Election Campaign: Analyst Warns on Impending Credit Crunch, Heightened Inflation

Dike Onwuamaeze

The Centre for the Promotion of Private Enterprise (CPPE) has warned that heightened political activities in the country as the 2023 general elections draw near would have adverse effect on the level of deposits in the banking system and banks’ ability to lend to the private sector.

The CPPE, in a statement titled: “Heightened Electioneering Activities: Implications for the Economy,” also said Nigeria might witness accelerate inflationary pressure due to increased liquidity injection into the economy by politicians to execute election campaign.

The statement, which was signed by the Founder and Chief Executive Officer of CPPE, Dr. Muda Yusuf added: “The electioneering and political activities 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.

“There is also 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.”

Yusuf added that the, “economy is witnessing a flurry of cash, in domestic and foreign currency.  Cash within the banking system have been significantly depleted in the past one month and trend is likely to continue till 2023. The economy is awash with cash which has implications for liquidity, for aggregate demand and surge in price level.

“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.”

He also added that the prevailing electioneering mood in the country would affect investments decision in the Nigerin economy as, “the focus of many investors at this time will be short term in order to manage the risk inherent in the uncertainty arising from the electioneering processes and the impending political transition.”

“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,” the statement added.

Yusuf, who is also the immediate past director general of the Lagos Chamber of Commerce and Industry, pointed out that major economic reform initiatives of the government would be practically stalled because their perceived political cost would lure the government to jettison them 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.

“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.”