2014 will go down as a significant year in Nigeria’s economic history. This was when the long-awaited results of Nigeria’s GDP rebasing revealed an economy that was 89 per cent larger than previously thought.
GDP statistics are typically rebased at least every five years, updated with new information from household and other surveys, shedding more light on the sectors that contribute to economic activity. In Nigeria’s case, GDP statistics had not been rebased since 1990. The impact of dramatic growth in sectors as diverse as telecoms, banking and Nollywood had been downplayed by the use of very out-of-date information. The result was a significant underestimate of the actual contribution of many sectors to economic activity, year after year.
Before Nigeria’s rebasing, estimates of the likely revision to Nigeria’s GDP size ran anywhere from 20 per cent to 60 per cent, with the high end of consensus estimates, suggesting an economy of about US$400 billion. This alone would have made Nigeria’s economy larger than South Africa’s, and substantially bigger than Hong Kong’s. Instead, taking into account some of the informal sector, Nigeria revealed an economy of about US$510 billion – much more than even the higher-end of the consensus had suggested. With its GDP rebasing, Nigeria became, by far, the largest economy in Africa, and the 26th largest economy in the world. It had achieved global scale.
Even ahead of the release of rebased GDP statistics, Nigeria has been touted as one of the ‘MINTs’ – alongside, Mexico, Indonesia and Turkey – one of the emerging (and in Nigeria’s case ‘frontier’) economies that demand greater investor attention. The successors to the BRIC economies, the MINTs ostensibly represent the next generation of developing economies that will achieve great importance. Demographics and geography, particularly proximity to large, established economies, work in their favour.
Domestic market potential
In Nigeria’s case of course, the emphasis is much more demographic, as gains from trade are limited. In fact, after the GDP rebasing, Nigeria’s trade share of GDP has declined even further, to very low levels. Although Nigeria is the only one of the MINTs to enjoy a current account surplus (now also smaller as a percentage of GDP), there are no big economies nearby with which it can trade.
Nigeria’s exports are dominated by oil, in volumes dominated by trading partners that are further away. Beyond this, Nigeria does not export much. Its productive capacity – whether of food, refined fuel, electricity, or other items for which it is reliant on imports – cannot currently meet the needs of its own population, let alone other trading partners. While reforms in key sectors such as agriculture and power should result in gradual change, Nigeria will not benefit from a big export-led surge in production, as other emerging economies may have done.
The hope is that the rebasing of its economy, and the production of more accurate statistics, will trigger greater investor interest, leading to a surge in investment in the non-oil sectors of the economy. To a large extent, this process has begun, with a meaningful increase in foreign direct investment in the consumer and power sectors. But the focus is much more on production for the domestic economy, and import substitution, rather than export growth.
When it comes to demographic growth however, Nigeria outpaces most. Its expected demographic growth has already been mentioned as one of the key factors likely to drive investor interest in Africa. On current projections, as early as 2055, it will be the world’s 3rd most populous country. Nigeria, like most Sub-Saharan economies, has not experienced the same fertility transition seen elsewhere. Birth rates remain high. It has a very young population.
As more of this population enters the working age demographic, Nigeria should in theory experience a substantial boost to growth. Even given the challenges of formal sector job creation, consumption should rise – especially compared with economies that are ageing faster. Countries with older demographic profiles need to increase pension savings, with much more savings chasing fewer assets, potentially driving down the return on those assets. In contrast, young countries like Nigeria will see a sustained rise in consumption, offering to investors higher returns on investment. The investment arguments in favour of Nigeria appear compelling: so many people, so much opportunity, and its economy is getting bigger still.
Overly reliant on oil
Things are not that clear cut however. Even though Nigeria’s economy is now thought to be dominated by services, and low public debt ratios (down to 11 per cent of GDP from 19 per cent after the rebasing) speak of some capacity to increase borrowing, important vulnerabilities nonetheless remain in place.
Oil still dominates exports, and prices may be volatile. With windfall oil earnings frequently shared between the three tiers of government, Nigeria has little incentive to hedge against oil price risk, potentially reducing the scale of the windfall. The overall result is that it enjoys a bigger windfall when prices are high, but being unhedged, it remains susceptible to any fall in oil prices.
Since its transition to civilian rule in 1999, Nigeria has seen its longest, uninterrupted period of growth in post-independence history. With the exception of a brief period in 2008/09, most of these years were accompanied by robust and pretty much uninterrupted gains in global oil prices. Since 2011 however, oil prices have largely flat-lined. Anecdotally, this coincided with more subdued growth in Nigerian corporate earnings, although the effect is admittedly difficult to gauge fully from headline GDP statistics, even post rebasing.
Size isn’t everything
Despite Nigeria’s GDP rebasing, there are few readily available, easily measurable micro-level indicators that suggest that Nigeria’s economy is substantially larger than South Africa’s. This is despite Nigeria’s population size – more than three times the size of South Africa’s population.
This may be because of the greater level of economic informality in Nigeria, and the fact that its economy is now dominated by services, which are also difficult to measure – and have less of an impact on variables for which data is available, such as external trade. With a manufacturing share of GDP now revised to 7 per cent in Nigeria versus 12 per cent of GDP in South Africa, the suggestion is that the difference in manufacturing value-added between the two countries is less than US$10 billion. However, South Africa’s official power generating capacity is several times the official grid capacity in Nigeria, where many producers have had to rely on more costly private generation of electricity.
While South Africa’s financial markets and its banking sector are easily on par with some developed markets, with measurements related to the scale and depth of its financial sector suggesting that South Africa has the much larger economy, Nigeria’s financially developing status means that it does particularly badly on these metrics.
This also holds true for tax revenue collection. South Africa compares favourably even with developed markets – with a revenue-to-GDP ratio of about 28 per cent to 29 per cent. Nigeria, in contrast, is overly dependent on oil, which contributes over 70 per cent of consolidated government revenue. If oil is taken out of the equation, Nigeria’s revenue-to-GDP ratio, normally around 26 per cent of pre-rebased GDP, falls to about 6 per cent to 7 per cent. Following the rebasing of its GDP, non-oil revenue collection in Nigeria has fallen to about 4.5 per cent of GDP – even lower than previously calculated, and much below regional peers. The challenge for the Nigerian authorities, having identified a large amount of the informal sector and services activity through the rebasing exercise, will be to tax this activity more effectively.
For developing countries, it is not so much the size of current GDP, as the potential of the economy to continue to grow, that should matter. Here, Nigeria’s metrics may be problematic, and the rebasing of GDP is likely to draw greater scrutiny to what is missing.
The overdependence on oil revenue, despite the supposedly declining role of oil in the economy, suggests a degree of autonomy of fiscal earnings that may weaken political accountability. One of the early achievements of post-apartheid South Africa was greater success in revenue collection, which stalled only around the global crisis. In Nigeria, despite the shift to more accountable forms of governance after 1999, little progress has been made in mobilising significantly more non-oil revenue – at least as measured against GDP.
Worse still, despite a significant infrastructure deficit, which will require years of public and private sector investment to remedy, Nigeria has accumulated little in the form of long-term oil savings. In the event of an oil revenue shock, as is already the case in 2014, capital expenditure may have to be cut back.
Bigger is not necessarily better. Post-rebasing, Nigeria’s average per capita income increased to US$2,700 – a jump of almost US$1,000 from pre-rebased levels. But survey evidence had previously suggested that the number of Nigerians living on US$1 a day was about 63 per cent of the population. These findings may not be entirely accurate. Nigeria’s National Bureau of Statistics has called into question the validity of previous surveys, which may have adopted a much higher calorie consumption level than is the norm in the rest of the world, inadvertently overstating the prevalence of poverty. Even so, the suggested difference between average and median per capita incomes is now more stark, highlighting a deep problem of inequality. This could exacerbate political risk.
None of this suggests that Nigeria’s middle class is not growing. Important gains have been made, but most likely, only within certain pockets of the economy. The challenge for Nigeria, both pre- and post-rebasing, is to ensure that conditions that support economic transformation, not just headline growth, are in place.
Growth needs to be made meaningful and prosperity needs to be shared more evenly. Transparency and fiscal accountability will need to be enhanced. Greater investment – more long-term, and in employment-generating sectors – remains a key requirement. As Africa’s largest economy, with a still-low per capita income, Nigeria has much potential. The production of more accurate economic data is an important opportunity to take stock, and do much more with this potential.