President Tinubu’s GDP ambition is a work of fiction
I consider the realistic options available and the implication for ordinary Nigerians
This conversation continues from my prior post: Nigeria needs a growth miracle. To not miss any context in this article, I encourage you to start there.
Some weeks ago, I saw in the news that President Tinubu believes a $1tn GDP is feasible by 2026.
A $1tn GDP is the kind of ambition we need. But that timeline is suspicious and makes it obvious that the President pulled the number from nothing.
To reach a $1tn GDP, Nigeria must grow nominal GDP in dollars by 48.43% annually between 2024 and 2026. This further means that, at a 10% annual depreciation rate, we must grow nominal GDP in Naira by 63.3% annually.
This is a work of fiction and it is unattainable. Even a generous rebasing of GDP will not deliver those numbers.
I recall a related ambition in President Yar’Adua’s Vision 20:2020, which was a plan for Nigeria to become a top 20 economy by 2020. We are obviously not there but it was more realistic. If Nigeria had maintained its momentum prior to President Buhari, Nigeria would be in the arena now.
Perhaps that would have been an ambitious ask of even a President that is more inspired and smarter than Buhari given the structure of our economy.
Anyway, Nigeria fell off.
You need around a $1tn GDP to be in that club today. By my calculations, Nigeria’s nominal GDP is likely to be around $312bn by the end of 2023.
We were ranked ranked number 30th in the world in 2022 and we will likely end 2023 at a rank of 48th.
The President’s economic planners expect a $415bn GDP by 2026 but their assumptions are inconsistent
Nigeria’s economic planners appointed by President Tinubu do not think a $1tn GDP is feasible by 2026. This makes me wonder what inspired the President’s bold declaration. But this is Nigeria, policymakers are experts at working towards different goals.
According to the recently published Medium Term Expenditure Framework (MTEF) by the Ministry of Budget and Planning, the expectation is a $415bn GDP by 2026. They assume a 9.1% annual growth in nominal GDP, 4.3% annual growth in real GDP and an average exchange rate of N678/$1.
These assumptions show that we do not have serious economic planners. Nominal GDP growth is a combination of the growth in prices (of domestically produced final goods and services) and growth in output (actual volume or quantities produced). Think of the growth in prices as inflation (different from the typical consumer inflation) and growth in output as real GDP.
The people at the Ministry of Budget and Planning say that nominal GDP growth will be 9.1% annually and that real GDP will be 4.3%, which means they assume that inflation will be 4.6% annually.
This is ambitious and it would normally be encouraging if we were serious about tackling inflation. But we are not, and even if we were, can we achieve that within 3 years?
Similarly, what are the chances of maintaining an average exchange rate of N678/$1 over the next 3 years?
What can the President Tinubu administration achieve over the next four years?
The key to unlocking value for Nigerians is to ensure that real GDP growth is strong and inflation is low and stable. This will further ensure that currency depreciation is weak, given the strong long-term relationship between inflation and currency depreciation.
There is really not much the new government can do this year, so let 2023 serve as the baseline. By the end of 2023, I expect average inflation to be 24.5%, nominal GDP at N234.2tn ($312.3bn), real GDP at 2.2% and GDP per capita at $1,352.5.
We are going to be using scenario analysis to show how nominal GDP and per capita income will change as real GDP and the value of the Naira changes over the next four years.
The depreciation assumptions in the table below show how much higher Nigeria’s inflation will be over US inflation (I assume US inflation to be an average of 2.0%). Think of it as our inflation differential when compared to the US. So, essentially, the higher Nigeria’s inflation over the US, the weaker the Naira.
The outcome (x,y) refers to nominal GDP ($’bn) and GDP per capita ($). Based on the table, annual real GDP growth ranges from 4.2% to 11.7% and annual inflation differential ranges from 2.0% to 16.0%.
You can see that the higher the real GDP growth, the higher the nominal GDP and GDP per capita. Inflation differential has the opposite effect but it is less sensitive. Therefore, the government must seek to grow real GDP faster. Growth is the mantra.
The target value of $396bn/ $1,552 represent what I believe to be attainable over the next four years (2024-2027) in an optimistic scenario. To attain this, the new government must be ruthless about inflation and implement policies to boost growth. You can see that the target value corresponds to a real GDP growth of 4.2% and inflation differential of 10.0%. This does not leave us much better than the baseline GDP per capita of $1,352 as at 2023. If this holds true, Nigerians would continue to face a harsh economy during President Tinubu’s tenure.
In 2014, we were doing $574.1bn in nominal GDP and per capita GDP of $3,201. None of the scenario in the above puts us near this peak, as we can only attain $2,061 GDP per capita even if depreciation is only 2% annually and we grow real GDP by 11.7%. Our population compounds, which means that when growth suffers for a long period, we need higher levels of growth to restore balance.
How can we attain a $1tn GDP?
The timeline matters, so I present a 10 year table below. What is immediately obvious is that achieving a $1tn GDP in the next 10 years will not move the needle much. It will only restore us to our GDP per capita level in 2014.
Our population growth is responsible for that. In 2014 we were doing $3,201 in GDP per capita with a GDP of $574.1bn. To attain that level in 2033, we need almost $1tn in GDP.
That is the consequence of the slump we suffered during the Buhari administration.
Yet to be ambitious we should be aspiring to GDP per capita levels of $10,000 and above. It would take a much longer timeline to reach that destination.
If Nigeria can grow at around 11% annually over the next 20 years and ensure we contain inflation, then we can attain a $10,000 GDP per capita. By then, we would need a GDP of almost $4.0tn
Where is the political will?
Obviously, I’ve covered what is obtainable on paper. Achieving a double digit economic growth and low and stable inflation over the next one or two decades will take some miracle.
It will require courageous leadership to ensure fiscal discipline, massive investment in physical and human capital and an export driven economy.
Is this kind of leadership within reach?
Goodluck, Nigeria.