How big is Lagos, and the VAT row?

While Nigeria is off the radar screen for many portfolio investors due to FX complications, the economy remains the biggest in Africa. That said, the range of per capita GDP across Nigeria is remarkable. This issue is particularly topical when we consider the new debate about VAT and whether this is collected by states or the federal government. It becomes quite clear why richer states Lagos and Rivers want to keep their VAT receipts to support their own development and why poorer states would oppose this.

In May 2019, the Nigerian National Bureau of Statistics (NBS) released GDP estimates for 21 states and the Federal Capital Territory (FCT) using 2017 data. The NBS said it accounted for 56% of Nigeria’s GDP, which leaves the remaining 44% to be split between Lagos (not counted in the survey) and 14 other states. The highest figure from the NBS implies per capita GDP was a surprisingly high $10,800 (at the NGN305/$ exchange rate of the time) in the capital Abuja.

However, our estimates (please see full report) suggest that Lagos boasts a very high 28% of Nigeria’s GDP at $105bn (at the NGN305/$ exchange rate in 2017) and might be richer per capita than Abuja. So much of the nation’s capital stock seems to be invested in the commercial capital Lagos that it only logical to assume it is the richest state per capita.

Also, Lagos has a high proportion of adults to children (due to the migration of adults to Lagos seeking jobs, as well as high education in Lagos contributing to a lower fertility rate), although this is partly true of Abuja too.

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Yet, if we estimate Lagos per capita GDP at $11,000 (slightly above Abuja), then per capita GDP in the other 14 states has to be cut from an average $966 to about $250, to make all the numbers add up. This is not plausible. Of course, our estimates might be wrong. Or perhaps Lagos GDP is in fact much bigger, and so the 2017 full-year national GDP figure may be much higher too.

These also let us look at the state’s GDP as a share of the national total. Even at $7,800 per capita, Lagos represents over one-quarter (28%) of Nigeria’s GDP of $105bn (at NGN305/$), three times larger than the 9% of the FCT (Abuja).

Using our GDP estimates, we can see that if Lagos was a country, it would be the seventh-largest economy in Africa. Even if we used the NGN391/$ weaker exchange rate of 2017, Lagos would have been $82bn and bigger than Kenya or Ethiopia. For investors then, it is fairly clear that the biggest opportunity in Nigeria is disproportionately in Lagos itself.

While Lagos and Rivers makeup 32-41% of Nigeria’s GDP and are already richer than most other states in Nigeria, they could be much richer if they were able to keep more of the tax revenues they generate. Lagos has acute infrastructure needs. We think that if Lagos had a plentiful electricity supply, it could become the manufacturing powerhouse of Nigeria, given human capital in Lagos is already literate enough (over 80% adult literacy) to industrialise. But electricity grids are expensive, and the question is where will the capital come from to let this happen? Relying on the federal grid has not met all of the needs of Lagos in recent decades.

This strikes at the heart of one of the hardest development dilemmas. Should tax revenues be used to reward success, to drive up growth in successful regions, or should the profits from modest success be used to alleviate poverty in regions in acute need, at the risk of slowing overall growth in the future. Do you give someone a fish, or a fishing rod so they can learn to fish for themselves?

It is a question for the politicians and the voters to answer, and one where there is likely to be a gulf in opinion, between the more numerous but lower-income populations primarily in the north of Nigeria, and those in the south.

Robertson, is global chief economist and head of Macro-Strategy Unit, Renaissance Capital