Election campaign to escalate credit crunch and inflation – Analyst

As the primaries of the various political parties are over and the wheel of the election campaign is in motion, the founder and managing director of the Center for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, warned against the effects of election expenses on the financial intermediation of commercial banks in the country.

In his comments on the implications of increased electoral activities on the economy, Yusuf said, this could pose an additional risk to the recovery of the Nigerian economy, adding that “electoral and political activities also have implications on the level of bank deposits”.

“With the increase in political spending, the banking system is likely to witness considerable withdrawals by political actors to finance the elections, most of them would be in cash. This may have a negative effect on the level of deposits in the banking system and have a negative impact on financial intermediation.
He further stated that there is also an implication for credit risk in the financial system.

“As the pace of political activity increases, the credit risk for players in the economy intensifies, especially for long-term projects due to growing uncertainty and high political risk. Therefore, the economy is likely to witness a deceleration in the outlook for credit growth to the private sector,” he said.
Election activities, he noted, would also distract many investors from long-term investments, saying investors would seek to invest “short-term in order to manage the risk inherent in the uncertainty arising from electoral processes. and the impending political transition.

Besides these effects of heightened focus on the upcoming general election, he said that as the regime grows hotter, “the political temperature rises and the risk of political violence rises. These have worrying implications for the investment environment, the safety of life and property and could undermine investor confidence.

“For investors, the level of uncertainty is usually higher in a season like this. It is much more difficult to plan for a long-term horizon due to the high political risk in the economy. Many important business decisions have been suspended, especially for long-term projects. The effect is that the economy suffers from these delayed decisions. This could further weigh on growth prospects.

“Election season releases cash on the economy resulting from soaring spending, both by political actors and the electorate. The economy is already experiencing a significant injection of cash to finance electoral activities through preparations for the elections. The surge in liquidity has inflationary implications.
Yusuf pointed out that with the upcoming elections, “political attention to governance and economic management is typically weakened as political office holders desperately seek to retain office in the next dispensation. This would have a negative impact on government activities.

“There is a strong likelihood that the apparatus and resources of the state will be deployed for electoral activities by appointees and elected politicians. The opportunity costs of such diversion for citizens are very high, especially in light of the weak budgetary situation of governments at all levels.
He also noted that major economic reform initiatives “have been virtually stalled due to the perceived political cost of such decisions. The government instead opted for populist policies at a high cost to the economy. With weak fiscal space, this would increase the fiscal deficit and push the country deeper into a debt-stress situation.