FEATURE ARTICLE

Akin Awofolaju, PhDTuesday, April 8, 2014
Awofolaju@aol.com
New York, NY, USA

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NIGERIA BECOMES NO 1 GIANT ECONOMY IN AFRICA WITH REBASED GDP CALCULATIONS
...AND WHAT IS IN IT FOR AVERAGE NIGERIAN?


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oday Nigeria as a country has overtaken South Africa and become continent’s biggest economy there is. Besides, in some quarters, it is highly orchestrated that Nigeria’s weakest link could become its greatest assets in the next couple of years to come especially when it comes to its human capital resources, market potentials, young growing population and macroeconomic stability of GDP growth 7.1%. It has been predicted that Nigeria GDP can easily rise to US$4.9 trillion by 2050 by World Bank.

Although, nobody is expecting Nigeria to perform to par especially in global forum where corruption discussion is the center focus, as many put far too much weight on the negative images that are well-known - crime and corruption in Nigeria, but when you begin to think of a nation

With mixed economy, one might generally say about Nigeria as an example of rebase went wrong with 24yrs behind it is easier to be positively surprised about Nigeria sudden economic growth in the face of the imminent social problem.

To the man in the street, it will make no difference at all. But it'll be of some interest to economists. Certain ratios will change, for example the debt to GDP ratio will fall. And on a GDP basis, Nigeria will become the largest economy in Africa, knocking South Africa into second place. Nigeria's rebased GDP is thought to be around $510bn compared with South Africa's GDP of $370.3bn at the end of 2013.

But as an economist I would like to point out that Nigeria's economic output is underperforming because at 170 million people, its population is three times larger than South Africa's. And on a per-capita basis, South Africa's GDP per capita numbers are three times larger than Nigeria's ($11,800 Vs $2,800 est. 2013) respectively . So, while Nigeria can claim the crown of Africa's largest economy, there are certain caveats.

The best way to look at it is the impact of the proposed new base year of 2008 will lead to a larger GDP base and this new denominator may lead to a slowdown in the rate of accretion in subsequent quarters.

In my opinion, when the GDP is finally rebased, the GDP growth rate of the country could drop from the current 6-7 percent range, to around 3.5 to 5 percent. On the other hand, if Nigeria is to continue to achieve the 6-7 percent growth rate after the rebasing, it means that the country will have to post a much higher level of economic output per quarter than it is currently doing.

This higher output would need to be induced by big domestics and FDIs investments aimed at plugging the massive infrastructural deficit.

Given all circumstances without sufficient enabling environment & FDI investments in infrastructure, especially on power supply, roads, rail, sea ports and security. If these does not happen Nigeria’s economic output may continue to suffer from some significant dysfunctional patterns which may undermine the growth trajectory in the long term”.

Nigeria has a modest debt to GDP ratio of below 20 percent at current levels, and the outlook for the ratio indicates a further moderation after the rebasing.”While policy makers may be quick to applaud the country’s benign Debt to GDP, we must note that the 2013 – 2015 estimates of the Budget Office indicate that the country may use up to 10 percent of its entire Gross Federally Collectible Revenue for 2013 and 2014 and 9 percent in 2015 for debt servicing (domestic and external debts)”.

“Policy makers should thus adopt a cautionary stance over the sustainability of debt levels at the current revenue base. The debt to GDP will only make meaning to Nigeria if there is a determined effort to widen the tax net as GDP expands”. Without this, Nigeria may accelerate debt levels without matching it with the commensurate repayment capacity”.

“Another drawback of the GDP rebasing is that it will further embellish Nigeria’s poor human development indicators. With a GDP size that may place Nigeria as an emerging economy, it becomes more tenuous for policy makers to explain the current significant poverty and unemployment levels within the country”.

It is a known fact that most governments overhaul GDP calculations every few years, to reflect changes in output and consumption, such as telecoms, financial services and internet usage. Nigeria has not done so since 1990 suggesting that the previous GDP framework underestimated economic activity.

It is expected that Nigeria’s GDP rebasing would give the country a greater positive outlook in terms of economic size and other indicators like the debt to GDP ratio, and the country’s per capita income.” It will also firm up Nigeria’s position as an emerging market economy and help improve the country’s economic profile amongst FPIs and FDIs, but a more comprehensive look, at the proposed October rebasing, also shows that Nigeria may experience a slower rate of economic growth because of the larger GDP base and this might automatically translate to a slowdown in the rate of economic growth, especially in some quarters.

The risk is that once the GDP is expanded after calculations, a significantly smaller cosmetically enhanced budget deficit will encourage government to push up spending, which would be inflationary. A bigger GDP also implies an upward revision in per-capita income.

“Nigeria’s current per-capita income is estimated at $1,600, which still trails that of many other economies on the African continent. Nigeria’s GDP per capita is expected to increase from $1,600 to $2,600, if the country’s year-end 2012 GDP is revised upwards by 60 percent” said an expert

“Even with this, ours is still far behind when compared to that of South Africa which stands at $8,700 per capita for, which is the IMF’s projection for 2012”.unquote

“That said, the big increase in per-capita income is likely to attract interest in consumer names in Nigeria, from investors who are likely to extrapolate the effect of a seeming increase in purchasing power on such consumer stocks, as Nestle, Nigerian Breweries, Guinness, Flour Mills and PZ, amongst others”.

Mr. Olufadi further explained that the draw-back in all of this is that policy makers might throw caution to the wind, and go into big time borrowing, which might again unnecessarily expose us negatively. “The debt to GDP will only make meaning to Nigeria, if there is a determined effort to widen the tax net, as GDP expands. Without this, Nigeria may accelerate debt levels without matching it with the commensurate repayment capacity”.

To me , another disadvantage for the country is that Nigeria might stop getting aid and grants from Millennium Development Agencies and global donors, because the rebasing might expose us to be seen as a big strong economy, strong enough to cater for our poor, which in the real sense of it, we are not, due to some internal reasons”.

Cadiz Asset Management equity analyst, Adrian Colette estimates show Nigeria has more than 40-million consumers in the middle income segment — just shy of South Africa’s total population of 51-million — with millions more expected to join in the next decade. There is also a large swathe of Nigeria’s unbanked population where interested foreign banks are angling to come into the country, like First Rand Bank of South Africa, because they believe they can use the country’s rapidly growing mobile telephone penetration to provide cell phone banking services.

Nigeria’s oil-based economy is expected to be the largest in the region, after South Africa, by 2015 after the country rebased its gross domestic product figures.

That alone will turn in to a further attraction for investors and potentially provide opportunities for FNB and RMB, and other South African banks eyeing the Nigerian market. My only reservation or prayer is that policy makers try too, live up to the expected expansion in economy after the result of the calculations in October.

Nigeria is a natural target for investors, given the size of its economy and its population, estimated at more than 160-million people.

As some economists have estimated the country’s economy seems to grow more than seven percent annually over the next five years, compared with less than 5 percent in South Africa, for example.

This is among the reasons Nigeria was being seen “as a very attractive market for banks in South Africa.

This will probably mark a symbolic turnaround on the regional geo-political scene, but may not change much in terms of actual leadership in Sub-Sahara Africa. South Africa will certainly remain the dominant entity in the Southern African region and, to a lesser extent, in parts of the COMESA zone. Nigeria is and will be the most influential member -but not undisputed leader- of ECOWAS.

Be it as it may, Nigeria remains significantly underdeveloped in terms of basic infrastructure (electricity, roads, etc) and faces very high income inequality. This negative perception will not dissipate just because of the revision in aggregate GDP, especially as output per capita in Nigeria will continue to trail that of South Africa over the next decades.

“On the macro front, the implication is that GDP growth will probably slow further as output moves to a higher base. Additionally, the current account-to-GDP ratio will reduce, but so will the nominal FG fiscal deficit-to-GDP and public debt-to-GDP ratios”.

Here is an amazing statistic about Nigeria. Hypothetically, let say, 170 million people in Nigeria today share about the same amount of power supply that is used by about 1.5 million people in the Europe. Almost every business has to generate its own power. The costs are enormous. Can you imagine, can you believe, that this country has been growing at 7% with no power, with zero power?

But the opposite is also true - and this could be a problem for Mexico, and all other three MINTs economies (Indonesia, Nigeria and Turkey), currently which financial investors are really quite, excited about.

And what is it that makes these economies unique than ordinarily, their economic potentials esp. three of them - Mexico, Indonesia and Nigeria - they are commodity producers (i.e. Oils) and only Turkey isn't. This contrasts with the Bric countries where two - Brazil and Russia - are commodity producers and the other two - China and India - aren't commodity driven economies either but technologically strong because of stable power supply. Think about what Nigeria can become if we take pains to fix our infrastructural problem, energy supply, good road networks, and other social problems such education etc. All Nigeria needs is to create an enabling environment for small & large scale enterprises to thrive

Mexico owes much of its rising wealth to the oil, which it sits on, especially offshore oil potentials.

Indonesia, the country needs more of a sense of commercial purpose beyond commodities, and has to improve its infrastructure so as to be able to sustain its gigantic rebased calculation but there is something that’s unique about Nigeria resilience that surpassed other developing economies, and that is how do you not give a due credit to an economy also Nigeria to able sustain

If you thought Maggie Thatcher stood for serious reforms, Jonathan government makes her seem like a kitten but with lacks of checks and balances. We need serious regulatory agencies to support transformational agenda. This government is putting in place many reforms (energy and fiscal policy) but need more follow-ups, time and serious accountability to shape it up esp. in education and non-oil exports. Corruption is obviously one topic that all developing economies have in common.

In Nigeria, people hides under the impression that hand-deep corruption is inimical to its development. Allow me to categorically say NO, Nigeria hypothesizes beyond corruption given the macroeconomic resilience, corruption stands as a rare prevention of economic development - and government should know that the growth of the economy, accompanied by improvements in education, emancipation of social responsibility programs would lead to better governance and greater transparency.

Speaking of the Mint countries, we should quickly note that corruption remains the consequence of their weak past, not a cause of a weak future, and certainly not the number one challenge. I’m not saying it’s a good thing but we must not let it slow us down. With time it will fall off the radar, It should fall way down a list compared with the costs of energy and the breadth of its availability and, of course, infrastructure. With Nigeria rebased its gross domestic product (GDP) this weekend which pushes it above South Africa as the continent's biggest economy. I know energy policy was seen in both Mexico and Nigeria as a top priority and each country has launched major initiatives this year, which if implemented, will accelerate growth rates significantly.

I personally reckon Nigeria could grow at 10-12% by sorting out this problem alone. That would double the size of its economy in six or seven years.

In Indonesia, the fourth largest country in the world, I would say leadership and infrastructure are the major challenges, though there are many more too. But challenges and opportunities sit side by side.

In one of Jakarta's slum areas, the land is sinking by 20cm per year because of over-extraction of water, but property prices elsewhere in the city are rocketing.

In Turkey of course, its politics and the combination of a Muslim faith with some kind of desire to do things the Western way is a unique sort of challenge. Some might argue the same challenge exists for Indonesia but I returned thinking this was not the case. In Jakarta at least, the Western way of doing things seems to be generally accepted - in striking contrast with Turkey.

So can the Mints join the top 10 largest economies in the world, after the US, China, the rest of the Brics and maybe Japan?

I think so, though it may take 30 years.

Akin Awofolaju, PhD, CSP, CLE, CFE (Cornell) is President/CEO Amerihire Inc -USA, Governance, Risk & Compliance, Management Consulting Group and President - Nigerians in Diaspora Organization (NIDO-NJ) Chapter

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