The recent updated gross domestic product (GDP) estimates for African countries released by the International Monetary Fund’s (IMF) World Economic Outlook (WEO), which put South Africa as the largest economy on the continent has been faulted by KPMG as spurious, saying that the calculations behind the assertion are methodologically incorrect.
The international professional services firm providing audit, tax and advisory services, says the reported US dollar estimates are based on GDP data from the end of 2015 while the exchange rate readings are from August 2016, which makes the calculations spurious.
It was widely reported that South Africa had overtaken Nigeria as Africa’s biggest economy in dollar terms owing to the strengthening of the rand rally and the devaluation of the naira in June 2016.
Calculating the GDP numbers using last year’s IMF figures and this year’s currency exchange numbers shows that South Africa’s economy is worth around $301 billion and Nigeria’s $296 billion, according to the International Monetary Fund’s (IMF) World Economic Outlook (WEO).
However, KPMG is casting doubt on these calculations, saying that it is methodologically incorrect.
“The reported US dollar estimates are based on GDP data from the end of 2015, while the exchange rate readings are from August 2016. The time difference between the two data points makes these calculations spurious at best and not really a reliable indicator of recent developments.”
It noted that in order to reflect the impact of the naira devaluation and the rand’s recovery on comparable GDP estimates, a calculation would need to be made based on GDP data for the second quarter of 2016.
However, Bismark Rewane, foremost economist and Managing Director of Financial Derivatives Company Ltd, faulted KPMG’s position, saying that the update was in order.
“I do not agree with KMPG. The value of currency in dollar terms today was what they used. They can’t use the exchange rate of 2015. Remember that our currency has actually depreciated in value. That argument cannot hold water,” he said.
Christie Viljoen, KPMG senior economist, said the 2016Q2 GDP reports from South Africa and Nigeria will reflect stagnant economies.
“From an exchange rate perspective, the naira ended the period notably weaker while the rand was quite stronger.”
He explained in a report that each country’s statistics agency or central bank is tasked with calculating local GDP numbers. The IMF then collects this data and use it in its own database and forecasts, adding that to determine the biggest economy in Africa, each country’s GDP should be calculated in local currency terms.
“This is then divided by the relevant exchange rate to attain a US dollar estimate of each country’s GDP, which is then comparable across countries for a given year.”
South Africa, Nigeria and Egypt will over the coming month release their 2016Q2 GDP reports and then we will have more clarity on this.”
South Africa lost the title as Africa’s largest economy in 2014 after Nigeria rebased its GDP. The country then moved down to third place at the end of 2015 largely due to its weakened currency as Egypt ranked in second position. These rankings however do not mean much for the average person.
“For the man in the street it does not really influence their general wellbeing, income prospects, safety or wealth,” said Viljoen.
“For the country as a whole, it is a positive influence in terms of foreign investment and international standing.”
The ranking is made on the basis of the size of the gross domestic product (GDP) of the countries in question, namely South Africa, Egypt and Nigeria. The GDP is a measure of total economic activity in a country in a specific period (for example a year). GDP is measured in the domestic currency of the country, which is the rand in the case of South Africa, the naira in Nigeria and the Egyptian pound in Egypt’s case.
For purposes of international comparison, the GDP values are converted at the prevailing exchange rate to a common international currency such as the US dollar. Owing to the increase in the exchange rate value of the rand, the US dollar value of the South African GDP increased. Given the change in the value of the country’s currency, its GDP exceeded the value of Nigeria’s GDP. The same applies to Egypt: owing to the increase in the exchange rate of the rand, South Africa’s GDP is now larger than the GDP of Egypt when converted to US dollars. It’s important to remember that South Africa’s actual GDP in rand value stayed the same.
The International Monetary Fund’s (IMF) World Economic Outlook (WEO) released in April 2016 updated gross domestic product (GDP) estimates for more than 200 of the world’s economies. For Africa, the update reflected another shift in the leader board for the continent’s largest economy. After losing its top spot to Nigeria in 2014 following the West African country’s rebasing its GDP, South Africa moved down to third place at the end of 2015 largely due to its weakened currency. Egypt had moved into the second position, based on US dollar calculations of each country’s GDP.
According to Bloomberg, “based on gross domestic product at the end of 2015 published by the International Monetary Fund, the size of South Africa’s economy is $301 billion at the rand’s current exchange rate, while Nigeria’s GDP is $296 billion.”
The change comes as the rand gained over 16 percent against the dollar since the start of the year, while Nigeria’s naira lost over a third of its value following the Central Bank of Nigeria’s removal of the country’s currency peg in June, says the media company.
Since the Nigerian naira was devalued on June 20 this year, there have been sporadic reports suggesting that Nigeria had surrender its crown as Africa’s largest economy due to the impact of a weak naira on the US dollar value of economic activity.