Between GDP Rebasing and Economic Growth

06 Feb 2013

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Ngozi Okonjo Iweala, Finance Minister


Obinna Chima examines plans by the National Bureau of Statistics (NBS) to rebase the country’s Gross Domestic Product (GDP) from a base year of 1990 to 2008 and its effect on economic growth

To economists, Gross Domestic Product (GDP), which is the market value of final goods and services produced within a country in a given period of time, is the most important measure of economic activities in the country.

GDP is also important because it gives information about the size of the economy and how an economy is performing. It is often used as an indicator of the general health of the economy.

That is why plan by the National Bureau of Statistics (NBS) to rebase the country’s GDP has been followed with keen interest.

The NBS had disclosed plans to change the base year for the country’s GDP computation to 2008 from 1990. The move, the Statistician of the Federation, Dr. Yemi Kale, had said, may raise the country’s GDP to about $247 billion almost as big as South Africa, the continent's top economy, whose GDP stands at $422 billion. Kale, had said that the policy would lead to a ‘huge jump’ in the estimated size of the country’s GDP.

The effect of GDP rebasing is to keep up with the evolution of prices in the economy. In other words, its aggregates at constant prices are recalculated in terms of the prices of a more recent time.

But THISDAY learnt at the weekend that the release of the rebased GDP figures has been postponed once more to October 2013. NBS officials explained that the reason for the delay in implementation is as a result of the need to gather more information on some sectors of the economy so as to ensure that the numbers are credible. The sectors include non-profit organisations and the mining industry.

Latest GDP Figures
Nigeria’s GDP rose by 6.48 per cent in the third quarter of 2012. The figure however was lower than the 7.37 per cent recorded in the corresponding period in 2011. The nominal GDP for the third quarter of 2012 was estimated at N10.9 trillion, compared with the N9.8 trillion of the corresponding quarter of 2011.

“The economy, comprising two broad output groups of oil and non-oil sectors, witnessed slower growth output in the third quarter of 2012 as a result of declines in non-oil sector output. While the oil sector witnessed positive growth for the first time in four quarters, the slower non-oil sector growth was driven by growth in activities recorded in the building and construction, cement, hotel and restaurant, as well as the electricity sectors,’’ the NBS had said.

It added that while oil sector contribution to real GDP in the third quarter of 2011 was 14.28 per cent, it declined to 13.42 per cent in the third quarter of 2012. It also showed that the non-oil sector recorded 7.55 per cent growth in real terms in the third quarter of 2012, compared to 8.76 per cent recorded in the corresponding period of 2011. This was largely attributed to declines in output in the agriculture, telecommunications, wholesale and retail trade and real estate sectors.

Macroeconomic Impact
The Managing Director/Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane explained that the move would probably result to an increase in the country’s nominal GDP to about 40 per cent.

But he argued that “It doesn’t change anything. We call it playing with mirrors because the number of yams you produce would not have increased. But if it makes you feel good, then fine!

“You know, if you have two mirrors in the room and you feel there are 10 of you in the room while there is only one person, if that makes you feel good, fine. Some countries have rebased their GDP for accuracy and statistical relativity. Malaysia did it in 2005, South Africa went from 2000 to 2005, Ghana from 1993 to 2006. But what are the implications of rebasing the economy?

“The first implication is that there is a law of large numbers which says that growth is more difficult when you have a larger base. 100 per cent of one is one; while 100 per cent of 10 is 10. But 10 per cent of 10 is one. So, it becomes more difficult to grow once the base increases.”

Also, the Director, Investment Research, Meristem Securities Limited, Mr. Gary Watson opined that rebasing of the GDP would lead to an increase in foreign direct investments, adding that a lot of investors would be attracted to the country.

“If you want to invest in some countries, you look at factors such as the debt-to-GDP ratio. In some countries in Europe, you are talking about high per cent debt-to-GDP ratio. If you look at South Africa, you are talking about roughly 45 per cent total public debt to GDP. But if you talk about Nigeria, it is currently about 16 per cent.

“So, Nigeria has low public debt. If we rebase the GDP, those numbers are even going to drop further. So, rebasing of GDP such that other sectors like telecoms would be captured in the computation is going to push the numbers. It is going to improve Nigeria’s external position and credit ratings and the debt-to-GDP ratio is going to come down,” he added.

To analysts at Renaissance Capital (RenCap), the exercise is also expected to reflect the change in the structure of the economy over the past two decades, including a smaller agriculture sector and bigger services sector.

RenCap pointed out that the anticipated rebased GDP figures would imply that various macro ratios would change.
“The credit/GDP ratio, for instance will shrink, suggesting that Nigeria is more underleveraged than current estimates suggest,” it added.

Rencap in a separate report insisted that move would also lead to improvement in some ratios, such as the budget deficit to GDP and public debt to GDP.

“An upward revision in Nigeria’s GDP could help the minister of finance achieve her objective by cosmetically reducing the budget deficit to GDP ratio. A bigger GDP will give the finance minister the room to step up Nigeria’s capital expenditure plan, particularly for infrastructure projects, without compromising the medium-term fiscal consolidation plans.

“Nigeria’s relatively low public debt to GDP ratio, which is currently in the high teens, is expected to drop even further following the rebasing, making Nigeria’s government one of the least leveraged in the world, especially compared with over leveraged Europe,” it stated further.

It also projected that GDP of the Nigerian economy may significantly exceed $250 billion when the policy is implemented.

RenCap added: “Most countries rebase their GDP on a regular basis (usually every five years in the West) to account for changes in production and consumption. We think the most obvious change in Nigeria is the sharp rise of the telecommunications industry over the past two decades. We expect the rebasing of Nigeria’s GDP to result in a significant upward revision, à la Ghana.”

Continuing, Rewane stressed that if a country rebases its GDP, the first thing that will happen is that its real GDP growth will reduce. According to him, instead of reporting seven per cent growth rate, five per cent growth is what it would be reporting.

“The other implication is that there are rules of borrowing public debt and the comfort zone normally for West Africa and regional integration is that fiscal deficit should not be more than three per cent of your GDP. If you take your GDP to $400 billion, then three per cent of that becomes a higher figure.

“Another implication is that there are three levels of countries: The low income countries, middle income countries and high income countries. The moment your income per capita crosses $1,500 or $1,700, to probably $4000 dollar, and you become a middle income country, all the international assistance that are supposed to come to you would be cut off. So, that is a major issue and it is one of the issues that are going to be debated in 2013 because one of the reasons for rebasing the economy is to create political mileage.”

Tags: Business, Nigeria, Featured, Gdp, Ngozi Okonjo Iweala, Economic Growth

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