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Published On: Wed, Jul 30th, 2014

GDP rebasing and impact on Nigeria’s investment environment

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Okonjo-Iweala_Ngozi (1)Excerpts from a paper delivered by Bismark J. Rewane, CEO, Financial Derivative Company, Lagos during the 19th seminar for Finance Correspondents & Business Editors, held in Kaduna recently.

n April 2014, Nigeria rebased its GDP and changed its base year to 2010 from 1990. As a result, Nigeria is now regarded as a medium income economy. The rebasing exercise helped incorporate the informal sector into the national accounts and this showed a great increase in activities of the service sector of the Nigerian economy.

Gross Domestic Product (GDP ) measures the size and activities in a country at a particular point in time. Many socio-economic indicators depends on its level; and its rate of change, corrected for price movement, is often used to evaluate the extent to which the activities and health of a country has improved over time.

Given its significance, it is important that its values are accurately captured. The United Nations defined rebasing as “the process of replacing present price structure (base year) to compile volume measures of GDP with a new or more recent base year.” GDP rebasing is usually carried out at an average interval of five (5) years in order to ensure that national accounts statistics present the most accurate reflection of the economy. When done, it usually incorporates new economic activities which have not been captured in the previous computational framework.

Table 1 shows that rebasing of Nigerian GDP has led to a change in total nominal GDP ranging from 59.5% (2010) and 89.22% (2013 forecast). Disaggregating these percentage changes further, table 2 depicts that the service sector is responsible for the majority of the changes documented from the rebasing exercise. Specifically, the service sector grew by about 240% between the 1990 base year values and that of 2010.

Table 1: Comparison between old and new GDP series

Total Nominal GDP 2010 2011 2012 2013f

Old Series (N’m) 33,984,754.13 37,409,860.61 40,544,099.94 42,396,765.71

New Series (N’m) 54,204,795.12 63,258,579.00 71,186,534.89 80,222,128.32

% Change 59.50 69.10 75.58 89.22

Source: NBS (2014)

The rebasing has enabled the service sector in Nigeria to be better covered and it has shown that economic activities such as wholesale and retail trade, information and communication, real estate services, human health and social services, professional, scientific and technical services have gained importance in Nigeria. Besides, the service sector is expected to grow fastest and ahead of sectors such as industry and agriculture. Therefore, while Nigeria is becoming slightly more diversified, the country is heading towards a more service-oriented economy.

Table 2: Percentage Change in the GDP between the Old and New Series by Sectors

2010 2011 2012 2013f

Agriculture 25.97 24.4 18.67 19.82

Industry -10.65 6.31 15.6 34.46

Services 239.68 237.63 239.56 240.49

Total Nominal GDP 59.5 69.1 75.58 89.22

Source: NBS (2014)

Lessons for Nigeria

In examining the impact of GDP rebasing on the Nigerian investment environment, it is important to evaluate how GDP rebasing will generally affect the determinants of investment and also analyze some stylized facts from countries that have also rebased their GDP.

Among the effects of the rebasing are that Nigeria’s GDP has increased in absolute term and some sectors have emerged as relatively important when considering their contributions to total output.

The table suggests that rebasing can either be a blessing or a curse for investment; depending on how well it is managed. However, the fact that it may boost investment in the aggregate is reinforced because more attention is likely to be accorded to some investment opportunities that may present themselves as a result of the newly-emerging sub-sectors such as wholesale and retail trade, information and communication, real estate services, human health and social services, professional, scientific and technical services.

The newly rebased figures may also influence government attention in some sector. This can lead to higher public investment provided attention to other sectors is not reduced. It will also be informative to consider some cross-country evidence on the status of investment in the post-rebasing period.

i. Uganda rebased its GDP in 2001: FDI inflows in Uganda went up from $151,486,150(2.6% of GDP) in 2001 to $1,721,169,095 (8.6% of GDP) in 2012. Gross capital formation grew from 19.3% of GDP in 2001 to 24.5% of GDP in 2012.

ii. Malaysia rebased its GDP in 2005: FDI inflows in Malaysia went from $3,924,786,634 (2.7% of GDP) in 2005 to $15,119,371,104 (5.22% of GDP) in 2011. Gross capital formation remained relatively the same at about 23% of GDP through the period 2005 to 2011.

iii. Brazil rebased its GDP around 2005: FDI inflows went from $15,459,981,604 (1.8% of GDP) in 2005 to $71,538,657,409 (2.9% of GDP) in 2011. Gross capital formation went up from 16.2% of GDP to 19.7% of GDP within the period.

iv. Nicaragua rebased its GDP around 1998: FDI inflows fell in the years following the exercise. It went from $218,200,000 (4.7% of GDP) in 1998 to $150,200,000 (2.8% of GDP) by 2001. Gross capital formation also fell from 34.3% to 26.8% over the period.

The evidence above is mixed but there is a higher tendency for investment as a ratio of GDP to rise following the rebasing of a country’s GDP. However, such investment rise is more likely to occur in foreign investment than domestic investment.

Summary and conclusion

The recent rebasing of Nigeria GDP from 1990 to 2010 has pushed the country towards achieving its goal of being one of the top 20 economies in the world by 2020. It has also generated a lot of debate; especially on its appropriateness, timing and effect on welfare of Nigerians. This paper attempts to contribute to this debate by examining the impact of GDP rebasing on Nigeria’s investment environment. It is shown that rebasing of Nigerian GDP has led to a change in total nominal GDP in a range above 60%. Majority of this increase is generated by the service sector; implying that Nigeria is heading towards a more service-oriented economy.

The investment environment in Nigeria is shaped by some macroeconomic, governance, infrastructure and other micro factors. While some successes have been recorded in the macroeconomic environment, much still have to be done to other factors as they grossly limit the competitiveness of the country. Theoretically, rebasing may boost investment in Nigeria; especially foreign investment. If new funds are channeled to the newly emerging service sector by domestic investors and if foreign investment is well integrated with domestic investment, then rebasing may also raise domestic investment. Evidence from countries that have rebased and the trends of investment data in Nigeria however suggest that rebasing will have higher impact on foreign portfolio investment than foreign direct investment and domestic investment.

The foregoing therefore suggests that rebasing has the tendency to exert a positive impact on investment but a deeper analysis will be required to isolate factors that can contribute to these impacts. This will be necessary so that Nigerian size can be converted to its benefits. Even though there are countries that have rebased and experienced higher foreign inflow, Nigeria has to work on improving its competitiveness and removing the identified problems to investment. It has to exploit the new opportunity presented in the service sector; but this has to be done without jettisoning its industrialization goal. This is because in the end, industrialisation is necessary for sustainable growth. More importantly is the growth in the manufacturing sector .

In addition to probable increase in investment in these sub-sectors, investments in labour-intensive industries will be high-yielding for the country and help solve its paradox of high growth and high unemployment. Also, the temptation to over-borrow should be guided against by the government as this is likely to crowd-out private investment and further shrink the already limited financing access that the country’s small and medium scale industry obtain. Although both FDI and FPI are important, efforts should be made to attract more of the former as it is less volatile.


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