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Economy

Nigeria overtakes South Africa as the continent’s largest economy

Africa has a new economic frontrunner. Nigeria has released figures suggesting the oil-rich country has overtaken South Africa in terms of gross domestic product. But do the numbers reflect reality?

Nigeria has long boasted the highest population in Africa, but now it is also officially home to the continent's strongest economy.

Recent calculations from the Nigerian statistics office estimate the value of the country's economy at around €369 billion ($509 billion) - nearly twice as high as previously thought. South Africa, long the economic frontrunner on the continent, has a GDP of €229 billion ($315 billion).

Razia Khan

Analyst Razia Khan thinks 2014 will be a watershed for the Nigerian economy

But what may come as a shock to most laypeople is less surprising to some experts. The director of the Standard Chartered Bank's Africa department, Razia Khan, recently authored a study championing Nigeria's economic might.

"Nigeria's economy will achieve global relevance this year," Khan said in an interview with Deutsche Welle.

When advising clients who are planning investments in Africa, Khan is quick to express her enthusiasm about Nigeria.

"There is absolutely no way around it," she said.

But other observers are more cautious and even warn that the latest statistics should not be viewed as a precise appraisal of economic life in Nigeria, but rather as a forecast.

The new calculations are higher than before because parameters have been adjusted to reflect modern conditions for the first time since 1990. Revenues from the telecommunications industry, for instance, as well as the film industry Nollywood, have finally been included.

An economic powerhouse on a shaky foundation

Nigerian capital Lagos

Nigeria has the world's seventh largest population

When asked about the facts behind the figures, Michael Monnerjahn, who follows economic and political developments in Africa for the Africa Association of the German Economy, just shakes his head.

"The absolute value of gross domestic product is not terribly helpful, especially in a place like Nigeria where 90 percent of export earnings are tied to oil," Monnerjahn said, adding that even if Nigeria's GDP is in the same league as that of South Africa, the two countries are far from equal. South Africa, he said, has a much more mature and sophisticated economy.

"They have their own carmakers, machine manufacturers and chemical producers,” he said.

One thing Nigeria does have is oil, but its status as the eighth-largest oil exporter in the world puts it in a precarious situation. Prices on the global market for crude oil are fickle and most refineries are located abroad.

But Nigeria has little else, even if the mobile communications market and construction industry in Nigeria are booming and films produced in "Nollywood" are selling well internationally. As Khan notes, Nigeria still lacks important, so-called micro-level indicators.

"Do the millions of people there have purchasing power? How strong is the retail sector? How does Nigeria spend its revenue?" she asked.

oil rig

Nigeria's dependence on oil exports makes it vulnerable to market fluctuations

Nigeria's strength is in its people

Nigeria's most compelling selling-point for investors is its 170 million people. The country has the seventh highest population in the world and investors' formula is simple: lots of people plus ample opportunity equals growth.

Yet even here, Khan warns that people who produce and consume are not enough to ensure a stable economy.

So what is Nigeria lacking? First and foremost, it needs functioning infrastructure. Logistics costs in Africa are higher than anywhere else in the world. Second, it requires a diversified economic landscape. Third, while Nigeria may indeed be the strongest country in Africa in terms of GDP, 63 percent of Nigerians live below the poverty line even after a decade of stable growth.

"The new figures reveal a growing disparity between a strong GDP and a high number of people living on a dollar a day," Khan said.

Additionally, the pace at which the middle class is growing is too slow. The economy has improved sharply but most wealth is concentrated among a small urban middle class.

"Too little of Nigeria's economic development is felt by the general population, especially in northern Nigeria," said Monnerjahn.

South Africaunder pressure

Why then was South Africa bumped down to second place in the statistics?

Skyline of Johannesburg

South Africa has welcomed Nigeria's rise

Monnerjahn described the South African economy as "stagnant," adding that this has to do with the dominance of the ruling African National Congress (ANC), which "caters to particular interest groups, such as unions."

The bump also has to do with changes in the country's energy sector.

"Energy was until now rather inexpensive in South Africa. For decades there was very little investment," said Monnerjahn. Money will now have to be pumped in to this sector, and that will increase the cost of energy and make South Africa more expensive for investors.

"Anyone starting from scratch in Africa doesn't automatically turn to South Africa anymore. Instead they shop around," Monnerjahn said.

For its part, South Africa's reaction to the new Number One have been largely positive. On Monday, the Ministry of Finance in Pretoria lauded Nigeria's rise in status.

"The announcement gives concrete expression to the fact that Africa is indeed rising," the statement read.

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