GDP REBASING: Playing with Mirrors

Proshare

Monday, December 16, 2013 16.55 PM / FDC

 

The National Bureau of Statistics has commenced the process of rebasing Nigeria’s GDP, using 2010 as its new base year. The preliminary result, which was expected to be released initially in November, has been postponed until mid December.

 

After 23years of using 1990 as its base year, major economic shifts and trends have occurred, one being the creation of the services and the telecoms sectors. This exercise is expected to provide a more realistic estimate of the Nigerian economy and although it is a welcome development, the wider implications on key macro-economic indicators are more cosmetic than material.

 

In this contribution, FDC analysts share their perspective on a number of issues and their impact on macro-economic stability.

 

Intro

There has been much ado about Nigeria rebasing its GDP, i.e. changing its mode of calculating growth in output and using a more recent base year of 2010 from 1990 prices.

 

This is meant to portray a better picture of the size and composition of the economy, by taking into account new sectors such as telecoms and the movie industry that have emerged over the years. A feat done by several countries (e.g. Ghana, South Africa and Malaysia), GDP rebasing has significant implications on the structure of an economy. However, before we jump the gun, where is Nigeria coming from?

 

A Low Income, Resource Rich Economy

With a 5-year average annual growth rate of 7%, the Nigerian government has been using a 1990 base year to calculate the growth of its real GDP. In nominal terms, this is estimated to be $283bn in 2013, according to the Economist Intelligence Unit (EIU). Nigeria has a young and growing populace, estimated at 170m, who have a per capita annual income of $1,624. Based on the above, Nigeria can be classified as a low-income economy that is heavily dependent on oil. According to the World Bank, Nigeria falls within the category of lower middle-income economies based on certain criteria such as the GDP and GNI per capita. Similar countries in this cadre include Senegal, Cote d‘Ivoire, Ghana and Cameroon.

 

One of the aspirations of the Federal Government of Nigeria (FGN) is for Nigeria to become one of the top 20 economies by 2020 (Vision 20:20). Rebasing its GDP base year brings it one step closer to this goal.

 

Playing with Mirrors?

Just like a child attempts to wear high heels to appear taller, the same way Nigeria will appear larger with a rebased GDP. According to some estimates, Nigeria may record an approximate 40% leap in nominal GDP to about $400bn, putting it ahead of the gi-ant of Africa: South Africa (with a nominal GDP of $384bn). How-ever, the real rate of growth may decline to an average of 5% from 7%.

 

Since GDP is the most frequently used index of comparison to other factors, other indicators will appear smaller with a larger nominal GDP. For instance, Nigeria has a total debt portfolio of $53.42bn (N8.3trn) as at September 30th, according to the debt management office (DMO). The total debt to GDP ratio is estimated at 19.3% according to the EIU and is projected to decrease to 13-14% with a rebased GDP. The threshold for fiscal deficit as a percentage of GDP is 3%; with a rebased GDP, the threshold widens, portraying an illusion that Nigeria can increase its borrowing (3% of $400bn is higher than 3% of $283bn).

 

What about Eligibility to Aids and Grants?

As mentioned earlier, Nigeria is currently classified as a lower middle-income economy. With a rebased GDP, this pushes the economy into the category of the medium income economies (e.g. South Africa, Malaysia and Namibia). The clause to this is that Nigeria forfeits its eligibility for, or access to, aids and grants from international organizations such as the International Monetary Fund (IMF) and African Development Bank (ADB). Ghana in 2010 rebased its GDP to 2006 from 2003 and was reclassified as a medium income economy.

 

What to Expect

The National Bureau of Statistics (NBS) is expected to release its preliminary results mid December. It would be interesting to see what would be released. In a country like Nigeria where data integrity and collation is a herculean task, it is highly unlikely that the NBS meets its deadline. Nonetheless, the rebasing is a welcome development long overdue. This is the first of many to come...watch out.

 

Download The November 2013 Economic Report Here


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