Why Nigeria’s GDP grew the fastest since 2014

Why Nigeria’s GDP grew the fastest since 2014

Nigeria recorded its fastest GDP Growth rate in 6 years after the National Bureau of Statistics announced the economy grew by 5% in the second quarter of the year. The last time Nigeria recorded real GDP growth was in the fourth quarter of 2014 when the economy grew by 5.94%.

Since then, the economy has been in a tailspin worsened by the Covid-19 pandemic of 2020 and the oil price crash of prior years. The recent GDP result may have come as a surprise to many but for those savvy with the working of the economy, it was expected.

Reason for the GDP Growth rate

A cursory review of the data reveals Nigeria’s Service sectors, which makes up about 55.6% of GDP was the major reason for the growth.

  • The sector grew at a faster pace of 9.27% one of the fastest in recent years. The other two major sectors, Agriculture and Industry recorded a 1.3% growth and -1.23% contraction respectively.
  • While the service sector triggered GDP Growth rate, the Trade Sector was the major driver of growth contributing about 64% to Nigeria’s growth rate.
  • The Trade Sector which currently contributes about 16.66% of GDP rose by a whopping 22% in the second quarter of 2021, its fastest since at least 2016.
  • This by our analysis is the major reason for the GDP Growth rate recording during the quarter.

But why did trade do this well?

Nairametrics Research believes the answer lies in an economic phenomenon termed base effects. See base definition below.

  • In 2020, Nigeria’s trade sector suffered a massive contraction of 16.5%, at the time the 5th straight contraction that started in the third quarter of 2019 when the government announced its border closure (See chart).
  • The 16.5% contraction in the second quarter of 2020 will be one of the largest and was exacerbated by the economic shutdown that followed the declaration of the Covid-19 Pandemic.
  • That economic shutdown in movements in major cities across the country, including Lagos and Abuja was the major reason for the crash in economic activities in the Trade Sector. Coupled with the border closure that was still in place, the sector was effectively in the doldrums.
  • However, economic activities have picked up since the 4th quarter of 2020 after the government jettisoned its border closure restrictions and relaxed its Covid-19 protocols.
  • We believe this has contributed significantly to the real GDP growth of the Trade Sector.

Bottom Line

A combination of Base Effects backed by the reopening of the economy and reopening of the borders have resulted in an improvement in the general economic activity in the country. This is the major reason for the 5.01% rise in Real GDP Growth Rate.

Meaning of Base Effects

Base Effects occurs when economists compare data from one period today to the same period the year before. The effects are observed when the base data from the prior period is very much lower and inconsistent to prior periods meaning that slightly better performance will lead to higher growth numbers. For example, if Consumer Food Basket fell to N200 in 2020 compared to an average of N400 in prior periods and then in 2021, the Food Basket jumps to N300, the growth levels will suddenly be 50%.

Source – Nairametrics

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