Agricultural productivity rises with formal credit access

A new empirical study confirms that access to financial credit from formal institutions directly improves agricultural productivity in Sierra Leone, while also offering important insights into how macroeconomic variables like land use, labor input, and rainfall interact with farming outcomes. The study, titled “Does Financial Credit Obtained from Financial Institutions Influence Agricultural Productivity While Balancing Economic Growth and Sustainability? Empirical Evidence from Sierra Leone Using the VAR Approach,” and published in SAGE Open, analyzes time-series data from 1990 to 2024 using a Vector Autoregression (VAR) framework and reveals critical dynamics affecting agricultural output in the country’s fragile yet agriculture-dominant economy.

The research shows that financial credit, agricultural land, and investment are positively correlated with productivity in both the short and long term. Conversely, excessive labor input and unpredictable rainfall are negatively associated with output, indicating a need for improved policy frameworks targeting credit access, land optimization, and climate-resilient infrastructure.

How strong is the link between financial credit and agricultural productivity?

The study demonstrates a statistically significant and stable long-run equilibrium relationship between formal credit and agricultural productivity. Using co-integration tests and error correction modeling, the authors find that a 1% increase in financial credit results in a 0.105% increase in agricultural productivity. This finding is critical for Sierra Leone, where agriculture employs approximately 75% of the labor force and contributes nearly 65% of national GDP, yet consistently struggles with underinvestment and vulnerability to external shocks.

Alongside credit, agricultural land and investment also yield positive effects: a 1% increase in land area boosts productivity by 0.344%, while investment contributes 0.04% gains. These findings indicate that targeted resource allocation, particularly in credit expansion and land optimization, can enhance the efficiency and sustainability of agricultural systems.

The use of a VAR framework allows for dynamic interaction modeling across multiple variables. The results reveal that credit plays both a direct role in capital availability and an indirect one by influencing other inputs, such as fertilizer purchases and irrigation. This underscores credit’s central role not merely as a liquidity mechanism but as a strategic enabler of broader agricultural transformation.

Why do labor and rainfall have a negative effect on output?

Surprisingly, the study finds that agricultural labor and rainfall are negatively associated with productivity in both the short and long term. A 1% increase in labor input reduces productivity by 0.77%, while a 1% rise in rainfall leads to a 1.59% decline. These results signal structural inefficiencies in the agricultural labor force and highlight vulnerabilities linked to climate volatility.

The negative labor coefficient suggests that Sierra Leone's agricultural sector suffers from labor saturation or underemployment. High levels of informal, low-skilled labor, without corresponding improvements in mechanization or input usage, appear to dilute overall productivity. In other words, adding more labor alone does not lead to greater output unless supported by complementary capital, technology, or efficient practices.

Rainfall’s negative effect reflects climate sensitivity and the risks associated with erratic weather patterns. Excessive or poorly timed rainfall can damage crops, disrupt planting cycles, and exacerbate soil erosion, particularly in the absence of irrigation infrastructure or drainage systems. These findings point to the need for climate-resilient agricultural planning and investment in adaptive technologies, such as rainwater harvesting, drought-resistant seeds, and improved weather forecasting tools.

The study’s short-run model, based on an error correction mechanism, indicates that the agricultural system in Sierra Leone adjusts slowly to external shocks. With a 33.4% annual adjustment rate toward long-term equilibrium, the sector demonstrates inertia and structural rigidity, requiring deliberate policy interventions to enhance responsiveness and resilience.

What policy measures can align financial and agricultural systems?

Based on the empirical findings, the authors propose a range of policy strategies aimed at unlocking the potential of financial credit while mitigating structural impediments in agriculture. First and foremost is the expansion of credit access for smallholder farmers through specialized lending programs, credit guarantees, and interest subsidies. Tailored financial instruments aligned with seasonal crop cycles and rural borrower profiles are essential for improving uptake and effectiveness.

Second, land optimization policies are recommended to increase output per hectare. These may include improved land tenure systems, precision farming incentives, and investments in land reclamation and soil health. Formalizing land rights and offering technical assistance to farmers can further improve long-term productivity.

Third, investment in agriculture must be strategic and targeted. Public and private sector partnerships can help scale mechanization, irrigation, and logistics systems. Digital tools such as mobile banking and agri-fintech platforms can also enhance credit disbursement, reduce transaction costs, and enable data-driven decision-making.

Next up, to address labor saturation and rainfall vulnerabilities, the study urges the promotion of labor productivity rather than labor quantity. This includes vocational training, youth inclusion in agri-tech innovation, and mechanization programs that reduce dependence on manual labor. Meanwhile, infrastructure investments in climate adaptation, such as flood control, water storage, and weather-resilient seeds, are imperative to mitigate the effects of changing rainfall patterns.

In addition, institutional reforms are needed to strengthen interlinkages between financial, agricultural, and environmental governance. These include better coordination between ministries, integration of agricultural financing into national development plans, and transparent monitoring mechanisms to evaluate program impact.