GDP Rebasing: After the Cosmetics Comes the Reality Check

Proshare

 

Friday, April 11, 2014 6.04 AM / FDC Economic Bulletin
 

Introduction: Africa’s First Half Trillion Dollar Economy
The National Bureau of Statistics (NBS), on the 6th of March 2014, released rebased figures that almost double previous estimates for Gross Domestic Product (GDP) and have seen Nigeria leapfrog South Africa to become the biggest economy on the African continent. Nigeria’s GDP now stands at $509.9bn, 89% larger than the previously stated estimate. This estimate was arrived at by shifting the base year for price calculations to 2010 from 1990, making the GDP reflective of new growth sectors, like information technology, film production, airline and on-line sales that have emerged and grown in importance since the last rebasing exercise in 1990. The keenly awaited rebase surpasses the 40 – 60% consensus expectation of analysts and elevates Nigeria to the position of 26th largest economy in the world. Nigeria’s population of approximately 170 million (2.43% of world population, 60% of ECOWAS and 20% of SSA) leaves it with a GDP per capita of about $2688, a near 60% increase from its pre-rebasing figure of $1599, making it the 121st highest globally.
 

The NBS estimates real GDP growth post-rebasing to be 5.1% and 6.7% in 2011 and 2012 and projects 7.4% for 2013. This compares to the pre-rebase growth figures of 7.4%, 6.6% and 6.8% respectively for the past 3 years.
 

Global and Regional context
The exponential increase in GDP occasioned by rebasing hoists Nigeria 14 places up the rankings, just ahead of Argentina, Austria and Iran, but just behind Norway, Poland and Belgium. It takes Nigeria to 1st among its African counterparts and 3rd among fellow OPEC countries.

 


 

Rebasing has revealed that there was about $240 billion previously unaccounted for within the Nigerian economy. To put this in perspective, this figure is about 77% more than the GDP of all other West African coun-tries, approximately $135 billion, put together. The fact that there were effectively eight “Ghanas” unaccounted for in the Nigerian economy is staggering. Furthermore, it increases the GDP of the entire continent by 20% to $1.42 trillion.
 

On a per capita basis, Nigeria is still the lowest among OPEC member countries and on the continent, lags be-hind South Africa, Egypt, Angola and even Papua New Guinea.
 

Why Rebase?
The rebasing was carried out to give the most up-to-date and accurate picture of the economy as possible, one that mirrors current realities. Economies are not static, they are dynamic. They constantly evolve, adding new sectors and new technologies and behavioural patterns are usually altered as it shrinks or grows. By gathering very recent data, the NBS overcomes issues bordering on data integrity, reliability and punctuality that have hampered evidence-based decision-making in the past. The exercise received full supervision, verification and wholehearted endorsement from the International Monetary Fund, World Bank and African Development Bank. In more advanced climes, rebasing of the GDP is a 5-year ritual. In a similar exercise, Ghana’s GDP rose more than 60 per cent in 2010.
 

At this juncture, it is pertinent to note that GDP is an estimate of the value of all final goods and services produced within a country during a stated period calculated by an income, expenditure or value added approach. It is however, NOT a measure of total revenue generated.
 

Structural Shift: More Diversity
Rebasing has revealed significant change in Nigeria’s economic structure. Decline in the share of the agricultural sector in GDP from 35% to 22% and a rise in the share of services (which comprises financial institutions, information and communications, real estate, professional, scientific and technical services) from 29% to 52%, a threefold jump in nominal terms, is indicative of a more diversified economy than reported in the past. The revised data shows that the industrial sector now contributes 25.7%, down from 36%. The telecoms sector now contributes 8.69%, manufacturing 6.83%, and entertainment (Nollywood) 1.41%, which had previously never been captured. The number of sectors under review increased from 33 to 46. The rebasing exercise ensured that more of the informal sector was captured in the GDP, and future rebasing exercise could see the informal sector contribute as much as 55% to GDP.
 

Impact: Worth celebrating?
Rebasing the GDP takes Nigeria from 40th to 26th in the GDP rankings and almost doubles the per capita in-come elevating it to the status of a middle income economy. In reality, nothing has changed. Incomes have not doubled overnight neither has consumption or output. It does not ease the pressure on the currency neither does it stop our import dependency. Unemployment figures remain unchanged at 30%. In fact, Nigeria’s newly acquired status as a middle-income economy comes with a loss in its eligibility to access foreign aid from international aid organisations. Many have pointed to this loss in aid eligibility, as well as institutional weak-nesses at the NBS and policy inertia, as the reasons for the 24-year wait in carrying out the exercise.
 

Rebasing does however, put Nigeria in the economic “spotlight”. Being the biggest economy in Africa gives Nigeria greater economic visibility and should put the government under much more intense scrutiny and pressure to aggressively carry out reforms that would facilitate inclusive growth.
 

Nigeria becoming the largest economy in Africa will have an impact on how it is perceived by international investors. The impact is essentially psychological. It may also boost investor confidence about Nigeria’s long term prospects as an investment destination. However, Standard and Poor’s just recently downgraded its out-look on Nigeria’s sovereign credit to negative purportedly due to perennial political infighting but ostensibly because of the removal of the CBN guard.
 

Implications on Fiscal Policy
The new GDP figures give a rather flattering assessment of the debt-to-GDP and budget deficit-to-GDP ratio positions for 2013. Both decreased from 20% and 1.8% to 11% and 1% respectively. This buttresses the case for further borrowing to fund infrastructural development.
 

The Debt Management Office should continue its drive towards increasing external debt from 14% to 40% in order to bring down overall borrowing costs. Fiscal revenue-to-GDP ratio dropped to 14% post rebasing from 26% which is considerably lower than the average of 26% for Sub-Saharan Africa. This highlights the narrow revenue base and will likely spur increased revenue mobilisation. The current account surplus was also almost cut in half from 9% to 5% of GDP.
 

Implications on Monetary Policy
The very healthy-looking debt-to-GDP ratio of 11% increases the government’s borrowing capacity. The risk of fiscal overdrive and its corresponding impact on inflation is prevalent as Nigeria approaches the election period. The Central Bank may react by further tightening monetary policy i.e. increase interest rates.
 

GDP Rebased: Cosmetic?
Any impact that a rebased GDP may have will sadly be lost on the majority of Nigerians as an estimated 60% of its people live in absolute poverty (less than a dollar a day). This figure was 52% in 2004; the worsening statistic is indicative of the absence of inclusive growth in Africa’s most populous nation. The unemployment figure at 30% is still largely underestimated and is much worse among the youth. Unequal distribution of wealth over the years has engendered a persistent inequality problem which is largely to blame for a great number of socio-economic issues faced by the country in recent times like kidnapping, militancy and even terrorism. The misery Index, defined as unemployment rate plus inflation is 37.7%. Pre-rebasing, potential GDP Growth had been estimated at 10.6%. The 3.8% differential between “what is” and “what could be” reflects constraints and sub-optimality.

Poverty in the midst of high crude oil prices and robust growth figures points to the neglect of labour-intensive sectors like agriculture and manufacturing in favour of capital-intensive sectors like the oil and telecommunications sectors. The challenges of poverty, unemployment and inequality require not just economic growth but also job creation and investments in improving the productive capacity of the economy and its people.
 

Ease of Doing Business
Many argue that the rebasing exercise is at most cosmetic as it effectively changes nothing of much substance like the ease of doing business and labour market weaknesses. The World Bank Ease of Doing Business survey recently ranked Nigeria at 147, slightly ahead of Iraq and Sudan. South Africa and Ghana on the other hand are ranked much higher at 41 and 67 respectively. The sub-Saharan African average is 142. Nigeria sadly ranks lower than its peers in the 3 crucial segments of Protecting Investors, Getting electricity and Trading across borders. Nigeria also came in at 144th out of 177 countries in Transparency International’s Corruption Perception Index. According to the IMF, continued weaknesses in labour markets, access to electricity, cost of doing business, and small and medium enterprises’ access to finance have prevented Nigeria’s transition to a more robust and inclusive growth path.
 

Conclusion
The Nigerian economy has been one of the fastest growing economies in recent times. Nigeria has even been included in a list of the next 11 countries to succeed the BRICS as well as one of the MINT countries (Mexico, Indonesia, Nigeria and Turkey). There however exists an apparent mismatch between Nigeria’s much-vaunted economic growth figures and the reality of its average citizen. Rebasing the GDP is not the “silver bullet” that brings an end to this disconnect neither is it intended to be. The objective was not to make Nigeria the biggest in Africa, but to ensure accurate and proper measurement of economic statistics which will pro-vide the basis upon which policy makers and the government can plan strategically and more effectively.
 

The major problems confronting the Nigerian economy are its weak institutions, weak infrastructure and an imperfect market characterised by subsidies on major factor prices like refined petroleum, the exchange rate value of the Naira and public Sector funds. This structure has fuelled rent-seeking behaviour over the years. These subsidies distort the allocation of resources and lead to sub-optimality at the macro level and underperformance in terms of productivity, output and investment. Addressing these problems would have much more effect than a change in the perceived size of the Nigerian economy. The good news is sub-optimality usually equals opportunity.
 

Rebasing does at least achieve one thing. Nigeria is now a couple of steps closer to its ambition of becoming one of the top 20 economies in the world by the year 2020. This feat has been achieved by attaining a more ac-curate measure of output. It does however require much more to attain levels of productivity needed to transform the lives of its average citizen.

 

 

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