The battle over which one is the largest economy in Africa has been raging for a number of years now. South Africa had for a long time sat at the helm until the year 2014 when Nigeria came out of nowhere and took the crown. Ever since that time, it has been a raging battle with the two giants.
The two countries have been in recession for a significant part of this year. They both only managed to come out of it in the second quarter of 2017. According to experts, determining which one of the two will emerge as the winner will to a great extent on the exchange rate that will be used in the calculations.
According to the International Monetary Fund which uses an approximate official rate of N304 for every US dollar, Nigeria will emerge victorious. Using this figure places the country’s GDP at $395 billion. However, basing the calculations on the Naira’s market price which is about 20% weaker than the official price, the GDP value goes down remarkably. This would place Nigeria behind South Africa which is currently rated at $344 billion.
We would like to take a closer look at these two economies in order to establish the true market leader. In this article, we will compare and contrast South Africa and Nigeria in depth and establish their relative positions on the list of Africa’s top economies.
Important Comparison Points for the Two Economies
A proper assessment of two diverse economies requires that we establish measurable points of comparison between them. This is the only way to ensure that the results are objective and reliable. The economies of these two major players have quite a number of similarities and distinctions. Let us take a look at some of these comparison points:
- Economic Diversity
One major difference between South Africa and Nigeria is the nature of their economies. South Africa is characterized by a highly diversified economic base. Initially, the country developed around two major pillars, rich mineral reserves and favorable conditions for agriculture. But as the country advanced its economy grew to include such tertiary sectors as tourism, communications and trade.
It has in the recent past taken steps to embrace financial services, ecommerce and technology. The automotive industry has also expanded remarkably to keep up with local market demand as well as the opportunities in neighboring countries. The country’s capital markets hold a remarkable position on global charts. The infrastructure of the country as well as its regulatory environment highly favors trade and contributes to sustainable growth.
This is in most ways a huge contrast to the Nigerian economy. It has in the recent past been bedeviled by remarkably low market prices. Repeated attacks by militant groups in the oil-rich Niger Delta regions have also led to low productivity. The crude oil being pumped out has decreased so much so that at some point in the year 2016 it hit its lowest volumes ever in 30 years. Even though the volumes recovered from that shocking low, sustained production continues to be at risk for as long as the attacks continue.
The rest of the Nigerian economy does not leave a lot to be desired either. Excessively stringent government regulations have made the country hostile to trade. There is high taxation on imports and the regulations surrounding the international trade industry are far from favorable. The presidential administration has also failed in currency management. The 2017 Doing Business report by the World Bank the country ranks dismally falling in 169th place out of the 190 countries classified.
- Currency Performance against US Dollar
Africa growth has been quite remarkable for a considerable period but took a turn for the worst in recent years. This was evident from the fact the continent’s leading economies got into serious trouble with regard to their currency rates against the USD.
The South African economy at some point in 2016 fell to third place on the list of Africa’s top 10 economies. This was in spite of the country’s being the most developed economy on the continent. It also came as a surprise considering the fact that Egypt, which dethroned it from second place, has a much less developed economic base. The reason behind its fall from glory was the weakening South African Rand.
Financial experts have sought explanations for the weakening South African rand and made a number of proposals. The first of this is the fact that the US dollar strengthened against a majority of world currencies ever since the Trump administration took over. However, concerns arise from the fact that the Rand lost a lot more than its peers from emerging markets. This goes to show that in spite of being big, the South African economy is still rather fragile.
This is one point of similarity between the South African and Nigerian economies. The West African giant’s currency woes began with the president’s initiative to control currency. The Central Bank of Nigeria (CBN) has refused to let the Naira flow freely but instead seeks to manage the exchange rate. The result is that there is a lot of black market currency exchange on which Naira prices are significantly lower than the rate set by the Central Bank.
It all began when global oil prices took a nose dive. At first, the CBN governor refused to undertake devaluation in spite of the country’s declining foreign currency reserves. But as soon as he acquiesced to the request the Naira immediately registered a drop against the USD. The adoption of this policy revealed some manipulation behind the scenes.
Floating currencies usually exhibit lots of volatility but the Naira remained suspiciously consistent, just operating at a different rate. The effect on the market was a low supply of dollars against very high demand. This made many turn to the black market and that marked the start of the rift between official and black market Naira rates.
Even though the banks are currently stepping up to try and quell the overwhelming demand, it will be a long time before sanity returns to this market. Investors took off from this volatile market due to the dollar shortage, the unpredictable moves by the CBN to control the currency and the generally weak economy. Some international airlines also opted out of the route altogether during this period.
But the government and CBN are trying to do their part to restore confidence in the country. The increasing availability of the USD has helped business people who rely on foreign raw materials and goods for daily trading. It has also
- GDP VS GDP Per Capita
The Gross Domestic Product is one of the methods used to measure the economy of any country. This figure is the sum total of everything that is produced in a country by all companies and individuals regardless of their background. Even foreigners and foreign owned companies have their products included in the GDP.
The GDP per capita divides a country’s total revenue by the number of people living there. This helps to calculate individual standards of living. Looking at the list of African countries by GDP, one would be surprised because neither one of these two countries even make the top 5. South Africa falls in the 13th position with $13,500 and Nigeria comes in at 17th position with $5,900.
By virtue of Nigeria’s huge population, the living standard of its people is less than half than of South Africans. This exploding population has made the economic giant’s citizens poor in a land of plenty.
A Closer Look at Nigeria’s Rebased GDP
An in-depth discussion of these two economies would not be complete without a discussion of what brought Nigeria to the limelight to begin with. As mentioned in the introduction, Nigeria made its debut to the top position in 2014 overnight, literally. This was the result of a process known as rebasing that saw the Nigerian GDP rise from $270 to $510. According to the country’s officials, previous GDP figures from the country did not include emerging industries like film production, airlines, online sales, music, telecoms and information technology.
According to the definition of GDP discussed earlier in the article, accurate calculations should include every aspect of the economy. Nigeria therefore took a step in the right direction when they updated the record to include previously omitted sectors of their economy. It had been at least 24 years before the country had updated its records. In 1990 when the last correct GDP was reported, the country only had a single airline and telecoms company. The reality in 2014 was a far cry from this.
Wealthy countries normally rebase approximately every five years. Incorporating the previously omitted data instantly transformed the status of the country from low income to low-middle income. It also made the economy seem a lot more diversified than the world previously thought.
But did this in any way alter the shape of its economy? Updating statistical records did not in any way change the situation in the country. The reality on the ground remains the same and the problems that rocked the economy before still held true.
The Truth about Comparisons
Comparisons of economic size can never take into account all of the factors that determine a country’s performance. This is especially true if the bodies responsible for gathering the relevant data omit crucial information or different countries apply different measurement indices. Most GDPs are calculated based on the price of products in the market using the local currency. At the same time, measuring economic performance of different countries using a common currency also has its challenges. Accurate GDP comparisons also have to take into account price differences and purchasing power differences. This is why we may never have a definite answer to the question “which is Africa’s biggest economy”.
A Peek into the Future
The rankings of top economies in Africa and the world at large do not make much of an impact on policy makers and those making investment choices. What people focus on ever so keenly are the economic prospects of the different countries. GDP growth is what allows investors to benefit from the opportunities in any given country. This is what reassures unemployed citizens that they will get employment and the employed people that standards of living will improve.
So what does the future hold for Nigeria and South Africa? Unfortunately, the growth prospects for these two markets are far from reassuring. Since the 2008 financial crisis, South Africa has never fully recovered. And for as long as Nigeria continues to be overly dependent on oil, it is highly likely to remain poor.
The African economy is still far from reaching its full potential and the situation in countries like Nigeria serves to emphasize on this fact. This is the reason why the continent is referred to as a “sleeping giant”. The resources and manpower in Nigeria and other African countries could transform the space remarkably if exploited fully. The only route to economic development in Africa would be through thorough reforms in government policies and trade regulations.
The good news however is that the continent’s high population is matched by an equivalent demand for goods from international markets. This is a great opportunity for import export traders to grow their business and satisfy demand.
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