This article was first published in the June 2014 international edition of Accounting and Business magazine.
Economists made history on 6 April when Nigeria suddenly overtook South Africa as the largest economy on the continent.
Achieved via a major revision of the way that GDP is calculated, or a ‘rebasing’ as economists term it, Nigeria’s great leap forward is a result of its GDP figures now including the business of Nollywood (Nigeria produces more movies than any other country except India), a huge, unplanned mobile telecoms boom, the vast informal sector and the multiple airlines that have started operating since 1990 when the last rebasing was carried out.
Usually there is a rebasing every five years, but Nigeria hadn’t undertaken one for 24 years and the effect was a surge in GDP to US$510bn. That meant Nigeria’s economy leapfrogged South Africa’s (GDP: US$453bn) for the first time ever.
Perhaps it is all just paper transactions, and nothing on the ground has changed, but the recalculation has already had a psychological impact on Nigerian managers and CEOs. It also means that several key statistics or indicators will change, and that in turn means more competition and ultimately a more open economy.
Investors looking at opportunities in frontier and emerging markets will be pleased to note that the ratio of stock market capitalisation to GDP in Nigeria is now just 18% (down from 33%); in South Africa it is over 250%. Interestingly, oil and gas represent just 14% of the economy (down from 32% before the rebasing).
Global investors thinking of beating a path to Nigeria should note that, despite these statistics, this African country faces the challenges of poor electricity infrastructure (although fuel prices are cheap), insecurity (with continuing terror attacks in the interior), widespread poverty, and a relatively poorly educated population, as well as governance and leadership issues.
Yet Nigeria continues to grow rapidly, with a resource boom and a growing middle class driving the future. South Africa on the other hand has an excellent power infrastructure, as well as better security, poverty and education statistics, yet continues to languish. It seems counterintuitive on one level, but in reality the riskier economy is outperforming the more stable one, and this may continue in the future – or not – depending on what actions are taken now.
Long-term success will depend on how Nigeria uses its resources, especially its currently extremely sweet oil resource.
In my last article I examined what lessons the oil-rich Middle East had for Africa, and I hope Nigerians are aware of the lessons they need to learn. In summary, if the country uses its oil resources and reinvests the income from them in its people, then Nigerians will benefit over the long term, even when the oil runs out. Otherwise the party will simply end when the oil does, and Nigerians will have only themselves to blame.
The Nigerian economy is robust and already beginning to diversify away from oil and gas. The mobile phone industry and Nollywood are examples of innovation and disruption of outdated methods of working, and ultimately these lead to the creation of new value for the people.
Nigeria can continue to build on this trend, as it has acknowledged the value of it in rebasing its GDP calculations. It can discover new industries in the IT arena, or in manufacturing industries.
Or it can simply use the figures as window dressing and continue on a course of business as usual, burning its oil and gas resources forever.
Alnoor Amlani FCCA is an independent financial management consultant in East Africa who writes regularly on business and social issues