Officially, Giant of Africa!

(Notes beyond the hype of Nigeria’s GDP rebasing)

ChartLast Sunday, the new figure for Nigeria’s Gross Domestic Products (GDP) was released to be $510billion, with a new base year of 2010, as opposed to 1990, when the last rebasing exercise was done. This propelled the Nigerian economy to number one spot in Africa, and 26th in the world.

With the flurry of reactions following the announcement, especially within the country where reaction to government pronouncements is sometimes cynical, it is important to clarify what the GDP rebasing exercise really is and its significance to the economy, the market and the people.

GDP REBASING

The GDP rebasing exercise is essentially a change of the base year for quantifying output. This exercise should ordinarily be done every five years, in line with global best practice, to reflect more accurate production patterns. The last such exercise in Nigeria was however in 1990, almost 25 years ago, leaving out various active sectors which had emerged in the computation of the country’s GDP.

What the rebased GDP therefore gives us is a more accurate picture of the economy, which simply confirms previous analysts’ opinion that the economy of Nigeria had previously been understated.

The rebased GDP figure considers 43 industries and economic sectors, up from the 26 sectors considered in the previous GDP series.

IMPACT ON THE ECONOMY

Rebasing the GDP is essentially like resetting a watch which was not telling the time accurately. When reset, that watch now tells the correct time. This does not mean that the time of day changed; the watch was simply reset to show the accurate time of day!

The Nigerian economy did not change overnight. The various parameters of the economy remain the same. The rebasing exercise did not increase the income to the country and neither did it make its citizens any richer or poorer.

The rebasing however presents a more accurate profile of the economy, showing the actual components and their contributions to the economy. Nigeria was hitherto considered an informal sector economy; however the new GDP figures identify the sectors lumped up in the informal sector to reflect key drivers of the economy.

For instance, prior to the rebasing, Agriculture and Oil & Gas contributed 35% and 33% respectively to the GDP, totalling 68%. Manufacturing was a paltry 2% of the GDP and services contributed 20%. The rebased figures however show Services and Manufacturing increasing to 55% and 7% respectively, while the share of Agriculture and Oil & gas reduced to 23% and 15% respectively.

This also does not, for instance, imply that agricultural output shrank. The sector actually grew by about 3% in 2013. However, other sectors have emerged and have grown significantly, contributing a lot more to the GDP.

IMPACT ON INVESTMENT

One of the key importance of the rebasing exercise is that the better represented economic data shows improvement in the criteria for investment consideration in the country. These include key ratios such as Debt to GDP ratio which reduced. This implies that Nigeria has a better profile for accessing capital from the international financial markets. It can borrow cheaper, since sovereign credit risk should improve along this line as well.

Per capita GDP, which measures GDP per population shows a country which is more aligned with a middle income economy than the poverty-indexed representation the country previously had.

Various sectors have emerged which give a fairer representation to the market and its drivers. Other sectors have been exposed as potential growth areas which investors, both local and foreign, will begin to explore. It will therefore become increasingly more difficult for foreign investors to ignore Nigeria, despite its challenges.

GDP size is however not the only measure of investors’ interest and confidence. Several other economic factors such as income distribution, levels of tangible and social infrastructure, overall business environment (including regulatory environment) are areas which would be considered, and which, in Nigeria’s present state, require significant improvement.

IMPACT ON GOVERNANCE AND POLICY ENVIRONMENT

Vision 20:2020 has been a goal of the Federal Government of Nigeria. This goal  is to get Nigeria into the top 20 largest economies of the world by year 2020. The rebased GDP which puts the country at 26th position brings the achievement of the 20:2020 goal very much in sight.

The rebased GDP should be used as a tool of policy making, such that the improved size of the economy can lead to real development and creation of economic benefits to the citizens of the country.

GDP growth does not really capture other factors such as income distribution, especially if the key drivers of GDP growth are in sectors that do not directly reflect the prevailing standard of living.

The key to translating growth into development is for the government to accelerate its strides by making reforms that will facilitate a more even distribution of wealth, by channeling more resources into key sectors of the economy which drive development, especially in the provision of basic infrastructure to reduce cost of living and to promote entrepreneurial endeavours.



Author: Diekola Onaolapo
Diekola is a finance professional with sound industry knowledge and a remarkable depth of experience. Diekola’s career includes experience from financial institutions, such as Citibank, and IBTC (now Stanbic IBTC, a member of the Standard Bank Group) where he managed international trade for public sector and large corporate clients, including telecommunication companies and manufacturing conglomerates. Before co-founding Eczellon Capital, Diekola was an Executive Director at Bluebird Capital and oversaw the advisory services and issuing house business of the company. Prior to Bluebird Capital, he worked with FutureView Financial Services Limited as Head, Advisory Services Unit, where he structured various M&A transactions and capital issues during the 2005 consolidation exercise in the Nigerian banking sector. He has also been involved in a lead role on various PPP and public sector projects including power sector privatization, federal and state road concessions, and the establishment of industrial parks. He is an expert in corporate finance, business and financial advisory.

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