Never has election campaign spending triggered an increase in inflation since 1999, but Abuja’s monetary authorities have made critical interest rate decisions with the dodgy hypothesis in mind.
When the Central Bank of Nigeria (CBN) said at its last monetary policy meeting that concerns over an upside risk to inflation from election spending formed part of why it held rates at a record-high, it left a sour taste in the mouth of a few economists.
The said economists argued that election spending has never presented a significant risk to inflation and were surprised that the CBN would base such a critical decision – as setting the benchmark lending rate in an economy where the real sector is starved of cash – on an unfounded theory.
The correlation between election spending and inflation is indeed weak at best, if historical data is anything to go by. Sadly, the economy has been made to bear the brunt of a dodgy hypothesis that has now faltered six years straight.
An inflation report by the National Bureau of Statistics (NBS) published Friday only served to further expose the baseless hypothesis.
The NBS reported that annual inflation slowed to 11.37 percent in the month of January, from 11.44 percent in December 2018, to the surprise of many who expected a price uptick on the back of election campaign spending.
For Wale Okunrinboye, head of research at Lagos-based fund manager, Sigma Pensions, it was no surprise. His team had predicted a decline to 11.3 percent in January, when the consensus estimate of 10 economists polled by BusinessDay was for an increase to 11.49 percent.
“We expected a moderation, so I won’t say (the decline in inflation) was surprising,” Okunrinboye said.
He hopes the latest report ends the weak hypothesis of election spending and inflation.
“The data is clear: inflation in Nigeria is always and everywhere a supply-side or cost-push issue. You will need to go way back to see any evidence of demand pull inflation here and I daresay it’s statistically insignificant,” Okunrinboye added.
The wide perception in Nigeria is that in periods of an election, campaign spending leads to an increase in money supply thereby triggering demand-pull inflation where there is too much money chasing few goods.
It was partly due to the need to neutralise that increase in money supply from the build-up to the 2018 elections that the CBN decided to keep interest rates high. This way, excess money supply is mopped out of the system and exchange rate gains are protected.
However, historical data puts paid to the theory. Never has election spending led to a rise in inflation since 1999.
BusinessDay inflation analysis shows that before the 1999 election, inflation declined from 10.2 percent in January 1998 to 7.9 percent by December 1998.
Before the 2003 general elections, inflation also declined from 18.9 percent in January 2002 to 12.9 percent by the year end.
In 2006, inflation more than halved from 17.9 percent in January to 8.2 percent in December. In 2010, the trend reversed for the first time as inflation rose from 12.6 percent in January to 13.7 percent at year end. In 2014, the downward inflationary trend during the campaign year was once again observed as inflation fell 40 basis points from January to December of that year.
And, more recently, inflation slowed to 11.44 percent in December 2018, from 15.13 percent in January.
Deeper analysis on campaign spending revealed that official campaign spending for the elections begins about three months before the election, according to INEC rules.
When this new insight was investigated on the inflation chart, the results appear to be inconsistent in terms of inflation direction in months of increased campaign spending. While in 1998, 2007 and 2014 inflation trended downwards, there was a slight uptick in inflation in 1999 and 2015.
The years in which inflation had an uptick also coincided with years of dollar scarcity and sizeable currency devaluation in the country, which throws into question the impact campaign spending actually had on inflation.
In 1999, dollar rose 321 percent against the naira and in 2015, it rose 21 percent against the naira.
“There is no established relationship between inflation rate and pre-election spending in Nigeria,” Omotola Abimbola, a fixed income and currency specialist, told BusinessDay.
“Inflation tends to be driven by major devaluation in exchange rate, investment repatriation of foreign investors due to political risk. However, Nigeria currently has stable exchange rate, surplus current account balances, and favourable oil price environment. Therefore, we may likely not see a major shock to inflation,” he said.
Electoral expenditure for the 1999 general elections by INEC was estimated at N1.5 billion. This increased to N29 billion in the 2003 elections and further grew to N45.5 billion in 2007. By the 2011 elections, electoral expenditure was N111 billion, while in the 2015 elections, total electoral expenditure declined to N85 billion.
Although total electoral expenditure seems to be exorbitant, it is very miniscule when compared to the total money supply in the country which CBN currently estimates to be around N24 trillion. Even if election spending reaches N600 billion, it will only account for less than 2 percent of money supply and less than 0.2 percent of GDP.
LOLADE AKINMURELE
