For more than a decade, household consumption has contributed a huge chunk to Nigeria’s GDP, with private investments, net exports and government expenditure contributing lower, a pattern that has continued to stifle the growth of Africa’s biggest economy.
According to the National Bureau of Statistics (NBS), household consumption expenditure accounted for about 60 percent of total GDP while government expenditure, private investment and net export contributed 9.3 percent, 14.8 percent and 10.1 percent, respectively, to GDP.
Although household consumption is an important part of the economy as it is essential drive for economic growth, the problem arises when private investments are thinning in a country, making it difficult to create jobs and grow the economy.
“Consumption expenditure will continue to take a large chunk of GDP for many years now but the growth rate of consumption should not be more than the growth rate of investment,” an economist with a development institution said on condition of anonymity.
Private investments and net exports have been battered by the coronavirus pandemic.
While consumption expenditure grew 0.81 percent to N42.8 trillion in 2020, private investments plunged 8 percent to N10.5 trillion and net export fell 23 percent to N7.2 trillion.
“It is the developed countries that can be luxurious about having a GDP totally consisting of consumption,” the source told BusinessDay.
For instance, the United States is the world’s largest economy and also doubles as the world’s largest consumer market.
In 2019, U.S. GDP was 70 percent personal consumption, 18 percent business investment, 17 percent government spending and negative 5 percent net exports.
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A developing country like Nigeria still needs to boost growth and may not be able to afford this luxury.
After two-quarters of consecutive contractions, Nigeria exited recession in Q4 2020 with a growth rate of 0.11 percent, however, the GDP for the full year 2020 still contracted by 1.92 percent.
By 2050, it has been projected that the population in Nigeria will double reaching over 400 million, the World Bank estimates.
When population increases, it means there are more people to feed and will need more jobs to survive, therefore private investment is necessary.
Nigeria’s unemployment rate at 33.3 percent is only rivalled by Namibia in the world, an indication that things could worsen as population expands.
If there is an increase in private investment, there will be more companies to absorb the growing unemployed population, this will boost demand and increase the rate of economic growth.
How GDP is calculated using the expenditure approach
The gross domestic product measures the total value of monetary services within a specific period. It’s equivalent to what is being spent in that economy.
However, unlike the output approach which measures the supply side of the GDP, the income and expenditure approach gives a clear insight into the demand side of various economic agents.
The four components of the GDP are household consumption, private investment, government spending, and net exports.
These components explain that the GDP or output is a function of household consumption, government expenditure, investments and net export indicated as Y= C + G + I + (X-M).
Consumer spending (C) is what households buy to meet everyday needs. This consumption includes both goods and services.
Investment (I) means additions to the physical stock of capital during a period of time.
Investment Includes building of machinery housing construction, construction of factories and offices and additions to a firm’s inventories of goods.
Government expenditure (G), summarises government spending on goods and services. It includes the purchase of intermediate goods and wages and salaries paid by the government.
(X-M) shows the difference between domestic spending on foreign goods (i.e., imports) and foreign spending on domestic goods (i.e., exports). Therefore, the difference between Exports (X) and Imports (M) of a country is called Net Exports.
How it works
The things consumers buy every day create the demand that keeps companies profitable and hiring new workers.
If the household stopped spending, businesses would go bankrupt and lay off workers. The government would then have no one to tax.
Also, when a country exports goods, it sells them to a foreign market, that is, to consumers, businesses, or governments in another country. Those exports bring money into the country, which increases the exporting nation’s GDP. The money spent on imports leaves the economy, and that decreases the importing nation’s GDP.
Lessons for Nigeria: How to boost investment
It is evident that Nigeria needs to increase its investment to achieve the growth needed to boost the economy in the coming days.
“For our stage of development, we need a lot of investment spending for us to boost our long term growth potentials,” OmotolaAbimbola, a macro Economist at Lagos-based Chapel Hill Denham.
The Chinese economy focused on investment spending to drive their growth.
It’s rapid economic growth can be attributed to two main factors; the large-scale capital investment (financed by large domestic savings and foreign investment) and rapid productivity growth.
Similarly, backed by sound financial institutions and liberal markets, the four East Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan) harnessed national savings to offer adequate funds to investors. From a low saving rate of about 5 per cent in 1960, East Asians increased their savings to about 35 percent, and channelled it towards local investments and eventually began to invest in other countries.
On an aggregate level, savings are a veritable tool for economic growth and development. In particular, savings allow the necessary investment to improve a country’s capital stock and its long-run growth trajectory.
Nigeria has one of the lowest savings rate globally. According to the International Monetary Fund, the gross savings rate in Nigeria stood at 13.9 percent in 2019, far behind far below China at 45 percent, and even below Tanzania (24.8 percent), South Africa (15.8 percent) and Togo (21.2 percent).
With consumer prices rising and incomes stagnating, many people cannot afford to save.
Inflation hit the highest in 4 years in February at 17.33 percent. This discourages savings because as Nigeria’s inflation rises, the real return on saving becomes negative.
While investment is still low in Nigeria, we have seen a bit of improvement in development spending due to ongoing projects such as infrastructure, roads as well as the Dangote refinery.
“Those have boosted investment spending a bit but we still need to see more to drive growth,” Abimbola said.
