There is a general consensus that the election period witnesses a slowdown in economic activity. Uncertainty is marked as a key variable that affect market indicators and lead to slowdown of the economy. The ways in which election can impact the economy can be as follows:
Election spending can be categorized under two subheadings: government spending and private sector spending. Government spending is the result of cost that the government bears to conduct elections, which include material expenses as well as expenses incurred on employing security and human resource for conducting elections. Other government spending includes expenditures incurred by the election commission, which include poll workers’ pay, meals, training as well as equipment transportation, poll-book printing, and security personnel arrangements.
Private sector spending, on the other hand, is a result of cost incurred by electoral candidates for the election campaign. The cost could include food, transportations and media among many other. In a nut shell, huge sum of money flows in the market during elections.
Domestic spending in theory, however, is not impacted by elections. As per the permanent income hypothesis, domestic spending behavior is unpredictable since they are based on individual expectations.Even if economic policies are successful in increasing economic growth, it shall have minimal effect on consumer spending until there are tax manipulations in the economy or change in expectations of workers regarding their future incomes induced by income reforms.
High government expenditure may cause imbalance in the aggregate supply and demand thereby inflicting demand side inflation. Such inflation resulted by abnormal government spending is harmful to an economy as it might dampen the real GDP.
Share market during the elections is unpredictable as it induces volatility and market instability. The market is subject to speculations (instead of rationing) based on the economic policies endorsed by the contesting parties.
Another major factor that affect the market is driven by the speculation on interest rate. Based on assumptions, the market price of shares increase if the winning party has expansionary monetary policies and decreases in the opposite case.
New investments in major projects tend to get postponed during the pre-election period. Investors prefer to wait for election results before making new investments as the payback on their investment is subject to the policies rolled out by the winning party.
Election causes the sporadic upsurge in the production and consumption of certain commodities like alcohol, meat, fuel among others. Similarly, construction business recedes until new policies are rolled out by the elected government. Another factor for the decline in businessahead of elections is because builders and businessmen inject their funds to illicitly finance political campaigns and also, some builders and contractors are electoral nominee themselves.
Federal elections in Nepal
For the elections of 2017, the finance ministry has allocated NPR 19.27 billion (USD 185.6 million) for Election Commission (EC) and poll security of which NPR 9 billion (USD 86.7 million) has been allocated for security and the remaining for the EC.
The series of government spending on different phases of local and federal election have resulted in the irregular increase and decrease of the inflation rate over the period of election. However, the overall trend of inflation shows increment of the inflation rate.
Nepali market has seen sharp decline in the share prices during the election period. Although this may be considered to be a normal reaction of the investors regarding the uncertainty of the political climate, the recent decline in the prices is being attributed to oversupply of shares in the market that has induced demand-supply disequilibrium and reduced investor’s confidence.
Also, in case of Nepal, closure of offices and schools during the election can be attributed for the decline in economic activities. As such, local level elections saw closure of the government offices from May 8-14 for the first phase, June 25- 28 for the second phase and September 18th for the third phase of local level elections.
Overall, the economy will see an upsurge in government spending and minimal economic activity during elections. With prolonged electioneering with two phases of elections, the country is expected to witness slowdown in business in various sectors.