DO IRRIGATION AND BANK LOANS MATTER FOR AGRICULTURAL SECTOR DEVELOPMENT IN THE ACEH PROVINCE, INDONESIA?

Abstract

This study aims to empirically measure and analyze the effects of irrigation, bank credit, economic growth, and the number of farmers on the agricultural sector’s growth in the short- and long-run across 23 districts/cities in Aceh Province, Indonesia. Combining the agricultural dimension (i.e., irrigation and number of farmers) and the economic dimension (i.e., economic growth and bank credit) into the determinants of the agricultural sector’s growth both in the short- and long-run perspectives is viewed as the main novelty of the study in the context of the agricultural sector in Indonesia. Using annual panel data from 2010 to 2020 from 23 districts/cities and analyzed using the Panel Vector Error Correction Model (PVECM), the study found that, in the short run, irrigation and bank credit distributed to the agricultural sector have promoted the growth of the agricultural sector. Meanwhile, in the long run, irrigation, bank credit for the agricultural sector, and economic growth contributed to the agricultural sector’s growth. These findings confirmed the importance of agricultural infrastructure and financial support for further promoting the growth of the agricultural sector. Thus, the government should provide more irrigation across the provinces and incentive schemes for the banks that allocate their credit with a lower interest rate to the agricultural sector.