Photo courtesy of Shardayyy via Flickr.
On Sunday April 6, 2014, something quite peculiar occurred to the Nigerian Economy – it seemingly doubled overnight.
As far as anyone knew, the size of the economy the previous day had stood at roughly $264 billion. By Sunday afternoon however, the figure had jumped almost 90% to $509 billion.
Such a jarring revision of a country’s own economic might should leave even the most naïve observer incredulous. After all, Nigeria is no stranger to corruption and has quite the penchant for fiscal opaqueness. Last year, Transparency International ranked Nigeria 144th out of 177 countries based on its Corruptions Perceptions survey.
But in fact, these revisions up to $509 billion, calculated through a process known as “rebasing,” give economists a much more accurate and realistic picture of the size of Nigeria’s economy, as measured by annual gross domestic product (GDP).
What is GDP and how is it calculated?
Before explaining what changed in Nigeria, it is important to understand GDP and how it is calculated. A country’s GDP is the total value of all the goods and services produced within an economy over the course of a year. In other words, it tells us how much money the people, businesses, and government in a country earned.
While these may seem simple enough in theory, much akin to balancing a checkbook, the actual collection of the data can be a painstaking process. Small surveys are given to businesses, such as manufacturers, retailers, and construction companies. This data is then combined with information on import and export flows and financial transactions.
Once the data has been collected, economists must decide how much weight should be given to each sector of the Nigerian economy. While the IMF suggests that these estimates of production patterns should be updated every five years, Nigeria had not rebased its GDP since 1990. This means that until last month, Nigeria’s official statistics viewed the economy exactly as it had been almost a quarter century earlier.
What changed in Nigeria?
In 1990, the country had only 300,000 landline users, but as of February 2014, there were almost 130 million active mobile phone subscriptions. Because telecommunications accounted for less than 1% of GDP in 1990, as opposed to almost 9% today, this dramatic growth was largely overlooked in Nigeria’s GDP estimates.
Other industries also saw similar expansions that, until last month, were not reflected in the numbers. The entertainment and film industry in Nigeria, known as “Nollywood”, generated nearly $600 million in revenue last year and employed over one million Nigerians. This made it the second largest employer in the country after agriculture.
However, almost all of this growth occurred after 1990. While today, Nollywood accounts for 1.4% of the economy, the GDP estimates prior to rebasing had no record of this.
The form of government has also changed in Nigeria. In 1999, the military dictatorship that had ruled the country since the 1980s gave way to a democratically elected leadership. Since then, the tourism and agriculture sectors have flourished.
What does all of this mean?
With the rebasing of Nigeria’s GDP, the estimates of per capita GDP (which are done by simply dividing GDP by population) rose from around $1,500 a year to $2,688 a year following rebasing.
However, this does not reflect any kind of a material gain for the average Nigerian. Over 60% of Nigerians still live in poverty and some statistics indicate that this number may be increasing. The money was already there; it just had not been accounted for in the official statistics.
Still, many of the statistics investors use when making decisions about risk rely on estimates of GDP.
Debt-to-GDP ratio, for instance, which simply shows how much money the government owes other people as a percentage of the overall size of the economy, dropped from 40% to 21%.
This will allow the Nigerian government to engage in more stimulative spending without increasing interest rates on debt.
Additionally, oil revenues are now thought to account for only 14% of GDP, as opposed to 33% with the old numbers, indicating a much more diversified Nigerian economy.
With the rebased GDP estimate of $500 billion, investors can make more informed decisions about the Nigerian economy. Seeing a bigger and more diversified economy in Nigeria will almost certainly lead to an increase in investment.