The new calculations take into account changes in production and consumption since the last time the exercise was carried out in 1990 and indicated that the economy grew to $453-billion in 2012, instead of $264-billion as measured by the World Bank for that year.
South Africa's economy was at $384-billion in 2012, according to the World Bank.
Estimates for 2013 indicated further expansion to $510-billion, Nigeria's chief statistician, Yemi Kale, told a news conference in the capital, Abuja.
"Nigeria has moved to be the largest economy by GDP size in Africa and has moved to be the 26th largest economy in the world," finance minister Ngozi Okonjo-Iweala said.
"On a per capita basis, Nigeria is number 121 in the world. So, we have a total GDP size where we have moved up to 26th," the former World Bank managing director added.
The widely expected results are based on calculations taking into account a range of new sectors and industries that were negligible or non-existent in 1990.
They include the massive mobile telephones market, music and the hugely popular local film industry, Nollywood.
With 170-million people, Nigeria is about three times the size of South Africa and has enjoyed high rates of growth, notwithstanding widespread corruption, poor governance, rampant oil theft and a raging Islamist insurgency in the north.
According to the International Monetary Fund, Nigeria averaged 6.8% annual growth from 2005 to 2013 and was projected to grow this year at a rate of 7.4%.
That compares to a little over five percent between 2005 and 2008/09 in South Africa, which has struggled to go beyond 3.5% since.
Potential boom market
Global investors have been eyeing Nigeria as a potential boom market, along the lines of the BRIC countries (Brazil, Russia, India and China) 10 years ago.
But economists have warned not to take the new figures at face value, given that South Africa – the continent's only G20 member – has fewer people and is streets ahead in areas such as infrastructure and governance.
Okonjo-Iweala said GDP per capita in Nigeria was now $2 688 – up from $1 555 in 2012 – taking the country from 135th position in the world to 121st.
GDP per capita in South Africa in comparison was $7 508.
The head of the Africa Finance Corporation, Andrew Alli, said he hoped the announcement would encourage overseas investors to see the potential in backing projects in Nigeria and across the continent.
"It is only through continued investment in basic infrastructure projects, such as road, rail and power generation, that all African countries will really be able to transform prevailing investor sentiment, demonstrate there is more to Africa than just natural resources, and harness opportunities presented by their young and growing populations," he said.
"Failure to do so could be catastrophic."
For ordinary Nigerians – most of whom still live on less than $2 a day – the rebasing is likely to have little effect, but it will improve the country's balance sheet and its credit rating and promote it from being a low-income economy.
Nevertheless, Nigeria still faces an immense challenge in terms of infrastructure deficits. Slow ports, bad roads and a lack of electricity are some of the major factors hampering business activity.
Bismarck Rewane, the head of the Lagos-based Financial Derivatives Company said the exercise could only be meaningful "if it impacts positively on the living standards of the people".
"Nigerians will still buy petrol at the same price, they will still have the same amount in their pockets, electricity is not going to improve on Monday morning," he said.
"So, the exercise is a journey from reality to vanity," he added.
South Africa will continue to remain the most competitive economy, despite Nigeria's new status. – Sapa-AFP