All eyes on Nigeria

Razia Khan Head of Research, Africa and Middle East

14 Feb 2014

Some suggest Nigeria’s economy may emerge as the largest in sub-Saharan Africa – we look at the facts

The year 2014 will go down as a milestone in Nigeria’s history, the moment when the country achieves global scale. For months statisticians have been working to recalculate Nigeria’s gross domestic product (GDP), an exercise which is likely to dramatically increase the size of its economy.

Countries typically ‘rebase’ their GDP statistics every five years – using new information from household and other surveys to shed light on neglected or under-reported economic sectors – but Nigeria has not done so since 1990.

Some suggest that as early as this year Nigeria’s economy may emerge as the largest in sub-Saharan Africa, with estimates of the likely upward revision to GDP running from 20 per cent to 60 per cent.

Nigeria has been named alongside Mexico, Indonesia and Turkey as one of the MINTs

What we tend to think of as a USD290 billion economy may in fact be closer to USD400 billion, a bit larger than South Africa’s and substantially bigger than Hong Kong’s – or so the argument goes.

Even before the new GDP statistics are released, Nigeria has been named alongside Mexico, Indonesia and Turkey as one of the MINTs – the four countries touted by former Goldman Sachs chief economist Jim O’Neill as the next generation of developing economies that will achieve great importance.

Nigeria – which doesn’t export much besides oil – will not benefit from a big export-led surge in production, as other emerging economies may have done. However, when it comes to demographic growth, Nigeria outpaces most. Already the world’s seventh most populous economy, UN projections suggest that Nigeria will be the fourth most populous by 2035, after India, China and the United States.

The investment arguments in favour seem compelling

As more of its population reaches working age, Nigeria should experience a boost to growth. Even given the challenges of job creation, consumption should rise. The investment arguments in favour of Nigeria appear compelling: so many people, so much opportunity, and its economy getting bigger still.

Alas, things are not so clear-cut.

First, there is the accuracy of expectations around the rebasing of GDP. Ghana’s experience in 2010 – ‘discovering’ an economy that was 60 per cent larger than previously thought when rebasing its GDP after 17 years – has done much to shape expectations. But Ghana is not Nigeria, and there is no reason why one country’s experience should mirror exactly that of another.

Second, oil prices play a big role in determining estimates of Nigerian GDP, and prices may be volatile. If global oil prices fall, we would have to change our thinking about the size of Nigeria’s GDP.

Examining a range of micro-level indicators, there is little evidence that Nigeria’s economy might be as significant as South Africa’s, despite Nigeria’s population being three times larger. While South Africa’s financial markets and its banking sector are easily on par with some developed markets, Nigeria’s financially developing status means that it does particularly badly on these metrics.

This also holds true for revenue collection. South Africa’s tax take compares favourably with developed markets – with a revenue-to-GDP ratio of 28 to 29 per cent. Nigeria, by contrast, is overly-dependent on oil, which contributes more than 70 per cent of consolidated government revenue. If Nigeria’s GDP is rebased, its non-oil revenue tax collection ratio may fall to less than 4 per cent of GDP, much lower than most regional peers.

For developing countries, it isn’t 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.

Years of infrastructure investment needed

The country’s over-dependence on oil revenue, suggests that the government enjoys a degree of autonomy from tax-raising that may weaken political accountability. One of the early achievements of post-apartheid South Africa was success in revenue collection, but, despite the shift to more accountable forms of governance after 1999, Nigeria has made little progress in mobilising significantly more non-oil revenue – at least when measured against GDP.

Worse still, despite significantly weak infrastructure, which will require years of public and private sector investment to remedy, Nigeria has accumulated little long-term oil savings. In the event of an oil-revenue shock, there is no financial cushion and capital expenditure may have to be cut back.

Bigger is not necessarily better. Post-rebasing, Nigeria’s average per capita income, currently estimated by the International Monetary Fund at USD1,725 a year, is likely to see a substantial lift. But the proportion of Nigerians who live on a dollar a day, estimated at 63 per cent in 2011, is unlikely to change very much. In effect, GDP rebasing will reveal an even deeper problem of income inequality.

Growth needs to be made meaningful and prosperity needs to be shared more evenly

Despite a decade of annual growth averaging 7 per cent in real terms – the kind of growth it takes for an economy to double in size every ten years – survey evidence suggests that Nigerian poverty, whether measured in relative, absolute or even subjective terms, has increased. The rebasing of GDP is unlikely to change this. In highlighting even greater inequality, it may reveal why so many Nigerians feel poor, and the attendant risk to political stability.

The fact that Nigeria’s middle class is growing is not refuted by these statistics. 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.

As Nigeria moves closer to elections next year, caught up in the hype of being a MINT – with the rebasing of GDP just one event in a rushed political timetable – the risk is the country will miss an opportunity to take stock and look more closely at the deeper messages behind the headlines.

A version of this article was originally published in The World Today

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