Nigeria still the largest African economy, no it’s South Africa

Reacting to a recent story by Bloomberg that South African has overtaken Nigeria as the largest economy in Africa in dollar terms, President of Dangote Group, Alhaji Aliko Dangote said Nigeria economy remains number one in Africa. Many have therefore being reacting to these. Business 247 News Online captures what analysts have to say on the issue.

When President of Dangote Group and Africa’s richest man, Alhaji Aliko Dangote spoke at the 2016 Presidential Policy Dialogue session which was organized by the Lagos Chamber of Commerce and Industry (LCCI) he was optimistic that Nigeria will soon overcome the challenges and remain stronger and still number one in Africa maintaining the faith that the country is still the best place to invest.

Meanwhile, Bloomberg had reported that South Africa has now overtaken Nigeria to regain its position as Africa’s largest economy due to the continued depreciation of the naira against the dollar.

The news agency used the data by the International Monetary Fund (IMF) that as at the end of 2015, the size of South Africa’s economy was $301 billion at the rand’s current exchange rate, while Nigeria’s GDP stood at $296 billion.

In dollar terms, South Africa has emerged as Africa’s biggest economy barely two years after losing it to Nigeria largely due to dwindling value of the naira against the dollar.

The rand had gained more than 16 percent against the dollar since the start of 2016, and Nigeria’s naira lost more than a third of its value after the Central Bank of Nigeria (CBN) introduced a foreign exchange liberalisation allowing market forces to determine the value of the local currency against the dollar.

Analysts at the Lagos-based financial services firm, Cordros Capital, said Nigeria’s GDP fell short of South Africa’s primarily as a result of Nigeria’s inability to control the value of the naira. To reverse the trend in the immediate, the analysts, said the naira would have to reverse its losses against the USD.

“To reverse its loss against the USD, the NGN would have to close N197 by Q4 2016, which is highly unlikely.”

They further said the possibility of naira reversing its losses against the dollar may well broadly depend on the decisions of both the monetary and fiscal authorities.

“In the long term, economic activities would have to return to the pre-recession levels, wherein growth per annum was in excess of 5 per cent,” they said.

Speaking on the development, Dr. Sale Ahmed, blamed the development on Nigeria running an oil-based economy.

“South Africa continues to strengthen its financial regulatory institutions, its production and manufacturing base,” he said.

The Nigerian economy shrank by 0.4 percent in the three months through March from a year earlier amid low oil prices and output and shortage of foreign currency. That curbed imports, including fuel. In South Africa, GDP contracted by 0.2 percent from a year earlier as farming and mining output declined.

“More than the growth outlook, in the short term the ranking of these economies is likely to be determined by exchange rate movements,”

Alan Cameron, an economist at Exotix Partners LLP, said. Although Nigeria is unlikely to be unseated as Africa’s largest economy in the long run, “the momentum that took it there in the first place is now long gone.” The South African rand rallied as investors turned to emerging markets with liquid capital markets to seek returns after Britain voted to leave the European Union on June 23, even as the central bank forecast the economy won’t expand this year and the nation risks losing its investment-grade credit rating.

Akin Ologe, an analyst based in Lagos says: “We are not surprised that South Africa has come with some calculation to portray itself as number one economy in Africa”.

Gross domestic product (GDP), the economic performance indicator that is the subject matter, is defined as the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. James Okoli, a retired banker, described those that came out with that ranking as mischievous.

“How can any person use the exchange rate of 2016 to match with economic activities of 2015? Of course, that is fraudulent,” he said.

The claim that the monetary value of economic activities of South Africa has surged ahead is sharply contested by top financial analysts. While some argue that there is little economic activity in Nigeria, others believe that the same has happened to South Africa. What they however seem to agree on is that, while the Naira has depreciated by over 40 per cent in Nigeria, the Rand has not done so badly.

For KPMG, currency depreciation is not an issue, because the matching of the present currency depreciation with a GDP of the past is an error.

KPMG disagrees sharply with reports that South Africa has overtaken Nigeria as Africa’s largest economy in dollar terms, saying the calculations behind this assertion are methodologically incorrect.

This is because the reported dollar estimates are based on GDP data from the end of 2015 while the exchange rate readings are from August 2016, KPMG senior economist Christie Viljoen said.

“The time difference between the two data points makes these calculations spurious at best and not really a reliable indicator of recent developments,” he said.

The assumption that South Africa had overtaken Nigeria as Africa’s biggest economy in dollar terms emerged following the recent rand rally and the devaluation of the naira in June 2016.

In order to reflect the impact of the naira devaluation and the rand’s recovery on comparable GDP estimates, a calculation would need to be made based on GDP data for the second quarter of 2016, which are yet to be released.

The 2016 second-quarter GDP reports from SA and Nigeria would reflect stagnant economies and revisions to historical data, Viljoen said.

“From an exchange rate perspective, the naira ended the period (second quarter) notably weaker while the rand was quite