Rebasing Nigeria’s GDP –Cosmetic or Placebo?

Nigeria plans to change the base year for its gross domestic product (GDP) from 1990 to 2008 and re-balance sectoral contributions to real activities. This move could lead to a "huge statistical jump" in the estimated size of Africa's second biggest economy.

According to the Director General of the National Bureau of Statistics (NBS), Dr. Yemi Kale, “most governments overhaul their GDP calculations after few years to reflect changes in output and consumption, but Nigeria has not done so since 1990.” Over the last two decades, structural changes such as the advent of mobile telephony, information technology, the emerging private led power sector and professional business services were evident in the Nigerian economy.

The NBS had scheduled this initiative to take effect from first quarter (Q1), 2013 but later shifted it to the fourth quarter, 2013 or at most Q1-2014. For now, we are not able to say for sure whether the ongoing quest to rebase the nation’s GDP was motivated by vision 20:2020 ambition of being among the top largest 20 economies in the world. The NBS is yet to clarify the economic/social rationale for choosing 2008 as the new base year for GDP computation. Again, the framework for reweighing contribution of different sectors of the economy to the GDP remains to be seen.

Nigeria Ranked Amongst Large Economies
Nigeria is currently ranked 40th largest economy by GDP numbers. In December 2005, Goldman Sachs, an international investment bank and research firm published a ground-breaking report that projected Nigeria as one of the “Next 11 (N11)” countries after the BRICS (Brazil, Russia, India, China and South Africa) with the potential of becoming one of the 20 largest economies in the world by 2010. Since then, Nigeria’s ambition to be the leader of Africa in economic size has been immense.

Rebasing Nigeria’s GDP to reflect the current structure of its economy is expected to lift the country to the 30th largest economy in the world from its current 40th position. When Ghana made a similar move to recalculate its GDP in 2010, its estimated output shot up by 60% from $18 to $31 billion. This catapulted it into the ranks of the middle income countries.

We expect to see the Nigerian GDP computation driven by revenue contribution and not nominal activities across the sectors. For instance, the agricultural sector which currently contributes about 33-38% of the nation’s GDP has no bearing to actual revenue that accrues to the economy. This is why most economic index and ratios denominated by GDP in Nigeria such as fiscal deficit are largely misleading. Analysts look to see sectors such as oil and gas, telecommunications, power & energy, trade & distribution and finance exerting a bigger influence on the nation’s GDP after the proposed rebasing and reweighting.

GDP Rebase and Economic Potentials
Rebasing Nigeria’s GDP at this time will potentially enable it to project its power on the world stage. It may as well pose a serious challenge to South Africa’s position as the dominant economic force on the African continent. In addition, it will advance Nigeria’s aim to be an African investment hub rivalling South Africa and making the country more attractive for prized foreign investment.

As stated earlier, Ghana’s output shot up by 60% when it rebased its vital statistics in November 2010. A fairly similar increase (45%) from the Nigerian’s current $247 billion economy would likely bring it to $358 billion. This is much closer to the continent’s top economy, South Africa’ GDP, which is currently valued at $385 billion. With Nigeria’s expected annual growth rate of 7-8% over the next five years, compared South Africa’s 2-3% over the same period, Nigeria is on the path to emerge as African largest economy in 2016.

A recalculation that shows a much bigger economy will potentially strengthen the Nigerian investment landscape, and in extension, the country’s political clout. It will help position the country from a frontier market to a developing economy. Nigeria’s frontier status – 170 million people coupled with a youthful growing population – will become more attractive for foreign investment.

Challenges Remain
If the Nigerian’s economy turns out to be the biggest in Africa, South African still commands clear advantages. This is because South Africa’s institutions function properly, and it is seen as having one of the best legal systems in African continent. In contrast, Nigeria has tended to be a “byword for corruption,” fraud and mismanagement –seen in its persistent failure to sort out its infrastructure and institutional problems. According to Reuters Africa newsletter in March 2013, Nigerian security challenges and the negative global perception will not dissipate just because of a revision in aggregate GDP.

Nigeria’s output per capita currently at less than $1,500 still trails that of many other economies on the African continent. According to Standard Bank, while GDP rebasing would be positive overall, it could also lead to lower economic ratios. On the fiscal side, the revenue-to-GDP ratio will decline. The current account surplus will also decrease especially as the current account balance has already been substantially dented due to sustained increase of import number.

On the other hand, the expected big jump in per-capita income is likely to attract interest in consumer brands into Nigeria. These are investors who are likely to assume a false effect of a seeming increase in purchasing power due to the new GDP figures which is just on paper. Nigeria’s current per-capita income by the 2012 GDP figures is approximately $1,500 and it is expected to increase to $2,600, if GDP is revised by up to 45% in 2014. Sadly, because Nigeria’s population is three times bigger than that of South Africa’s, its per-capita income will still be trailing far behind South African’s per-capita income of at $8,700.

GDP Rebasing –Cosmetics or Placebo?
The gross domestic product is a number commonly used to represent the combined size of a nation’s economy, usually over the course of a year. These are large numbers that represent and record every economic significant action taken within a country’s borders. The percentage growth in GDP is also a figure that is closely watched by economists, businessmen and governments worldwide as an indicator of how a country’s economy is performing.

The paradox is that, a bigger GDP also implies an upward revision in per-capita income; with the change only appearing on paper. There is no corresponding shift in the actual income, earnings, productivity and wellbeing of Nigerians. The implications of this move carry some adverse possibilities of macroeconomic ratios. For instance, a bigger GDP could actually mask the impact of a higher deficit/GDP ratio. An upward adjustment to GDP will look good for the Federal Government that would have successfully narrowed its budget deficit to as low as 1.1% by 2015, in line with its medium-term objective. The beauty of it is that government can now achieve a lower fiscal deficit number concurrently with increasing borrowing. This is because as the denominator (GDP) increases exponentially accompanied by a modest rise in the numerator (debt size), the quotient (fiscal deficit) will fall dramatically.

The risk is that a significantly smaller cosmetically enhanced budget deficit will naturally encourage the government to push up spending, which even in minute portions would be inflationary. The reality is that at the current debt levels, Nigeria’s debt to GDP ratio, which is already lower than that of most sub-Sahara African countries will drop significantly from 20% to between 10-12% of GDP. This implies that the government will have more capacity to borrow and is likely to be more inclined to do so and thus sustain the deficit for a few more years due to the favourable debt ratio.

Guards while Adapting International Models
There is an increasing trend among policy makers in Nigeria to replicate or copy economic policies from other countries. For instance, it took the masses and a high powered intervention to stop the Nigerian Apex bank in 2007 from replicating the Ghanaian currency redenomination model. Another recent example includes the Nigerian banking consolidation tailored along the Malaysian model and the pension industry reform which followed the Chilean framework. In fact, the outcome of Ghana’s currency redenomination exercise is now on the downside of economic history and a sad reference in economic literature.

The medium term fall out of the just concluded GDP rebasing in Ghana is yet to be seen. Nigeria is at it again staring at the Ghanaians GDP rebasing policy. The strong drive to copy models from other countries notwithstanding, we have not seen any effort from the Nigerian leaders at adopting the drastic measures employed by the Ghanaian government  in the 1980’s to clean up both social and economic rot in the system, build strong institutions, create a sense of belonging and patriotism among economic agents. This is why we maintain that it is time for Nigeria to look more inward while crafting its policies and guide against the temptation of “demonstration effects.”

Rebasing GDP –the Right Way
Most countries rebase their GDPs on a regular basis (usually every five years in the developed countries) to account for changes in production and consumption. This is because the ‘freezed’ prices of the base year (1990 in Nigerian’s case) becomes more and more unrealistic as the current year draws away. During this process, the System of National Accounts is rebased to keep up with the evolution of prices in the economy. In other words, its aggregates at constant prices are recalculated in terms of the prices of a more recent time. Also, the System is revamped about once a decade to introduce new accounting conventions, improved methods of estimation and revised statistical classifications. Thus, it is expedient that the exercise be done, especially with major changes to several sectors of the economy. It is undoubted that some colour is bound to be added to the Nigeria’s GDP structure and figure.

To put this into perspective, China’s GDP grew 6-folds, from approximately $1.2 trillion to $8.3 trillion in nominal terms since over 2000 and 2012. This is in the order of 10%-13% per year for the past decade. In real terms it is a bit more modest and still no small feat when compared against Nigeria’s 7-8% growth average over the same timeframe. To achieve the current size of China’s economy, will take Nigeria over half a century at its current growth rate.

Most times a straight comparison between GDP is hugely unfair. Agreed that China took off as a developing nation with a huge population like Nigeria (10 times the Nigeria’s size) and arguable lower capital per person, most studies collaborated that large population size helped China to take advantage of its large domestic market. It subsequently opened up itself to the world export market in the early 1990′s. By transitioning from an agricultural economy into an urbanised industrial manufacturing “leadmodel” and using the biggest labour force in the world, China was able to grow through manufacturing exports –producing everything from T-shirts to washing machines, and etc.

Other factors which allowed the rapid growth included advances in information technology which made it easier for China to take advantage of the latest technological developments around the world. Today, Nigeria is far from the China’s economic prosperity take off point in the 1990’s.

Moving From Aspirin to Vitamin
Fact remains that Nigerian government will receive a pass mark for posting huge GDP numbers after the proposed rebase exercise. The country will be able to get away with a whole lot more on the back of huge GDP size but macroeconomic implication remains. Inflation rates are likely to reduce in numerals but with a greater and untraceable impact on the society. The increase in government ability to leverage and borrow will come at no extra cost or input and will most likely make the country worse off. The truth is that majority of stakeholders feel that this step should be taken, but the outcome will be whatever we decide to make of it.

Nigeria can take a clue from the Chinese model by refusing the “quick fix” syndrome (aspirin) and embark on hard long term permanent solution (vitamin). This will be achieved first, by decisively dealing with the scourging incidences of corruption at all levels and build firm institutions. This should be complimented by aggressive investment in all forms of infrastructure required to power the economy. With the GDP rebasing, Nigeria will likely make history by becoming the first frontier market coupled with ravaging poverty in the league of top 20 economies in the world. Overall, we are yet to see the long term benefit of Nigeria cleverly forcing its way (via cosmetics and paper work) into the league of world 20 largest economies.