Traders at a popular market in Lagos waiting for customers
Kunle Aderinokun
Based on the data released by the International Monetary Fund (IMF), Nigeria has been displaced by South Africa as the biggest economy in Africa. By the latest development, South Africa has reclaimed the topmost position it lost to Nigeria in 2014, when the later rebased its gross domestic product (GDP), to increase the size of its economy to $510 billion, using 2010 as the base year to replace 1990 previously used. The GDP is the total value of a country’s goods and services over a period of time.
According to reports, the appreciation of South Africa’s rand, placed the country ahead of Nigeria, which had the naira, its national currency, devalued following the introduction of a flexible foreign exchange regime in June. Specifically, in the wake of the flexible foreign exchange regime, the naira was devalued 30 per cent, wiping off about $150 billion of its GDP, which enabled South Africa to be in the second position, overtaking Egypt and moved closer to Nigeria. Even though the South African economy shrank as the rand weakened , Nigerian economy also witnessed serious challenges, which narrowed the gap between the two economies. But South African economy gained traction following the appreciation of rand, while the Nigerian economy continued to be depressed.
Using GDP at the end of 2015 published by IMF , Bloomberg reported that the size of South Africa’s economy was $301 billion at the rand’s current exchange rate, while Nigeria’s GDP was put at $296 billion.
Bloomberg noted that the rand has gained more than 16 per cent against the US currency since the start of 2016, while in contrast, Nigeria’s naira has lost more than a third of its value. Only last Wednesday, the rand firmed by more than a per cent against the dollar, to R13.29.
Notwithstanding the change of position, Nigeria and South Africa face the risk of recession, having contracted in the first quarter of the year, according to Bloomberg.
While Nigerian economy contracted by 0.4 per cent, South African GDP shrank by 0.2 per cent. Nigeria has suffered amid low oil prices, while South Africa is sensitive to shifts in the commodity cycle.
In their reaction, economic analysts have expressed divergent views on the latest development. While some faulted the indices for ranking the economies and also wondered the rationale behind the use of GDP as the measure of the progress of nation, the others did not see any big deal in the ranking. Nevertheless, they proffered the way forward for the economy.
Managing Director and Chief Economist, Africa, Global Research, Standard Chartered Bank, Razia Khan, argued that “the obsession with being the ‘biggest’ economy in Africa, based on FX valuations is extremely flawed.”
According to her, “Economists prefer purchasing power parity measures of GDP, simply because they avoid the problem of FX volatility having an outsized impact on the measurement of GDP.
Ultimately, Khan pointed out, it is countries with more flexible FX regimes that are better able to absorb external shocks.
“Over time, it is these countries that should see better growth, other things being equal. From this perspective, it is even more erroneous to base GDP comparisons on FX moves alone,” she stressed.
Khan advised Nigeria to focus on “the long-term drivers needed to foster an improved (and more diversified) growth environment.”
“It needs to do this for its own sake, and not because it is trying to regain the number 1 position in Africa. A more rapidly growing South Africa does not take away from the growth opportunity in Nigeria, and vice versa.
“If we measure economic welfare (and this is where the emphasis should lie), being biggest in the region has no bearing on this,” she noted.
Similarly, Managing Director, Global Analytics Consulting, Tope Fasua, contended that “GDP is a very weak measure of national progress and wellbeing”, stressing that, “by extension GDP growth is an almost meaningless measure in the league of thinkers as to what a people have to do to achieve socioeconomic progress.”
“But we are stuck with it. Therefore for now, the country whose GDP is highest has bragging rights. Nigeria utilised its bragging rights when it rebased its GDP in 2014. GDP the world over is measured and reported in dollars, so if between then and now, the Naira has officially devalued by 50 per cent, its GDP has fallen by half, “ he noted.
Fasua therefore advised the authorities to ensure that all the indices are handled properly if Nigeria desire to be in the league of countries with high GDP, expressing the need to build sustainable economy.
“If Nigeria is serious about being in the league of countries with high GDPs it has to be mindful of the indices. Naira has to be strong vis a vis the Dollar, but more importantly, we need to commence building a sustainable economy. Perhaps the fact that South Africa has overtaken us will remove the delusion, and force us to stop bragging around while we have such a flimsy economy. Perhaps it will put the Buhari government under pressure to do the needful because we cannot keep complaining about the past.”
To the Director-General, West Africa Institute of Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, “Nigeria as the largest economy in Africa was not really a big deal.”
He noted : “The GDP was recalculated with a new base year of 2010 after 24 years. Definitely, the GDP would be large with several implications. One was that it placed Nigeria as a middle income country thus making it difficult for the country to obtain IDA loans on concessionary terms. The GDP per capita is an average measure.”
Stating that, “The number one gets does not translate to millions of Nigeria having such money in their pockets,” Ekpo argued that Nigeria was the largest economy with nothing to show for it.
“Yes, the largest economy in Africa with decayed infrastructure, rising poverty (about 70 per cent), rising and embarrassing rates of unemployment and underemployment and rising inflation (17 per cent). The real sector is dead and cannot be revamped with an average interest rate of almost 28 per cent. The agricultural sector remains at the peasantry level; power supply is epileptic and a near collapse of basic social services such as education, health, housing, running water, poor sanitation, among others,” he lamented, pointing out that, “there are other useful indicators capturing the wellbeing of citizens than growth in GDP and/or growth in GDP per capita.”
According to him, “Even when South Africa was in second position, her infrastructure is first world by all standards; the economy of South Africa is semi-industrialized thus foreign exchange flows in from various sources. Her currency, the Rand, is very strong and relatively convertible. Her currency is quoted in most emerging markets. The Naira is not.
“Consequently, the issue is not whether a country in Africa is number 1 or 2, the challenge is for our policy-makers and leadership to deal with the present recession in Nigeria by implementing robust fiscal policy that will ensure economic recovery.”
This, he said, “entails spending on hard infrastructure such as power, roads, railways etc.” He added that, it also mean, “Putting in place the right policy to reduce dependence on the export of crude oil and curtail the craze of Nigerians for imported goods and services; implementing an aggressive monetary policy that would reduce lending rates in order to revamp the real sector.”
“It is not important to play a catch-up race with South Africa. If the Nigerian economy becomes strong, modern and knowledge-based then the world would not ignore Nigeria. Singapore is not large in population and size but the achievements she has recorded over a short period make her a reference point in the calculus of development. Nigeria’s economy should at some point be a positive reference for others to cite. To be the largest economy is, therefore, not the issue,” he also stated.
Speaking along the same line of thought, Executive Director, Corporate Finance, BGL Capital, believed that, “apart from the pride in being the largest economy in Africa, there is no direct effect on the economy.”
“This is because the loss of the first position was due to the shrinking of the economy. It was due to exchange volatilities, which means that in local currency, the economic size is the same.”
In order to take the leading role again, Ademola therefore noted, “we need to deploy all possible to ensure that the economy grows at an average rate of 6-7 per cent again.”
“Secondly, we need to improve domestic production to ease the pressure on the exchange rate. A strengthening of the Naira could help us to get back to the top. In addition, another rebasing of the economy which is due in another 8 years could make us the biggest economy in Africa again,” he added.
“Although it is not clear what exchange rate was used to determine the new value for Nigerian GDP, it is apparent that the economic value will decline based on the exchange rate depreciation. However, it is just a matter of statistics for comparison purposes, it doesn’t have any direct effect on the citizens.”
Going forward, an analyst, who is also an investment manager, Adetola Odukoya, advised that, “in addition to other complementary measures, I believe the monetary authorities should lower interest rates to single-digit levels so that capital and investments can be re-directed to the appropriate sectors of the economy that can drive GDP growth.”
For example, he pointed out, “SMEs should be able to access long term capital at sustainable interest rates in order to thrive. The current interest rate levels cannot support business growth.”
“Meanwhile, fiscal authorities can support this by removing or reducing instances of double taxation for businesses, especially SMEs, whilst equally improving the ease of doing business within the economy,” he added.
