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After it overhauled its economic statistics for the first time in decades, Nigeria this year announced that it had overtaken South Africa to become the continent’s largest economy. Government officials rejoiced and foreign investors celebrated.
The revision brings Nigeria significantly closer to its objective of joining the world’s top-20 nations by 2020, overtaking other emerging nations in Asia and Latin America.
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Nigerian gross domestic product for 2013 was recalculated at $510bn, a hefty 89 per cent more than previously stated, and well above South Africa’s $350bn.
The new estimates were made by updating the base year for calculations to 2010 from 1991, when booming sectors in Nigeria such as the mobile phone industry, the banking sector and the “Nollywood” film industry were in their infancy.
But within weeks, the reality of poverty and inequality was kicking in: the local branches of Unilever, Heineken and Cadbury – seen as barometers of consumption – reported surprisingly large double-digit falls in profitability for the first quarter of the year, a sign that the much-hyped nascent middle class is struggling.
Nigeria’s economy may be far larger than thought, but that does not make it immediately better. That is a paradox of which government officials are well aware.
“The quality of growth needs to change,” says Ngozi Okonjo-Iweala, the minister for economy and finance. “We need to grow faster in the right sectors, including agriculture and manufacturing.”
For several years, the International Monetary Fund has been warning the country about the problem, saying in its latest report on Nigeria that “despite strong growth in recent years, key social indicators remain below average for sub-Saharan Africa”.
The new economic figures have lifted Nigeria’s GDP per capita substantially, to $2,689, up from a previous estimate of $1,555. But the recalculation will not put more money in the pockets of the average man and woman in Nigeria, where more than 60 per cent live in severe poverty.
On the contrary, they could reinforce perceptions of marginalisation in a country in which a crop of multimillionaires and billionaires has emerged and private jets clog the tarmac.
Razia Khan, chief economist for Africa at Standard Chartered Bank, says the new figures confirm that income inequality is higher, “which risks adding to perceptions of political risk”. She adds: “The pressure on the authorities to create some sort of social safety net in response will be significant.”
Ms Okonjo-Iweala, a former senior official at the World Bank, says the country would need to grow even faster than during the previous decade, when it averaged 7 per cent, to reduce rampant inequality and generate enough jobs. “We need to grow faster, as China did – faster than 7 per cent,” she says. “The biggest safety net is to have a job. But we need social protection programmes too.”
The IMF forecasts that Nigeria will grow this year at a rate of 7.3 per cent, up from 6.4 per cent in 2013, “driven partly by a rebound in oil production, and supported by positive effects of reforms in power and higher agriculture production”.
But analysts in the private sector are taking a more cautious view, projecting growth of 6-7 per cent. Ironically, the 2015 election could provide a short-term boost, as public spending usually increases as the ballot date approaches. Ms Okonjo-Iweala is, however, adamant that she will keep a tight leash on the public purse. “We have tightened the belt and I have the backing of the president.”
But she acknowledges that the excess crude account, which Nigeria uses to save extra oil revenues, has been drawn down significantly over the past 12 months, dropping to less than $3bn at the end of 2013, down from $11bn in 2012. She attributes the drop to lower oil production because of theft, but critics also say it is related to billions of dollars of unaccounted oil revenues.
The IMF forecasts that the country’s fiscal deficit will drop from 4.9 per cent in 2013 to 1.9 per cent this year. Still, Nigeria is still far from the big fiscal surpluses it enjoyed for most of the 2000-08 period, when oil production was higher.
Nigeria’s fiscal troubles have another – and more challenging – source than volatile oil revenues: a very small tax base, even by the standards of Africa.
Before the rebasing, Nigeria’s ratio of tax revenues to GDP of about 20 per cent was within the range for an emerging country. “We are not looking so good now,” says Ms Okonjo-Iweala.
The new figures put tax revenues to GDP at a mere 12 per cent. Excluding tax and royalties from the petroleum and natural gas sector, the ratio is even worse, with non-oil tax revenues to GDP at a meagre 4 per cent. Nigeria is bringing in external advisers to help it broaden the tax base and improve collection, in an effort to mimic the success of South Africa.
Inflation, the Achilles heel of macroeconomic policy in the 1980s and 1990s, when it hit annual rates above 70 per cent, remains under control, within the target of 6-9 per cent.
