Monday, September 09, 2013 9:37 AM / DLM Research
GDP remains the key measure of economic activities as it aggregates the market value of final goods and services produced within a country in a specified period of time. In practice, most governments validate GDP calculations by rebasing periodically, in a bid to reflect structural changes in the economy. Rebasing is the process of replacing present price structure (base year) to compile volume measures of GDP with a new (more recent) base year. The need to re-calculate GDP figures using a new base year is underpinned by the fact that the new base year would incorporate structural changes which the outdated base year might not adequately capture. Nigeria currently uses a base year of 1990 which suggests that the GDP framework likely underestimates the level of economic activity.
The Nigerian GDP Rebasing Project is long overdue. Rebasing can be either done annually or on a periodic basis. On a periodic basis, the base year is recommended to be updated every five years. Whilst most countries rebase periodically to reflect changes, particularly in production and consumption patterns; Nigeria has not rebased her national account estimates in about twenty three years. Against this backdrop, the ongoing GDP rebasing project aims to reflect the accurate value of the Nigerian economy which currently stands at c.N40.54trillion as the economy differs structurally to a large extent from 1990. Therefore, the calculation of the Nation’s real GDP which has been based on 1990 prices will now be revised upwards to 2010 thereby taking into account new sectors of the economy that have emerged over the last twenty three years whilst also incorporating the changes in patterns and classification of sector, sub-sectors and their regrouping due to the adoption of the latest System of National Accounts (SNA) of the United Nations. To actualise this, the National Bureau of Statistics (NBS) engaged over 250 stakeholders from various socio-economic sectors. The preliminary estimate of the rebased GDP is expected to be released in November 2013 upon completion of a series of activities including several surveys to be carried out across various sectors.
Structural changes in the economy not captured in the previous GDP estimates. Over the last twenty three years, significant structural changes has taken place in the economy on all fronts. From a political perspective, the economy transitioned from the military era into democratic rule in 1999 which has subsisted for the last 14 years. From an economic standpoint, we observed that in 1990, the Industrial sector was the highest contributor to GDP (43.20 percent) followed by the Agricultural sector (31.52 percent). However, the Industrial sector declined consecutively in subsequent years to record a contribution of 20.36 percent as at 2010. Agriculture has been the most dominant contributor to GDP since 2002. Whilst the Industrial sector recorded a decline, the Services sector has recorded steady growth over the period up from 10.25 percent in 1990 to 18.10 percent in 2010. (Fig.2)
We are of the opinion that the expansion recorded in the Service sector over the period is largely attributed to the performance of the Communication sub-sector as its contribution to the Service sector grew from 1 percent in 2000 to 25 percent in 2010. (Fig.3)
The phenomenal growth recorded by the Telecommunication sector between 2001 to 2010 is still being sustained in the current decade. The sector’s contribution to GDP grew from 0.62 percent in 2001 to c.8.53 percent as at Q1 2013 (Fig.4). Amongst other key indicators, this fact is underscored by the significant growth in subscriber base from 866,782 subscribers in 2001 to 113,195,951 subscribers as at 2012 (Fig.5). Over the last four years, the subscriber base has grown at an average of 15.3 percent.
Also worthy of note is the banking consolidation exercise which improved confidence in the financial sector to a large extent thereby heralding the inclusion of Nigerian Banks into the list of Top 1000 Banks in the world. A recent release by The Banker which highlighted the Top 1000 Banks in the World had 13 Nigerian Banks in the list which includes: Zenith Bank, First Bank, Guaranty Trust Bank, Access Bank, United Bank for Africa, Ecobank, Fidelity Bank, First City Monument Bank, Skye Bank, Diamond Bank, Stanbic IBTC, Union Bank and Standard Chartered Bank.
The growth in the nation’s Entertainment sector also brings to the fore the change in the structure of the economy. The Nigerian economy has evolved remarkably over the review period even as we highlight that Nigeria has grown to be a key investment destination in Africa as shown in the growth of foreign direct investments stock from c.$8.54 billion in 1990 to c.$76.37billion as at 2012 (Fig. 6).
According to the World Investment Report 2013 released by the United Nations Conference on Trade and Development (UNCTAD) in H1 2013, Nigeria was ranked as the Number one investment destination in Africa as it led the group of countries in terms of Foreign Direct Inflows (FDI) with about US$7.029billion with the next being Mozambique with US$5.218billion. (Fig. 7)
GDP Rebasing Experience for selected countries. Countries rebase the System of National Accounts (SNA) periodically to keep up with the pace of price changes within the economy. In the previous fiscal year, Malaysia reviewed her base year upwards from 2000 to 2005 consequently recorded an increase of c.3.3 percent in GDP figures as it is estimated that GDP increased from US$256.27billion to US$264.68billion. Ghana also reviewed her base year from 1993 to 2006 thereby recording an increase of c.60.3% in GDP (Fig. 8), and the Services sector was discovered to be the largest contributor to the GDP rather than Agriculture as shown by the previous GDP estimates(Fig. 9). Consequently, Ghana moved from being a low-income to a lower-middle-income country. South Africa currently uses a base year of 2005 done during the 2009 re-basing exercise with the next benchmarking and rebasing exercise due in 2014.
We expect that the rebasing exercise will see GDP figures being revised upwards. As at the end of 2012, Nigeria’s GDP was c.US$260.2 billion (N40.54 trillion) with a relatively low GDP Per Capita of c.US$1,541 in 2012. Based on the structural changes that the economy has undergone which have not been captured by the previous GDP estimates, we are of the opinion that the planned revision will reflect the significant expansion that has occured within the domestic economy over the years. We believe that the Service sector would most likely have a higher contribution to GDP when the exercise is concluded as opposed to the Agricultural sector being the dominant contributor. We forecast an increase to c.US$377.35 billion (N58.78 trillion) and a GDP Per Capita of c.US$2,235.49. In terms of size of GDP, Nigeria currently ranks as the 37th largest economy in the world and the second largest in Africa as the nation ranked ahead of Egypt to become the second largest economy in Africa behind South Africa.
We are positive that the rebasing exercise will move Nigeria up the rank inching closer to South Africa which currently ranks as the 28th Largest economy in the world in terms of GDP with a nominal GDP figure of c.US$384.31 billion as at 2012. In addition, our analysis show that the rebasing exercise will relatively lower debt ratios and the budget deficit as a share of GDP.
Growth rates might decline as a result of a higher GDP base. Whilst we project that GDP figures will improve considerably, we also highlight that growth rates going forward would trend relatively lower from current levels. To maintain growth at current levels, it is imperative to harness the growth opportunities of Nigeria’s agricultural and industrial sectors as they have potentials to drive sustainable growth. With the teeming population and natural resources at Nigeria’s disposal, we maintain our position on the possibility of attaining double digit-growth rates in the near term if the various reforms aimed at developing the non-oil sector are implemented.
Promising GDP figures...........Need for broad based growth. We commend the decision to rebase the GDP as the process would herald reliable data which would aid effective planning and accurate policy decisions. Whilst we acknowledge that the rebasing exercise would improve Nigeria’s global rankings and ratings in terms of her economic capacity and opportunities. We note that it will indeed bring to the fore the developmental challenges facing the nation as the growth in national output is not commensurate to the state of infrastructure, poverty and unemployment levels within the country. Poverty incidence was reported at about 70 percent in 2010 which highlights the extreme income inequality with an unemployment rate of 23.9 percent as at 2011. It is indeed a paradox however, that despite the growth rate being recorded in the economy year-on-year and the promising GDP size being expected after the rebasing exercise is concluded, the proportion of Nigerians living in poverty has been on the increase although we note the decline between 1985 and 1992, and between 1996 and 2004. In our analysis, we observed that the population of the extremely poor rose significantly from 6.2 percent in 1980 to 29.3 percent in 1996 declined to 22.0 percent in 2004 and rose to a record high of 38.7% in 2010.
Nigeria is in need of stronger broad based growth to tackle its key socio-economic challenges of poverty, huge infrastructural deficit and high unemployment. The high unemployment rate can only be brought down by removing all the impediments and implementing an efficient policy shift that supports investments in enabling infrastructure which would aid sustainable growth. The economy needs to be restructured through the creation of an enabling environment that encourages industrialisation which would subsequently create jobs.
Disclaimer/Advice to Readers: While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the authors best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This article is published with the consent of Dunn Loren Merrifield, the author(s) for circulation to the online investment community in accordance with the terms of usage. Further enquiries should be directed to the author whose e-mail is Dunn Loren Merrifield Limited [Email:firstname.lastname@example.org]