Nigeria: Election Campaign to Heighten Credit Crunch, Inflation – Analyst

With the primaries of the various political parties over and the wheel of electioneering campaign set in motion, the founder and chief executive of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, has warned of the effects of election spending on the financial intermediation of commercial banks in the country.

In his comments on the implications of heightened electioneering activities on the economy, Yusuf said, it could pose an added risk to the recovery of the Nigeria economy adding that “the electioneering and political activities also have implications for the level of bank deposits.

“With the increase in political spending, the banking system is likely to witness considerable withdrawals by the political actors to fund the elections, most of these would be in cash. This may have an adverse effect on the level of deposits in the banking system and negatively impact on financial intermediation.

He further stated that, there is also an implication for credit risk in the financial system.

“As the tempo of political activities increase, credit risk to players in the economy becomes heightened, particularly for long term projects because of the growing uncertainty and elevated political risk. Therefore, the economy is likely to witness a deceleration in the credit growth outlook to the private sector, ” he stated.

The electioneering activities, he noted, would also shift the focus of many investors from long term investments, saying, investors would be looking to invest in the “short term in order to manage the risk inherent in the uncertainty arising from the electioneering processes and the impending political transition.”

Asides these effects of increased focus on the upcoming general elections, he stated that, as the polity is getting increasingly heated, “political temperature is rising and the risk of political violence is growing. These have ominous implications for the investment environment, the security of lives and property and could dampen investors’ confidence.

“For investors the level of uncertainty is generally higher in a season like this. It is much more difficult to plan for a long-term horizon because of the elevated political risk in the economy. Many important business decisions have been put on hold, especially for long term projects. The effect is that the economy suffers as a result of these delayed decisions. This could further dip the growth outlook.

“Electioneering season unleashes liquidity on the economy arising from a surge in spending, both by the political actors and the electoral body. The economy is already witnessing a significant injection of liquidity to fund electioneering activities by the preparations for the elections. Liquidity surge has inflationary implications.”

Yusuf pointed out that, with the elections at hand, “political attention to governance and economic management gets characteristically weakened as political office holders seek desperately to retain their offices in the next dispensation. This would adversely impact the business of government.

“There is a high probability that the apparatus and resources of state are being deployed for electioneering activities by political appointees and elected officials. The opportunity costs of such misappropriation for the citizens are very high, especially in the light of the weak fiscal position of governments at all levels.”

He also noted that major economic reform initiatives “have been practically stalled because of the perceived political cost of such decisions. The government has rather opted for populist policies at a heavy cost to the economy. With a weak fiscal space, this would increase the fiscal deficit and plunge the country deeper into a troubled debt situation.”

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