Nigeria is set to hold its general elections in early 2015 and politicians are already perfecting their strategies on how to achieve their ambitions. As political activities gather momentum, there are concerns that election-related spending will result in higher government expenditure and by extension fuel inflation. Already, Nigeria’s headline inflation rate, though still at single digit, increased consistently from March to August before moderating marginally to 8.3 percent in September 2014. Ngozi Okonjo-Iweala, finance minister and coordinating minister of the economy, has done well to provide a ‘forward guidance’ that spending related to the 2015 general elections will not increase inflation. The relationship between election spending and inflation remains an empirical matter.
The pioneer work of William D. Nordhaus in 1976 which propounded the ‘Political Business Cycle’ theory found evidence that politicians stimulate the economy before elections to increase their chances of victory, thereby fuelling inflation. Thirty years after that lead-way study, the findings of Stephen B. Kaplan in 2006 did not support the theory.
Concerns about election spending and inflation, especially in resource-rich countries like Nigeria, are not misplaced. This anxiety is usually more pronounced when elections coincide with regimes of high oil prices. However, going into Nigeria’s 2015 elections, the declining oil prices (oil prices are currently at three-year low) mean that even the ‘inflation-biased’ politicians will not have the basis to lobby for extra-budgetary spending.
In addition, given the strict adherence to fiscal prudence measures that the Ministry of Finance and the Budget Office of the Federation have been implementing, the likelihood of overshooting budgetary provisions for the 2015 election is slim. These may be the reasons why the minister of finance argues that the spending on the elections will not fuel inflation.
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The Central Bank of Nigeria (CBN) through the Monetary Policy Committee (MPC), however, differs with the minister. The CBN is concerned that government spending linked with the 2015 general election is one of the factors that will stimulate inflation in the medium term. Specifically, the MPC’s statement as highlighted on page 7 of the September 2014 Communiqué reads: “The policy challenges would include sustaining the stability of the naira exchange rate, managing the vulnerability to capital flow reversal, building fiscal buffers to insure against global shocks, managing inflation and exchange rate expectations and safeguarding the financial system stability as well as a build-up in election-related spending.”
When the individual statements of the members were scrutinised, Godwin Emefiele, the CBN governor was among those who made specific reference to the likely impact of elections spending on inflation. According to him, “In the domestic environment, factors such as election-related expenses, likely increase in electricity tariffs, global rise in food prices, and supply shocks due to insurgency constitute upside risks to the medium-term inflation outlook.”
Adelabu Adebayo, another MPC member, was of the view that “election-related expenses, depreciation of the exchange rate at the BDC due to current measures, rising global food prices, and seasonal factors portend upside risks to price level, particularly core inflation in the near term”.
Other MPC members shared the same view. Dahiru Hassan Balami said, “The months coming ahead are in electioneering period with consequence of rise in the level of government expenditure which will lead to rise in inflation.”
For Suleiman Barau, “CBN’s intervention activities and likely increase in fiscal spending as we head into election year, as well as security-related spending, should be of significant concern to monetary policy.”
Shehu Yahaya said that “headline inflation is projected to trend upwards up to the early part of 2015 on the back of persistent excess liquidity in the banking system, prospects of increased fiscal expenditure in the run-up to the election, as well as pressure on the forex market”.
Anastasia Daniel-Nwaobia said, “Staff projections indicate that the year-on-year headline inflation would remain within single digits in the next six months with the end-December, 2014 rate projected at 8.8 percent.”
“Indeed, with headline inflation for December 2014 projected at 8.8 percent, the possibility of missing the target band looms large,” said Adedoyin Salami.
Given this scenario, it is, therefore, important that the finance minister and the CBN governor share and compare information on important issues like inflation. While divergent views may be expressed by other MPC members and indeed other analysts, these two need to be on the same page on critical matters like inflation. This will enhance policy coordination and credibility by ‘creating the right news’ and ‘reducing noise’ and, by extension, help manage expectations.
Two suggestions are hereby provided. The finance minister may consider appointing an aide to attend the meetings of the CBN’s MPC as an observer. The aide will have the responsibility of briefing the minister on the outcomes of such meetings, and the views expressed by the CBN governor in particular.
Secondly, there is need for the CBN to improve its communication with the public, including the Ministry of Finance. The public needs to know the underlying assumptions and models used in making estimates.
Nigeria has enjoyed macroeconomic stability in the last couple of years. Headline inflation remains at single digit and, more importantly, core inflation is lower than headline inflation. However, historical inflation rates are already ‘history’ and are not as important as inflation expectations. Therefore, to effectively gauge and manage these expectations, communication between the Ministry of Finance and the CBN needs to improve.
Maxwell Ekor