Abuja, Nigeria, capital of Africa's newly crowned leading economy

In a long overdue exercise, the National Bureau of Statistics of Nigeria recalculated the country’s GDP, dethroning South Africa as Africa’s largest economy earlier this year. While the rebasing of economic output is a standard procedure usually done quite regularly by countries, Nigeria has not recalculated its GDP in more than 20 years. With a population of at least three times the size of the incumbent number one economy in Africa, Nigeria’s claim of the economic pole position in Africa did not come as a surprise. Its rise to the top was inevitable and arguably the only surprise may have been that it took the West African giant of 170 million people so long to do so.

Announced on April 6, 2014, this meant that literally overnight, Nigeria’s economic output almost doubled, growing by 89 percent to $510 billion. Nigeria thus leapt past South Africa, taking the economic lead by more than $150 billion in GDP terms.

One month later, Abuja played host to the prestigious 24th World Economic Forum on Africa from May 7-9, 2014, previously a fixture in Cape Town. Attended by more than 1,000 political and business leaders from across Africa and the world, representing more than 70 countries, the forum was expected to be a key platform to support the country’s economic rise by lifting its international prominence. It however only further exposed the contrasts that the country represents in light of mounting security concerns.

Under the theme “Forging Inclusive Growth; Creating Jobs,” two key issues were at the forefront of the WEF Abuja discussions: While Africa and countries such as Nigeria have built much economic momentum and a more attractive and investable brand from a decade ago, a more secure and peaceful environment is required in order to attract both foreign and African investment and for positive spillovers from growth to take root. These spillovers will need to result in more inclusive growth – that is growth that creates employment opportunities for Africans. Creating jobs will reduce the number of people taking the easy way out and turning to crime and terrorism. In Nigeria especially, the activities of militant Islamist group Boko Haram have been mainly in the poorest regions in the north, and less in the oil-rich south.

In this regard, Aliko Dangote, mooted to be Africa’s richest man, made the announcement at the summit to invest $2.3 billion in sugar and rice production in the north of the country, in order to reduce unemployment in the region and quell resultant insurgencies. As a visible proposed recipe to fight terror, actions of the Nigerian Government in tackling the situation are perhaps less clear, except for President Goodluck Jonathan calling this as “the beginning of the end of terrorism.”

Bragging rights aside, and given recent events, Nigeria’s fundamentals have not changed with the recalculations done by the National Bureau of Statistics - something that other countries do every five years or so. Nigerians did not wake up to find an extra stash of Naira, the local currency, in their wallets with the announcement.

A closer look at Nigeria’s rebased statistics offers a gleam of hope, as the rebasing suggests that the West African economy has slowly started to diversify away from a mono-resource economy. Non-resource sectors such as film production, the creative industry and telecommunication are increasingly playing a more important role in Nigeria’s economy and have revealed strong growth rates under the rebased regime. Nevertheless, the rise of new sectors is yet to reduce Nigeria’s over-dependency on oil exports.

In addition, no number crunching exercise in the world can hide the fact that Nigeria’s economy still has a long way to go to reach the structural, institutional and business sophistication that is seen in South Africa’s economy. Major challenges such as insufficient infrastructure, corruption, and socio-ethnic tensions beg to be overcome in order for Nigeria to reach its full potential and to create wealth for its people. As such, while leading as the economic powerhouse of the region, no rational investor or fund manager is going to turn around and say “Nigeria just doubled its GDP, let’s go there and invest” without weighing up other elements considered in an investment decision.

One such element will continue to be the security challenges still facing the country and region. The security situation at WEF Abuja, following two car bombings only two weeks before the forum, as well as the kidnapping of more than 200 school girls in a northeastern province, all claimed by Boko Haram, overshadowed the forum both visibly by the military and security presence on the ground, as well as a key theme across various thematic discussions.

That said, the single most important aspect that undoubtedly attracts prospective investors and players to Nigeria is its massive population. Nigeria is a numbers game. And therein lies a key challenge. It seems that too often economic commentators and politicians are obsessed with quantity and “big numbers.” In order to create a viable and vibrant economy and to address socio-economic issues such as poverty, unemployment and inequality, governments have to focus on the quality of growth and not necessarily only the speed or quantity thereof. Emphasis also needs to be placed on creating an environment that is enabling and conducive to sustained investment and growth going forward. This is achieved through, inter alia, the right set of policies, good governance and the creation of a favorable business environment.

As a result, South Africa being dethroned by Nigeria does not mean much in broader terms, yet. Despite persistent infrastructure challenges, South Africa still enjoys some of the most advanced infrastructure on the continent. The Johannesburg Stock Exchange remains the most sophisticated, best governed and largest exchange in Africa. And the southern African powerhouse also continues to be Africa’s largest recipient of portfolio flows and ranks as the largest holder of inward FDI stock on the continent. South Africa is also a leading source of outbound FDI. In fact, it is the only African economy with a sizeable number of competitive multinational companies investing in the continent - estimated in 2011 to be the fifth largest holder of FDI stock in Africa.

However, this does not mean South Africans can sit back and rest on their laurels. South Africa seems to have become too comfortable in its position as the most advanced regional economy and has shown signs of complacency. Already, in 2013, South Africa lost its first place ranking as Africa’s most competitive economy to Mauritius in the World Economic Forum’s annual Global Competitiveness Report. Beyond making a dent in the country’s ego, Nigeria’s rise to economic supremacy in Africa may serve as the much needed wake-up call for South African corporates and politicians to reflect on the economic and political structure and resultant challenges of South Africa. This needs to be done to find ways to implement and see through the right set of policies, to ensure good governance and to create a favorable business environment that will see South Africa reach its future economic potential. CA

(Simon Schaefer is senior analyst at Frontier Advisory. Hannah Edinger is director at Frontier Advisory)