The Effect of Credit to the Agriculture Sector on Coffee Export Growth in Tanzania

Abstract

Coffee is among the traditional exports that contribute to the economic growth in Tanzania. Depending on the increasing efforts of the country to increase foreign exchange earnings, coffee exports can be met by increasing coffee production and export exports. Schumpeter (1912) pointed out that well-functioning banks spur technological innovation by identifying and funding entrepreneurs with the best chances of successfully implementing innovative products and production processes.  In this respect, it is crucial to investigate the coffee export growth and the factors affecting coffee export growth. This study aimed to examine the effect of credit on agriculture and coffee export growth in Tanzania. In the study, with the aim of examining the relationship between agricultural credit and coffee export growth in Tanzania, 1991 – 2022 data on credit to agriculture by commercial banks and the value of coffee exported annual data covering the period given above were sourced from Bank of Tanzania and Tanzania Coffee Board. The statistics analysis tool is the Vector Error Correction Model (VECM) technique. The results of VECM estimation show that agricultural bank credit has a positive significant effect on coffee export growth in the long run. This implies that the increased number of loans issued to the agriculture sector by commercial banks also promotes coffee export growth in Tanzania. This study suggests that an agricultural credit mechanism needs to be developed to increase the agricultural financing opportunities for the realization of the use of recommended agricultural practices including the use of fertilizers, pesticides, modern seeds, and the adoption of new technology by coffee growers. The paper concludes by suggesting that policy intervention in the form of availability of credit supply on flexible terms to farmers could be effective in improving export performance as farmers could be able to purchase inputs and modern equipment to increase productivity. These findings will inform policymakers and coffee stakeholders on the best actions and decision-making regarding the importance of farmers.