, yet its transformative potential is constrained by low value addition, with most produce exported or consumed raw. Financial inflows, particularly agricultural credit and foreign direct investment (FDI), are presumed to catalyze agro-processing, but empirical evidence on their effectiveness remains contested. Objective: This study investigates the impact of agricultural credit (AGR-CRED) and foreign direct investment (FDI) on agricultural value addition (VA-AGR) in Nigeria from 1991 to 2023. Using time-series data from FAOSTAT, the study employs an Autoregressive Distributed Lag (ARDL) bounds testing approach to examine the long-run and short-run relationships. Preliminary tests for stationarity (ADF, KPSS) and model diagnostics (autocorrelation, heteroskedasticity) were conducted to ensure robust inference. The ARDL model confirms a long-run cointegrating relationship among the variables. Findings reveal a paradox: agricultural credit has a statistically significant negative effect on value addition in the long run, suggesting systemic inefficiencies in credit utilization. Conversely, FDI has a positive and significant impact, indicating its potential when channeled effectively into agro-processing. The study concludes that the volume of agricultural credit is less critical than the efficiency of its utilization. Policy should prioritize redirecting FDI towards processing infrastructure and establishing agro-industrial clusters to create a more conducive ecosystem for value addition.