Nigeria, Africa’s Biggest Economy On Paper?

Nigeria, Africa’s Biggest Economy On Paper?

Rebasing Nigeria’s GDP may be easier than changing investors’ perceptions when it comes to doing business in the country, experts say.

Nigeria gained bragging rights over South Africa when it announced on April 6 after statistical rebasing that the country’s gross domestic product nearly doubled, making it the largest economy in Africa.

Statistical rebasing sent Nigeria’s GDP to $509.97 billion, surpassing South Africa’s $370.3 billion, according to the Nigeria’s National Bureau of Statistics.

As Africa’s most populous country with 170 million people, Nigeria has grown as an investment target due to the size of its consumer base. But the implications of Nigeria’s recalculated GDP are being hotly debated.

John Campbell was U.S. ambassador to Nigeria from 2004 to 2007 and is the Ralph Bunche Senior Fellow for Africa Policy Studies at the Council on Foreign Relations in New York City.

“I have little confidence that the reality is being described statistically,” Campbell said in an interview with AFKInsider. “I think statements like ‘Nigeria has an annual rate of growth of 8- or 9-percent a year’ — I would put that figure as purely aspirational.”

Campbell admits he is not a statistician, but said he believes most African government statistics are suspect, with the exception of South Africa.

Campbell is author of “Nigeria: Dancing on the Brink.” He writes a blog, “Africa in Transition” and edits the Nigeria Security Tracker.

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Campbell cited Morten Jerven‘s book, “Poor Numbers,” published by Cornell in 2013 to back up his argument. “It’s a pretty devastating critique of actually most African statistical offices — the South Africa one being the exception,” Campbell said.

Peter M. Lewis is director of African Studies at Johns Hopkins University.

“Just revising your GDP upward doesn’t mean that you are structurally more important as a location for investment, as a producer, as an exporter, as a trading partner, or a voice in the global economy,” Lewis told AFKInsider.

Nigeria had not rebased its GDP since 1990, which flies in the face of the United Nations Statistical Commission recommendation that such adjustments should be made every five years. This should be done to account for changes in economic activity such as increases in production, discovery of new natural resource wealth, or the unexpected collapse of a major industry in the country.

In Nigeria’s case, the rebased figures take into account business growth impacts from industries such as banking and finance, internet e-commerce and telecommunications, expansion of the services industry, and the Nollywood film industry. None of these were previously counted because they didn’t exist in 1990.

Zerihun G. Alemu is chief country economist in Nigeria for the African Development Bank Group. He says the rebased GDP is reliable. During preliminary estimates leading to the rebasing, the Nigerian government was responsive to tough questions and “suspicious” numbers, Alemu told AFKInsider.

“I believe the numbers are reliable because the African Development Bank, together with sister institutions — the International Monetary Fund and the World Bank — have worked closely to support the National Bureau of Statistics in their rebasing and benchmark revision exercise,” Alemu told AFKInsider. “Intensive interactions were made at different times to review preliminary estimates. In fact, there were times when we asked some tough questions and pointed out suspicious numbers which were addressed and contributed to the further refinement and production of quality estimates.”

Changing Investor Perceptions

The new numbers will have a psychological impact on foreign investors, Finance Minister Ngozi Okonjo-Iweala said at a news conference. Travel business for hotel owners, travel agents and airlines will boom as Nigeria attracts more investment conferences.

Tom Coogan is Nigerian regional program director for the U.S. African Development Foundation.

“I can’t speak for foreign investors, but what I can say is I would hope that it would encourage more direct foreign investment in Nigeria and people would take a second look at Nigeria for investment,” Coogan told AFKInsider.  

Alemu said he expects the GDP rebasing will have an impact on foreign investment, “but I don’t think it will be that significant. It all depends on investors’ perception about the country.”

According to Alemu, the perception of the GDP rebasing would have several effects.

Firstly, being the largest economy on the continent is important because together with its population it expands consumers’ market base. Secondly, it makes the economy more diversified than previously thought, which opens up new investment opportunities in areas not previously known to foreign investors. Thirdly, it improves the country’s sovereign credit profile, which the country could use to borrow cheaply from international financial markets and address its infrastructure challenges. 

“These, together with existing investment pull factors — a growing economy, surplus in the current account, manageable fiscal deficit, vibrant capital market — would help Nigeria attract additional investment,” Alemu said. “But I don’t think these are significant enough. The country has to perform better than its peers on the continent. This requires … concerted effort in all fronts to improve investors’ perception about the country — attractive investment policies, addressing deficient infrastructure, improving the living standards of the citizenry, improved service delivery, peace and security.”

Campbell said he thinks “virtually nothing will come of (Nigeria’s GDP rebasing). I mean those companies, American or otherwise, that are trying to make money by organizing and managing foreign investment in Nigeria, they will probably trumpet it to the skies. But whether it goes beyond that or not, I have my doubts.”

Johns Hopkins’ Lewis said, “I think it could have a very general impact on perceptions of the market and it might prompt some investors to take another look at the Nigerian market. But investor behavior will be influenced by relative returns and the conditions of doing business.”

Growth Challenges

Even the positive implications of the new statistical GDP pale when one considers the track record of the Nigerian government and the state of the country’s basic infrastructure, such as electric power and roads needed to sustain growth and offer good conditions to attract businesses.

“Despite announcements that they were going to dramatically improve their electricity output, in fact, it’s been declining,” Lewis said. “They have a very overextended road network, ports network, rail network, which are badly in need of refurbishing and expansion. So, all of those critical infrastructural constraints are going to hold back expansion.” This also challenges the basic productive sectors in agriculture and manufacturing from dramatically growing or expanding as a percentage of output, Lewis said.

There is still a lot of grassroots development that needs to be done, said U.S. African Development Foundation’s Coogan.

Global Recognition

South Africa represents Africa at the G20, as well as in the BRICS group of emerging economies that includes Brazil, Russia, India and China. Nigeria has suggested it should be allowed to join those clubs due to the size of its economy. But it’s not that simple.

If membership would encourage Nigeria to further its participation in the world economy, that would be a positive thing, Coogan said.

BRICS provides a consultative forum among countries that seemingly have almost nothing in common, Campbell said. “Russia, India, China — they’re enormous countries. Then you throw in Brazil, which is not nearly as large but it has been enjoying some economic success, and then you throw in South Africa allegedly because you needed a country from the African continent. But what is the meaning behind all of this? I would suggest not much.”

Timing is Everything

The rebasing of Nigeria’s GDP had several false starts since it was last done in 1990 and there is much speculation that the rebasing will impact future loans or financial aid.

“What it could impact would be Nigeria’s ability to borrow money at concessionary rates,” Campbell said. “In other words if Nigeria is a lower middle-income country, then the special concessionary terms that are extended to poor countries would no longer apply.”

“Over the last two decades there has been discussion about doing this rebasing, but the authorities elected not to because they wanted to be eligible for concessionary debt relief and other considerations from the global financial institutions,” Lewis said.

 Campbell weighs in: “It has been suggested that one reason this rebasing didn’t take place 10 years ago was that the then president, Olusegun Obasanjo, was in the process of initiating debt forgiveness … and that therefore it would not be helpful to show that the country’s economy was as large as it really was.”

The GDP rebasing will not affect African Development Bank’s loan to Nigeria, says African Development Bank Group’s Alemu, who notes that Nigeria is currently accessing loans from the bank’s concessional and non-concessional lending windows.

“The almost doubling of Nigeria’s per capita income to $2,688 due to the GDP rebasing will not change its status,” Alemu told AFKInsider. “It would rather make it sit comfortably well above bank’s threshold for middle-income country and hence strengthens its position …”

Politics of GDP

President Goodluck Jonathan’s 2015 re-election campaign could tout an “economic miracle” and take credit for the higher GDP as a result of the president’s Transformation Agenda.

“I think, certainly the ruling People’s Democratic Party will do so. And I suspect within the ruling party, they are not unhappy with the fact that this announcement has come out now,” Campbell said.

“There is no question that the current timing also plays into political aspirations and a desire to improve their reputation,” Lewis said.

One issue rattling the government’s reputation is Nigeria’s oil industry. As Africa’s top oil producer, Nigeria is a member of the Organization of the Petroleum Exporting Countries (OPEC). But Jonathan’s government is grappling with oil theft and allegations that the Nigerian National Petroleum Corp. has not accounted for billions of dollars of oil resource revenue.

Jonathan’s government is also struggling to suppress an Islamist insurgency in the north, where more than 1,500 people died in the first three months of this year, according to Amnesty International estimates. The Amnesty International report, released April 1, said the military has carried out hundreds of killings since the conflict stepped up.

“(A few weeks ago) you had a pitched battle in Abuja between Boko Haram and security forces in front of the state security service, which is next door to the presidential villa,” Campbell said. “A week before that, you had a Boko Haram attack on to the barracks in Maiduguri, the most strongly fortified military position in Northeastern Nigeria, in which they freed 1,000 prisoners. In other words, things were not looking very good before this economic news.”

Ultimately the security situation on the ground is going to be a problem in terms of attracting investment, Lewis said, “even though a lot of the key investment areas are on the other side of the country from where the insecurity is.”

Real Economic Boom?

The GDP rebasing makes Nigeria the world’s 26th-largest economy and raises its per capita income to $2,688, ranking it No. 121 in the world, up from No. 135.

“Again, what does that mean?” Campbell said. “That figure basically comes from oil production and oil prices. So it doesn’t have any meaning as far as individual Nigerians are concerned. Much more meaningful are statements like the one the president of the World Bank made recently that some 70 percent of Nigerians live in dire poverty.”

Though Nigeria’s economy has grown by at least 6 percent a year since 2006, according to the World Bank, poverty remains an issue in the oil- and gas-rich country compared to South Africa’s $7,336 per capita for a population of 48 million. South Africa is also light-years ahead as far as business-friendly infrastructure and electric power generation — producing 10 times more electricity than Nigeria.

Yet, one would think that almost doubling its GDP would allow Nigeria to make the changes needed all the way down to the country’s poorest.

“The rebased GDP doesn’t represent new money, it just represents an updating of the statistics. So, it’s not a question of whether new money will trickle down, it’s a question of what’s happening to the wealth and the value that’s already there,” Lewis said. And the fact is that it is a grossly unequal, highly impoverished economy.”