A fresh start: The rebasing of GDP figures should give the economy a major boost

Proper metrics are crucial to a full understanding of the economy. By most measures economic data on Nigeria is vague at best, with GDP estimated at between $247bn and $555bn in 2012, according to the UN, and a more commonly used $259.8bn, according to the National Bureau of Statistics (NBS), depending on whether one includes Nigeria’s significant informal economy of between 40% and 60% of GDP. Although measures of the country’s economic weight will always remain approximate, the rebasing of GDP figures due to be concluded by the end of 2014 should give a better indication of the contribution of sectors that are relatively new since the last such exercise in 1990.

With GDP figures expected to increase significantly – most observers assume a 40% jump – Nigeria’s economic weight will rival that of South Africa, while higher per-capita-income figures will likely boost Nigeria’s profile on the radar of global investors.

A similar exercise in Ghana three years ago resulted in a significant boost – on paper at least – to the country’s economy, increasing its overall GDP by two-thirds and vaulting it into middle-income status. Although Nigeria’s classification from international organisations like the World Bank is already transitioning to lower-middle income before this technical switch, this is not merely a numbers game; more accurate figures will be crucial to longer-term policymaking.

CURRENT APPROXIMATIONS: While most advanced economies recalibrate their GDP figures and sector weightings every five years, current Nigerian data is based on 1990 production and consumption patterns. Although using a GDP deflator to account for the impact of inflation in the past 22 years can minimise distortions in aggregate numbers, the statistics over-estimate the size of traditionally dominant sectors like agriculture, which accounted for around 40% of GDP in 2012, but underestimate the significance of new sectors like telecoms and formal retail and distribution. The old figures also underestimate the geographic areas of growth – Abuja, for instance, is over twice its 1990 size. As a consequence growth rates for telecoms tend to be overestimated, while those for agriculture are undervalued given the base effect of larger weightings. Although the economic weight of sectors like agriculture and manufacturing has trended downwards – from 40.19% in 2011 to 39.02% in 2012 and from 4.16% to 4.06%, respectively – their economic weight is widely assumed to be over-valued compared to telecoms and distribution, which accounted for 7.17% and 19.81%, respectively, in 2012, according to NBS figures.

REBASING EXERCISE: Since early 2012 the NBS has worked on a programme to rebase GDP figures, using 2010 as the new base year. This will entail conducting two six-month-long censuses – one for agriculture and another for business and industry to replace the last censuses completed in 1998 – as well as nine three-month-long surveys in sectors including real estate, hotels and restoration, mining, building and construction, as well as film production in Nollywood. To help pay for this, the NBS, which operates offices in every state and employs 2500 staff, has seen its budget rise six-fold in the past three years, according to Yemi Kale, the bureau’s director-general.

PROCESS & FUNDING: The rebasing project is steered by the NBS, but the bureau will employ contract workers to carry out the surveys and censuses. Although the NBS had requested financial assistance for this project from development partners such as the World Bank, the IMF and the African Development Bank (AfDB), the project is being funded through the federal budget with the three development partners offering technical assistance since September 2012. The IMF, for instance, is helping the NBS to formulate modelling assumptions for the new sectoral weightings.

“If the NBS requires technical assistance, multilateral donors stand ready to assist it in all manners except for funding,” Ousmane Dore, the AfDB’s resident representative, told OBG. While the original deadline for publishing new data was originally set for year-end 2012, the timeframe has since slipped to 2014 due to slower-than-expected funding increases and low survey response rates. Kale admitted to local press that he underestimated the size of the task. Despite delays, political support for the project is clear and the NBS expects full funding to reach the 2014 deadline.

LIKELY IMPACT: While it remains unclear how great an impact the rebasing exercise will have when completed, most commentators expect a jump of some 40% in GDP figures, with a concurrent drop in aggregate growth rates due to a higher base effect. Two examples are generally cited – that of Ghana, which rebased GDP in 2010 and witnessed a 60% rise in nominal GDP, and that of Turkey, which saw a 30% rise in nominal GDP in 2008. According to Renaissance Capital (RenCap) projections in early 2013, a 40% increase in formal GDP figures would expand Nigerian GDP to $361bn using 2012 figures, close behind South Africa’s estimated GDP of $385bn. Assuming a more conservative 20% increase in GDP as a result of rebasing, independent macroeconomic research company Capital Economics forecasts Nigeria could overtake South Africa by the end of 2014. Using the same population figures from the last census in 2006 (demographic censuses are held every decade), this should prompt a rise in GDP per capita from $1650 to $2600, according to RenCap estimates. The impact may be greatest in Lagos State, which accounts for 12% of Nigeria’s GDP and is Africa’s 13th-largest economy with GDP per capita of $2900, according to a 2013 RenCap report.

WIDER EFFECTS: While such changes are relatively cosmetic – influencing Nigeria’s bid to become Africa’s largest economy, for instance – the new figures will also have wider-ranging consequences. “The rebasing of GDP statistics is a technical exercise by NBS, although it could have implications for sectoral budget allocations in the medium term,” the AfDB’s Dore told OBG.

Alongside more accurate weightings of the economic contribution of relatively new sectors such as telecoms and entertainment, the project will also encourage better data collection and economic modelling methodologies. This will go a long way in resolving what Shanta Devarajan, the World Bank’s chief economist for Africa, referred to a mid-2012 conference as “Africa’s statistical tragedy” of inaccurate and unrepresentative data collection. Although federal budgeting is not based on the relative importance of sectors, the new figures could impact the budgeting process in more indirect ways. “You need coherent statistics to be able to formulate policies, and more importantly, evaluate policies,” Marie Francoise Marie-Nelly, the World Bank’s Nigeria country director, told the press in May 2013.

As GDP grows, Nigeria’s stock of sovereign debt will decrease as a share of the economy from 18.4% in 2012, as will its annual budget deficit figures. With a 35% cap on sovereign debt-to-GDP, this would create more space for the federal government to raise debt. Inversely, the larger figures will highlight the low level of current fiscal buffers built up through the Excess Crude Account as a share of GDP. The IMF expects the new figures to shine more light on the factors driving Nigeria’s paradox of high economic growth coupled with low job creation and widening unemployment. While the new figures will be ready for the 2016 budget exercise at the earliest, they could impact iterations of Nigeria’s medium-term fiscal and debt strategies.

GLOBAL RANKINGS: Beyond their impact on policymakers’ visibility, the new statistics will also affect Nigeria’s terms of trade with portfolio and direct investors. The country is already in the process of transitioning from a low-income market, covered under the World Bank’s International Development Association (IDA), to a lower-middle-income market under the bank’s International Bank for Reconstruction and Development (IBRD) programme over the three years to 2016.

While Nigeria still receives some funding under IDA, most new projects will be under less concessional IBRD terms – this will cause the rates at which Nigeria can borrow from the World Bank to jump from 1.5% to 2.5% once the shift is complete in 2016. The fact that this shift is already under way reduces the impetus for political interference in keeping per capita GDP figures lower. The likely jump, however, is expected to have a more significant impact on prospective investors.

Portfolio investors eyeing local fixed-income and equity markets will take note of both lower aggregate indebtedness figures (as a share of GDP) and higher purchasing power. Foreign direct investors will see in this higher domestic spending power more impetus for investing in the Nigerian domestic consumption story.

Although statistics are often used for political purposes, the government’s efforts to depoliticise the rebasing project and adopt international best practices in data collection and modelling methodologies is an encouraging sign. While it will always be challenging to accurately estimate the size of the significant informal economy, updating Nigeria’s formal statistics is long overdue. Despite understandable delays in this ambitious project, modernising the country’s economic information infrastructure will provide significant support for the growing pool of foreign investors looking for a more accurate view of local conditions.