Why most African countries understate the size of GDPs

Last week, Ghana announced that it is recalculating its gross domestic product (GDP) based on measurements from 2013 instead of 2006 to more accurately reflect recent activity in the petroleum, communication technology and construction sectors. The rebasing will likely add 30 to 40 per cent to the size of Ghana’s economy.

The rebasing is a reflection of how the size of African economies is often understated. This understatement is informed by three factors.

First, the actual number and size of businesses actively operating in Africa and contributing to GDP are unknown.

Most African governments do not have the operational muscle to conduct research and analysis on the number of functioning businesses in the economy, their size, profits, or turnover.

This is partly informed by the fact that the private sector in Africa is dominated by informal businesses, most of whom are micro and small enterprises (MSEs) primarily engaging in subsistence business activity.

The combination of millions of MSEs operating in informality coupled with the lack of data gathering and statistical capacity to collect business activity data translates to notable inaccuracies in terms of the actual number and size of operational businesses in the continent.

Second, the private sector in Africa tends to understate business size and profit earnings in order to minimise tax liabilities.

Again, African government capacity is limited as taxmen do not have the ability to ensure all companies are posting accurate tax returns.

Most companies in the continent keep two books of accounts: the official audited reports that are submitted to investors, tax authorities and government agencies, and the internal books that reflect what is actually going on in the business.

Given limited tax surveillance muscle, it is relatively easy to dodge tax penalties and most African taxmen are happy taxes are being voluntarily submitted. Therefore, they often do not bother to ensure profits and tax liabilities are accurately reported. The effect is again an understating of how much money businesses are making.

Finally, there are incentives for African governments themselves to understate GDP size.

Dimitri Sanga, ECA director for West Africa echoes the view that some African countries purposefully avoid rebasing GDP upwards to reflect current realities in order to avoid graduating from low-income to middle-income countries.

Low-income status comes with certain perks such as cheap loans, generous aid packages and charitable trade agreements.

In short, the evidence seems to indicate that there is more money being made in Africa than is being reported and thus GDPs in Africa are probably higher than what is officially captured. And while some countries will rebase GDP upwards to access larger loans and shift debt-to-GDP ratios into favourable terrain, it is up to African governments to determine whether rebasing or deliberately understating GDP is in their national interest.