Nigeria to lose crown as Africa’s largest economy

In April 2014, Nigeria proudly declared that its economic output in 2013 had hit $509bn, displacing long time dominant economy, South Africa to claim the enviable title of Africa’s largest economy.
But, just two years later, South Africa is widely tipped to once again reclaim top spot: by one measure at least it has already done so.
“I am going to be talking to clients about South Africa being number one this year,” Renaissance Capital’s Chief Economist, Charles Robertson says.
It is not the case that South Africa has been a glittering success story in recent years, however, just that it has done less badly than its rivals.

While most analysts expect growth in South Africa to return during the first quarter, the IMF is pencilling in a full-year return of just 0.8 per cent.

With the rand averaging 15.26 against than in 2011, the country’s GDP, in dollar terms, fell from a peak of $417bn in 2011 to $280bn last year. However, factoring in the modest growth and 6 per cent inflation forecast by the IMF for this year, and the partial recovery in the rand to 12.95 to the dollar, that figure could rise to $354bn in 2017.
Nigeria on the other has also endured a difficult period since becoming Africa’s top dog, assailed by the jihadist Boko Haram in the country’s north and militants in its oil-producing south, sabotaging oil production. In conjunction with weaker oil prices, this has led to a shortage of dollars, shredded government finances and a recession, with the economy contracting last year for the first time in 25 years, by 1.5 per cent. The central bank bowed to the inevitable and devalued the naira from 199 to the dollar to 305 last year.
Using this official exchange rate, and factoring in the IMF’s forecasts for tepid GDP growth and 17 per cent inflation this year, Nigeria’s economy will still be larger than that of South Africa, at $410bn, even if that is a far cry from its 2014 peak. However, the official exchange rate is not available to all people and businesses, due to a severe shortage of dollars.
Moreover, foreign currency cannot be used at all to import 41 banned categories of goods, totalling 700-800 items, known as the “toothpick ban”. A truer picture may be given by the black market, or “parallel”, exchange rate that many Nigerians are forced to turn to.
This currently has a midpoint of N460 to the dollar, according to AbokiFX, which monitors rates at Lagos’s bureaux de change.
Based on this exchange rate, Nigeria’s GDP is likely be about $272bn this year, comfortably below that of South Africa based on calculations by John Ashbourne, Africa economist at Capital Economics.
Indeed, using this measure, South Africa regained its crown in the third quarter of 2016, Ashbourne says. Some argue that this black-market rate understates the true value of the naira, as it is determined by a market with a chronic shortage of dollars and poor liquidity.
One counterargument, as Robertson points out, is that people said the same about Egypt’s black-market rate. Yet when that country allowed its pound to float freely in November, “the exchange rate blew out to below the black-market rate”, he notes, suggesting such a parallel rate does have validity.
But even if we were to generously grant Nigeria a stronger exchange rate, it might still lose top spot. Last month Nigeria did indeed create a new rate: wealthy Nigerians can now pay foreign school fees and medical expenses at a rate of N366 to the dollar.
“It may be that that [rate] is closer to the median and that is a reasonable number,” says Ashbourne. Using the N366 rate, and feeding in the IMF’s assumptions for this year, Nigeria’s GDP will be $342bn, some $12bn behind South Africa’s.
“It really will be very, very close [depending on the exchange rate used],” Ashbourne says. “But Nigeria used to be hugely ahead of South Africa, so the fact that it is down to being close is a pretty big shift.” Mr Robertson adds: “Unless oil goes up and therefore the exchange rate, I think it would be hard for [Nigeria] to argue they will be in first place this year.”
He argues that South Africa has regained its mantle “partly because it did not interfere in the exchange rate” when it was plummeting between 2011 and January 2016. “They stood back and that helped with the worst pain, and as a result South Africa is already bouncing back because it embraced the free market on the currency.”
Nigeria is struggling to bounce back because it has not,” says Mr Robertson, who notes that other oil exporters that let their currencies slide, such as Russia and Kazakhstan, are also now on the recovery trail. One legitimate question is how much it really matters that Nigeria, in particular, has seen its GDP in dollars fall sharply, and will seemingly be overtaken by South Africa. “From an economic perspective it does not really matter that much,” says Ashbourne. “It is not as if in real terms Nigeria produces a third less than it used to, it is just that the value in dollars is different. On a day-to-day basis it does not really matter, except for imported goods.”
Nevertheless, he adds: “It is a status thing. I think it will be seen as a symptom of Nigeria’s decline after a period being this investor darling.” There is also a belief that Nigeria’s demotion will prove short term, and that the continent’s most populous country will ultimately reclaim its position as its economic kingpin.
“It is temporary. You cannot escape the demographic trends and the fact that Nigeria should be growing faster than South Africa for years ahead,” Robertson says. “Over the longer term Nigeria will be the largest economy in Africa. It has so many more people and it is difficult to imagine that growth in real terms will be higher in South Africa over a long period of time,” adds Ashbourne. “Its growth potential is so much higher because of lower incomes and it does not have some of the structural problems that South Africa has.