Questions raised by Nigeria's recalibrated GDP figures

The product of two years of work, recalibrated figures for Nigeria’s GDP, which shifted the base year from 1990 to 2010, were published in April 2014. As a result, the economy leapfrogged 10 places in global rankings, with 89% growth in GDP in one stroke. As in any rebasing exercise though, the new figures are a double-edged sword. The updated national accounts reveal previously underestimated dynamic sectors and further raise Nigeria’s profile amongst foreign investors. Yet, they also compound chronic challenges facing Africa’s (now) largest economy, including low fiscal revenue, difficulties in job-creating sectors and persistent poverty. More accurate figures make for better policy-making though, and authorities are currently working to adapt their statistical tool-kits in light of the new figures.

Extensive Exercise

While most advanced economies do so every five years, the National Bureau of Statistics (NBS) launched Nigeria’s first rebasing exercise in 20 years in early 2012 – two years after a similarly-overdue process in Ghana expanded the measurement of that country’s economy by roughly 60%. As Nigeria had not changed the base year for calculating the value of its GDP for two decades, changes in the prices of its goods and services during this period – as well as the growth of new economic sectors – were not being factored in when compiling its annual output.

Supported by a six-fold increase in allocations from the federal budget over three years, as well as technical assistance from the World Bank, the African Development Bank and the IMF, the NBS conducted two six-month censuses, one for agriculture and one for industry – the first since 1998 – as well as nine three-month surveys, including real estate, hotels and restaurants, film, mining, telecommunications, building and construction.

Far more comprehensive than previous exercises, the NBS expanded the number of economic activities used in calculations from 33 to 46 in total and increased the sample size 10-fold to cover more than 850,000 establishments.

Leap Forward

When Nigeria’s updated 2013 GDP was released in April 2014, the $509.97bn figure represented an 89% increase over previous estimates, allowing Nigeria to jump 10 places in global GDP rankings to 26th. Leapfrogging ahead of South Africa ($354bn), Thailand ($401bn) and Argentina ($485bn), Nigeria’s per-capita income is still far lower than its new peers: despite rising over 70% to $2689, it remains roughly one-third of South Africa’s.

The higher nominal GDP value implies significantly higher annual growth than previously estimated, at 48% in the four years to 2013. Annual rates jumped from an average of 8% between 2010 and 2014 ( prerebasing) to 14%, according to Nigeria-based investment firm Dunn Loren Merrifield.

The new figures paint a better picture of Nigeria’s vast informal economy, which had been estimated at between 40% and 60% of GDP: the UN Development Programme estimated its size at 57.9% in a study released in June 2014.

New Narrative

With such figures, Nigeria appears on track to becoming one of the 20 largest economies globally by 2020 – one of its key development goals. Of more immediate significance, however, is the dynamism that the figures reveal in relatively new sectors. “The recent rebasing of GDP has revealed significant opportunities in under-estimated growth areas,” Moses Tule, director of monetary policy at the Central Bank of Nigeria, told OBG. Although the rebasing has had no impact on the country’s sovereign credit rating, it has raised its profile amongst international investors. In particular, Nigeria now appears significantly more diversified than in previous estimates, even if its natural resources industry, mainly oil and gas, retains an oversized importance relative to peer markets of a similar size.

The greatest growth took place in the services sector, whose economic weight rose from 29% to 52%, driven particularly by strong expansions in financial services, transport, real estate, telecoms, and wholesale and retail trade, while agriculture declined from 35% to 22% and industry fell from 36% to 26%. Previously dominant industries such as oil and gas saw the starkest declines, from 32% of GDP to 14.4%, while telecoms proved one of the biggest winners, with a 12-fold increase from 0.8% to 9%. Entertainment alone – including the so-called Nollywood film industry – which had never before been counted, was found to account for 1.4% of GDP.

Following the rebasing exercise the real GDP growth rate was estimated by the NBS at 5.09% in 2011, 6.66% in 2012 and a projected 7.41 % in 2013. However, according to the revised and final GDP rebasing results by output approach, released in June 2014 by the NBS, GDP growth for 2011 had also been reviewed upwards to 5.31%, while in 2012 it was revised downwards to 4.21%.

Fiscal Implications

The new figures are a double-edge sword for the government. While they allow more fiscal space in order to comply with the 35% debt-to-GDP ceiling, with indebtedness falling from 19% to 11%, they also expose chronic shortfalls in revenue collection, with oil- and non-oil-revenue-to-GDP ratios dropping from 20% to 12% and from 7% to 4%, respectively, as a result of the rebasing.

The rebasing exercise will not have an impact on Nigeria’s international classification as it was already in the process of transitioning from a low-income country to a lower-middle-income one, according to the World Bank’s definitions.

Once the transition is completed (estimated by 2016), Nigeria will qualify for International Bank for Reconstruction and Development funds at 2.5% interest rates rather than the 1.5% for International Development Association funds.

The World Bank, which assisted Nigeria in calculating its new GDP results, said that the rebasing process was an important step forward in improving the understanding of the size and structure of the Nigerian economy.

The ratings agency Moody’s also responded positively to the rebasing results, issuing a statement following the release of the new data that the measure supported an accurate assessment of Nigeria’s economic standing and its sovereign credit profile. Importantly for both local and international investors, Moody’s has predicted the jump in Nigeria’s GDP will pale in comparison to the growth surge expected over the coming three decades and more.

Further Calibration

Although an important step forward, the recalibration of official statistics remains a work in progress. The next step for the NBS will be to rebase and reweight the consumer price index (CPI) used to track inflation. Food and utilities account for 60% and 8.5% of the CPI, respectively, according to the IMF; however, in changing the CPI base year from 2004 to 2009, the NBS will reduce the share attributed to food: as the middle class gradually develops, the share of income spent on food naturally declines. This may curb volatility in headline inflation figures, given that non-food items are typically more price-stable than food.

Despite the enthusiasm surrounding Nigeria’s new economic figures, the authorities see both sides of the issue and are emphasising the human development and fiscal challenges they highlight. Greater investor interest in the country’s sizeable market should help the government as it seeks to attract foreign direct investment in job-creating industries.