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Economy & Politics

Explainer: What does GDP actually mean, and how does it affect you?

GDP is not a measure of the overall standard of living or well-being of a country.

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Explainer: What does GDP actually mean, and how does it affect you?

There are several technical jargons and acronyms peculiar to many professions. In economics, one of the most common acronyms used is GDP, which stands for Gross Domestic Product.

It is often cited in business news across newspapers, radio, television news, and in reports by governments, central banks, and the business community.

It is widely used to measure the health of national and global economies. According to Tim Callen, the Divisional Chief in overseeing IMF’s Middle East and Central Asia Department,“When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not.”

READ: Nigeria’s unemployment rate jumps to 27.1% as at 2020 Q2

Back story: Recall that Nairametrics had reported, on Monday, that Nigeria’s Gross Domestic Product (GDP) in real terms declined by 6.10% (year-on-year) in Q2 2020, thereby ending the 3-year trend of low but positive real growth rates recorded since the 2016/17 recession.

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According to the numbers contained in the GDP report, the performance recorded in Q2 2020 represents a drop of 8.22% points when compared to Q2 2019 (2.12%), and 7.97% points decline when compared to Q1 2020 (1.87%).

Apparently, the significant drop reflects the negative impacts of the disruption caused by the COVID-19 pandemic and crash in oil price on the Nigerian economy.

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What is GDP?

GDP is the monetary value of final goods and services (i.e those that are bought by the final user), produced in a country in a given period of time; per quarter or year. It counts all the output generated within the borders of a country, and is composed of goods and services produced for sale in the market. It is important to note that it also includes some non-market production like defence or education services provided by the government.

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Its twin, Gross National Product (GNP), counts all the output of the residents of a country. For instance, if a German-owned company has a factory in Nigeria, the output of this factory would be included in Nigeria’s GDP, but in Germany’s GNP.

However, not all productive activity is included in GDP. Some of such activities are unpaid work (work performed at home or by volunteers) and black-market. They can’t form part of GDP because they are difficult to quantify or value accurately. For instance, a food vendor that cooks for a customer would contribute to GDP but won’t if he cooks at home for the family.

Also, wear and tear of Capital stock like machines, buildings, which are used in producing the output are not inclusive in GDP. If this depletion of the capital stock, called depreciation, is subtracted from GDP, we get the net domestic product.

How GDP is calculated

  • Production approach: This adds the value-added, which is the total sales – the value of intermediate inputs into the production process) at each stage of production. What is an intermediate input? Flour would be an intermediate input and bread the final product, or an architect’s services would be an intermediate input and the building the final product.
  • The expenditure approach adds up the value of purchases made by final users. For example, “The consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners,” Callen added.
  • The income approach: This sums the incomes generated by production. According to the expert, this is the compensation paid to employees, rent paid to landowners, interest paid on capital, and profit paid to the company owners.

GDP in a country is usually calculated by national statistical agencies, which is the National Bureau of Statistics in the case of Nigeria. The agency compiles the information from a large number of sources.

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In making the calculations, however, most countries follow established international standards. The international standard for measuring GDP is contained in the System of National Accounts, 1993, compiled by the International Monetary Fund, the European Commission, the Organisation for Economic Co-operation and Development, the United Nations, and the World Bank.

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Real GDP

Since GDP gives information about the size of the economy and how an economy is performing, one thing people want to know about an economy is whether its total output of goods and services is growing or shrinking.

But because GDP is collected at current, or nominal prices, one cannot compare two periods without making adjustments for inflation.

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To determine “real” GDP, its nominal value must be adjusted to take into account price changes to allow us to see whether the value of output has gone up “because more is being produced or simply because prices have increased. A statistical tool called the price deflator is used to adjust GDP from nominal to constant prices.”

The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well.

Callen said, “When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets. But real GDP growth does move in cycles over time.

“Economies are sometimes in periods of boom, and sometimes periods of slow growth or even recession (with the latter sometimes defined as two consecutive quarters in which output declines).

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What GDP is not

It is also important to understand what GDP cannot tell us.

GDP is not a measure of the overall standard of living or well-being of a country. Why? Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being.

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GDP is generally not a good measure of economic development. GDP’s preference for tangible goods also means it is insufficient at capturing the value of technology.

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Generally, there are five indicators that GDP doesn’t take into account that could help measure national progress more accurately and these include: job quality (underemployment /unemployment), well-being, carbon emissions, inequality, and human health.

Abiola has spent about 14 years in journalism. His career has covered some top local print media like TELL Magazine, Broad Street Journal, The Point Newspaper.The Bloomberg MEI alumni has interviewed some of the most influential figures of the IMF, G-20 Summit, Pre-G20 Central Bank Governors and Finance Ministers, Critical Communication World Conference.The multiple award winner is variously trained in business and markets journalism at Lagos Business School, and Pan-Atlantic University. You may contact him via email - [email protected]

1 Comment

1 Comment

  1. BODE RICHARD

    January 8, 2021 at 12:29 pm

    Hey Abiola,

    Good ideas and Great Research you have done.
    Keep it up.Bode,RICHARD

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Economy & Politics

Productivity-enhancing reforms is required for quick economic recovery – World Bank

Productivity-enhancing structural reforms key to quick economic recovery.

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World Bank, Focus on lifting people out of poverty - World Bank tells FG , World Bank, IFC to assist in solving Nigeria’s infrastructure deficit , EXCLUSIVE: World Bank tasks developing nations to tap opportunities in GVCs, Warning signs: Nigerians living in extreme poverty might increase by 30 million – World Bank, US, China and UK’s protectionism ambition to affect Nigeria’s export, FDI , Terrorism bane to Nigeria's Agric development - World Bank

The World Bank has revealed that a slow recovery of the global economy is not an inevitability and can be avoided through productivity-enhancing structural reforms.

This is contained in the Bank’s flagship report – Global Economic Prospects.

The Bank believes structural reforms are capable of offsetting the pandemic’s scarring effects and lay the foundations for higher long-run growth. It agrees that the global economy appears to be emerging from one of its deepest recessions and beginning a subdued recovery, beyond the short term economic outlook, following the devastating health and economic crisis caused by COVID-19.

According to the report, policymakers face formidable challenges — in public health, debt management, budget policies, central banking, and structural reforms, as they try to ensure that this still-fragile global recovery gains traction and sets a foundation for robust growth and development.

Highlights

  • Growth in Nigeria is expected to resume at 1.1% in 2021 – markedly weaker than previous projections – and edge up to 1.8% in 2022, as the economy faces severe challenges.
  • Investment is projected to shrink again this year in more than a quarter of economies – primarily in Sub-Saharan Africa (SSA), where investment gaps were already large prior to the pandemic.
  • Growth in Sub-Saharan Africa is expected to rebound only moderately to 2.7% in 2021 – 0.4% point weaker than previously projected, before firming to 3.3% in 2022.
  • Relative to advanced economies, disruptions to schooling have, on average, been more prolonged in emerging market and developing economies (EMDEs), including in low-income countries.

What the World Bank is saying

  • “In the longer run, a concerted push toward productivity-enhancing structural reforms will be required to offset the pandemic’s scarring effects.
  • “The intended productivity-enhancing structural reforms encompass promoting education, effective public investment, sectoral reallocation, and improved governance. Investment in green infrastructure projects can provide further support to sustainable long-run growth while also contributing to climate change mitigation.”

Are we ready to adjust structurally?

The World Bank has identified key areas that could trigger quick economic recovery. A close look at events in the country appears to suggest that we may be far from ready in terms of adjusting structurally.

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A cursory look at the structural adjustment areas suggested by the Bank indicates that in Nigeria, for example, and maybe elsewhere, the single most important factor is improved governance.

All other factors appear to be contingent on this, as the Bank admits that improved governance and reduced corruption can lay the foundations for higher long-run growth. Policymakers and politicians in the country are therefore advised to pay close attention to activities geared towards reduced corruption and improved governance.

Another key area is public investment. Even though most public enterprises and related establishments are usually plagued with corporate governance problems, there are several ways by which the problems could be curtailed.

The issue of education, especially tertiary education, has been problematic with governments failing to meet the demands of university unions, resulting in strikes, almost on a yearly basis. It is hoped that a lasting solution to this springs forth soon.

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Economy & Politics

Nigerian government spends equivalent of 83% of revenue to service debt in 2020

The Federal Government of Nigeria achieved a debt service to revenue ratio of 83% in 2020.

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The Federal Government of Nigeria achieved a debt service to revenue ratio of 83% in 2020. This is according to the information contained in the budget implementation report of the government for the year ended December 2020.

According to the data seen by Nairametrics, total revenue earned in 2020 was N3.93 trillion representing a 27% drop from the target revenues of N5.365 trillion. However, debt service for the year was a sum of N3.26 trillion or 82.9% of revenue.

READ: FG posts 27% revenue shortfall in 2020 as budget deficit hit N6.1 trillion

Nigeria’s debt service cost of N3.26 trillion has now dwarfed the N1.7 trillion spent on capital expenditure of N1.7 trillion incurred in 2020. This is also the highest debt service paid by the Federal Government since we started tracking this data in 2009.

The total public debt (External and Domestic) balance carried by Nigeria as of September 2020 stood at N32.22 trillion ($84.57 billion). Included in the total debt is a domestic debt of about N15.8 trillion.

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READ: Nigeria’s high recurrent costs, low revenue and escalating debt numbers

READ: Customs revenue rises by N200 billion to hit N1.5 trillion in 2020

What this means: Nigeria’s debt to GDP ratio is estimated at about 22%, one of the lowest in the world and much below what is obtainable in most emerging markets.

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  • However, the challenge has always been the debt service to revenue ratio, a metric that reveals whether the government is generating enough revenues to pay down its debts as they mature.
  • Since the first recession experienced in 2016, Nigeria has struggled with a higher debt service to revenue ratio as revenues slid in direct correlation with the fall in oil prices.
  • Nigeria’s government spent about N2.45 trillion in debt service in 2019 out of total revenue of N4.1 trillion or 59.6% debt service to revenue ratio.
  • At 83%, 2020 ranks as the highest debt service to revenue ratio we have incurred. Before now it was 2017 with 61.6%.

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Breakdown of what debts were serviced

The following amount was spent on debt service during the year

  • To service domestic debt, the government spent N1.755 trillion in 2020 as against a budget of N1.87 trillion.
  • For foreign debts, a sum of N553 billion was spent against a target budget of N805.47 billion. The drop here is likely a result of lower interest rates on foreign borrowing as well as very limited borrowing from the foreign debt market during the year.
  • The government only contributed N4.58 billion into its sinking fund instead of the budgeted N272.9 billion.
  • The sinking fund is required to set aside funds that will be used to pay down on other loans such as bonds when they mature in the future.
  • Finally, a sum of N912.57 trillion was spent on servicing CBN’s loans, granted via its Ways and Means provisions.
  • Nairametrics reported last week that a total sum of N2.8 trillion was extended by the CBN to the FG as Ways and Means.

READ: World Bank hopes to cut down debts of poor countries rather than delay payments

What happens next: In 2021, the government projects a debt service of N3.1 trillion against revenue of N6.6 trillion or debt service to revenue ratio of 46.9%.

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  • The government plans to spend N4.3 trillion on capital expenditure during the year.

 

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Economy & Politics

FG receives N144 billion in dividends from NLNG in 2020

NLNG, paid the Federal Government a dividend of N188 billion in the fiscal year ended December 2020.

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Nigeria Liquified Natural Gas Company, NLNG, paid the Federal Government a dividend of N144 billion in the fiscal year ended December 2020.

This is according to the information contained in the Ministry of Finance Budget implementation report for the period of January 2020 to December 2020 and presented by the Minister for Finance Dr. Zainab Ahmed.

During the year, the Federal Government budgeted a sum of N80.3 billion as its share of dividends from NLNG, however, the actual sum received as its share was N144 billion, N63.2 billion more or 79% higher than projected.

The year 2020 was a difficult year for the government as the fall in crude oil prices and the economic shutdown that was triggered by the Covid-19 Pandemic dented projections and ravaged revenues.

READ:  NLNG says Train 7 project will surge production capacity to 30 million MPTA 

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NLNG Dividend Bliss

The dividend received from NLNG was a major bright spot in the government’s revenue performance for the year.

  • During the year, the government projected revenue of N5.36 trillion but only received N3.9 trillion in revenues representing a shortfall of N1.4 trillion or 27% for the year.
  • The huge dividend windfall received in 2020 is a stark contrast from 2017 when Nigeria just exited a recession triggered by falling oil prices and a sharp exchange rate devaluation.
  • In that year, the Federal Government’s share of dividends from Nigeria Liquefied Natural Gas (NLNG) dropped by as much as $687 million, from $1.04 billion in 2015 to $365 million in 2016, a 65% drop.
  • The N144 billion received in 2020 topped the amount received from signature bonuses only N78.2 billion and complimented the N192 billion received by VAT.
  • It is the most effective form of revenue generation for the government.

READ: NLNG signs 10 year sales deal with Eni

NLNG Controversies

Back in July Nairametrics reported that the House of Representatives planned to investigate the alleged illegal withdrawal of $1.05 billion from the NLNG account by NNPC without its knowledge and appropriation.

  • They had accused the NNPC of illegally tampering with the funds at the NLNG dividends account to the tune of 1.05 billion dollars thereby violating the nation’s appropriation law.
  • NLNG is a company jointly owned by Nigerian owned NNPC(49%), Shell (25.6%), Total (15%), and ENI (10.4%).
  • The company is located in Bonny Island and has six trains with a total capacity to process 22 million tonnes of LNG a year and as much as 5 million tonnes of natural gas liquids.
  • NLNG currently accounts for about 7% of the total LNG supply in the world. Nigeria is ranked as the 4th exporter of Natural Gas in the world.

READ: NLNG signs supply agreement with Galp Trading SA

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Upshots: The FG is targeting a revenue of N208 billion from NLNG as dividends in 2021. If this materializes, it will be a significant payout in dividend (in naira terms) competing with the N238.4 billion expected from VAT.

  • Important to note that the recent devaluation of the naira will increase the naira value of dividends and other government revenue, as it did in 2020.
  • The government also targets N6.6 trillion in revenue for the period under review.

Updated: An earlier version of this article captured the dividend as N188 billion instead of N144 billion. It has now been corrected. 

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