Putting the “Largest Economy in Africa” Tag into Perspective

In 2014, the National Bureau of Statistics (NBS) announced the rebasing of Nigeria’s 2013 GDP figures from N43 trillion ($270 billion) to about N81trillion ($510 billion). Subsequently, Nigeria (previously the third largest economy in Africa behind South Africa and Egypt) was heralded as the largest economy in Africa. This is very reminiscent of its “Giant of Africa” tag in the 70s and 80s. The rebasing exercise has raised a lot of questions about its meaning and relevance. Critiques complain that it is of no real value since much of the touted growth is non-inclusive: There is rising inequality with much of the country’s wealth residing in the hands of a very privileged few while the masses wallow in abject poverty.

Though the points raised above are valid, I would like to put the “largest economy” tag into perspective by looking at government budget (revenues and expenditures). But before we take a deep dive, I would first like to state that size does not necessarily imply quality. That Nigeria is the largest economy in Africa does not imply it is the most advanced, modernized, or developed. A Rising GDP is just a necessary but not a sufficient condition for economic development.

Before touching on government budget, let’s take a quick look at GDP per capita.

Per capita income is a measure of average income per person in a country. It is the GDP divided by the total population and measures how prosperous a country feels to each of its citizens. GDP in turn is the market value of all “officially” recognized final goods and services produced within a country in a given period (NBS).

 

Source: AnswersAfrica. Top 10 African Countries with  the Biggest Economy

Looking at the table above, out of the ten largest economies in Africa by GDP; Nigeria comes 7^th in terms of per capita GDP. Despite being the largest economy in Africa, the standard of living in Nigeria remains relatively low. Viewed the other way round, it simply implies that given Nigeria’s population size its GDP should be way above its current rebased value of $569 billion.

Source: CIA, The World FactBook

A country’s national budget is very important as it is the expression of public policy determining the allocation of resources and consequently economic growth and expansion. Governments are governed mainly by their budgets, which are written estimates of anticipated revenue and expenditures during a specific period of time. Nigeria ranks a miserly 6^th out of the top ten African economies in terms of budget. The revenue accruing to the federal government of Nigeria in 2014 is a meager $23 billion while South Africa earns about $87.1 billion. Hence South Africa’s revenue is four times that of Nigeria even though Nigeria’s economy is about twice that of South Africa. Likewise South Africa’s expenditure ($102 billion) is three times that of Nigeria ($34.62). South Africa earns and spends more than Nigeria and this in part explains why its economy is far more developed. Excluding Nigeria and the bottom three countries (Sudan, Ethiopia, Tanzania), the other countries' budgetary expenditure as a percentage of their GDP averages 36%. Nigeria budgetary expenditure is merely 6% of its GDP. If Nigeria is to spend 36% of its GDP, its budget will be about $200 billion.

Based on its GDP, Nigeria should be earning more revenues than South Africa and it can earn more if it strengthens its tax systems and continues to diversify the economy. The World Bank currently classifies Nigeria as a lower-middle-income economy (countries with GNI per capita between $1,046 to $4,125) with robust growth averaging 7% for the past decade. However, it is currently threatened by exchange-rate volatility and falling global oil prices that impact public-sector revenues. Lower revenues due to the over-dependence on oil (oil accounts for 75% of the country's revenues) means ever dwindling government expenditure on much needed infrastructure required to develop the country.  

This brings me home to my question, “Given that Nigeria needs to develop and modernize, must its spending on infrastructural depend solely on what government generates in revenues? The answer is “NO.” The Africa Infrastructure Country Diagnostic (AICD) Report for 2011 estimates that Nigeria requires sustained spending of $14.2 billion per annum over the next decade in order to address the infrastructure challenge. Furthermore, it is estimated that Nigeria needs N10.63 trillion ($67 billion) for road upgrades, bridge repairs, the energy sector, hospitals and schools. Clearly, Nigeria must borrow to be able to build new infrastructure. As early mentioned, Nigeria should be spending close to $200 billion and if the country is serious about developing, it has to borrow to cover the current revenue shortfall. However, budgetary discipline and a change in fiscal policy are needed to ensure money borrowed is judiciously employed. Nigeria’s budget should ideally be clocking the neighbourhood of $200 billion is we are serious about advancing our economy.

Countries with growing vibrant economies usually take on more debt to finance economic development. Governments borrow to maximise their GDPs and grow their economies. Ironically, the opposite is the case in Nigeria. Despite the fact that the economy has been growing at 7% for over a decade, Nigeria has maintained extraordinarily low debt levels of about 9.9% since 2005 (compared to an average of 60% in Eurozone countries- IMF). Nigeria has a very poor road and rail network, only one functional seaport, and a largely inadequate power supply system. With our current budget levels, we will keep taking ten years to build a ten kilometer road. It is best for Nigeria to follow the BRICS model where on the average, debt to GDP ratio is 41.7%.

References

• FinIntell. http://www.myfinancialintelligence.com/banking-and-finance/real-output-and-aggregate-leverage-%E2%80%93optimal-levels-emerging-economies#sthash.LGzOAQpD.dpuf
• CIA World Fact Book
• AnswersAfrica. http://answersafrica.com/largest-economies-africa.html