June 30, 2013 4445 VIEWS

Sunday, June 30, 2013 / by Tunji Andrews**

“The irony is that, a bigger GDP also implies an upward revision in per-capita income, but with the change only appearing on paper but with no shift in the actual income/earning power of Nigerians”.

The hullabaloo created by the highly ineffective Nigeria Bureau of Statistics on the plan to rebase Nigeria’s GDP came to an anti-climax recently when the Head of the bureau came out to announce that the rebasing might likely not hold until 2014. Nigeria’s expected attempt to rebase its gross domestic product (GDP) this year, to better reflect the structure of its economy is expected to create a leap for the Nigerian economy to become the 30th largest economy in the world, from its current 40th position. The implications, of a move that has been widely cheered, for me carries for Nigeria’s macro-economic ratios mixed possibilities, as a bigger GDP could actually mask the impact of a higher budget deficit/GDP ratio.

The thing is, an upward adjustment to GDP will look good on the FG who will have successfully narrowed its federal budget deficit to 1.1% of GDP by 2015, in line with its medium-term objective. The beauty is that it could achieve this even though it may actually increase borrowing; because as the numerator (which is the GDP) increases, the denominator (which is the deficit) diminishes. 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 fact is that, 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 -15% 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. On the other hand, the big increase in per-capita income is likely to attract interest in consumer names in Nigeria – from investors who are likely to assume a false effect of a seeming increase in purchasing power on such consumer stocks as Nestle, Nigerian Breweries, Guinness, Flour Mills and PZ, among others.

The irony is that, a bigger GDP also implies an upward revision in per-capita income, but with the change only appearing on paper but with no shift in the actual income/earning power of Nigerians. Funny thing however is, even if it did, Nigeria’s current per-capita income by the 2012 GDP figures, is at approximately $1,600 and expected to increase to $2,600, if GDP is revised by 60% in 2012, with Nigeria’s population three times bigger than that of South Africa’s and after its GDP adjustment its revised GDP per capita will still be smaller than that of South Africa at $8,700 per capita.

Now, The gross domestic product (GDP) is a number commonly used to represent the combined size of a nation’s economy, usually over the course of a year. We are talking about large numbers, intended to represent and record every economically significant action taken within a country’s borders. The percentage growth in GDP is also a figure that’s closely watched by economists, businessmen and governments worldwide as an economic indicator of how a country’s economy is performing. There have even been papers written about how presidencies in democracies are made or lost based on the size of this number

Most countries rebase their GDP on a regular basis (usually every five years in the West) to account for changes in production and consumption, because the freezed prices of the base year (1990 in our 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, especially the sharp rise of the telecommunications industry over the past two decades, it is undoubted that some colour is bound to be added to our present figure. As it was the case when Ghana’s GDP was rebased in 2010, the size of its economy was found to be 60% bigger than previously recorded – $31 billion, compared with $18 billion.

To put this into perspective China’s growth over the past decade and a half, China’s GDP grew 6-fold, from approximately $1.2 trillion to $8.3 trillion in nominal terms since 2000. This is in the order of 16%-17% per year for the past decade. In real terms it’s a bit more modest at 11% a year, still no small feat when compared against Nigeria’s 7-8% p.a. average over the same timeframe. This is the difference between a 25% growth VS a 350% growth in the real economy over the same period. To achieve the same growth as China with Nigeria’s economy at our current rate would take half a century.

Of course a straight comparison between GDP is hugely unfair – Even though China began as a developing nation with a huge population, like Nigeria, though 10 times its size and arguable low capital per person. Most studies agree that this has allowed China to take advantage of the export market when it opened itself up to the world for trade in the early 1990′s. By transitioning from an agricultural economy into an urbanised industrial manufacturing lead model 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 everything in between. Other factors which allowed the rapid growth included advances in information technology which made it easier to take advantage of the latest technological developments around the world.

Now, to explain what a placebo is to throw more light on my point. It is a simulated or otherwise medically ineffectual treatment for a disease or other medical conditions, but administered with the intention to deceive the recipient (Like administering distilled water in an injection). Sometimes patients given a placebo treatment will have a perceived or actual improvement in a medical condition, a phenomenon commonly called the placebo effect. My point is that, the Nigerian government will receive a pass mark for doing absolutely nothing with this GDP rebase and will be able to get away with a whole lot more if it goes through. Inflation rates are also likely to reduce in numerals but greatly increase in impact on the society. The increase in ability to leverage and borrow will come at no extra cost or input and will most likely make us worse of for it. The truth is that, we all must agree that this step should be taken, but the outcome will be what ever we decide to make of it.


**Article originally appeared in Y! Naija (Op-ed) in Opinion on May 10, 2013


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