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This work presents an empirical analysis of the impact of capital flight on Nigeria economy. The research work made use of secondary data collected from Central Bank of Nigeria’s Statistical Bulletin. The empirical measurement covers the sample period between 1981 and 2015. An Ordinary Least Square (OLS), Augmented Dickey-Fuller unit root test and Co-integration test were adopted to carry out an extensive analysis of the adopted variables which include Gross Domestic Product, Capital Flight and Exchange rate, foreign reserve and foreign direct investment. The results revealed that capital flight have a negative impact on the economy. However, recommendations were made that the government should create an enabling environment for investments in Nigeria so as to encourage more inflow of funds from abroad and dissuade outflow of funds by providing investment outlets. Consequently, it is recommended that funds from foreign sources in form of loans, gifts, grants and aids should be judiciously used for economic growth of Nigeria. It also recommended fiscal discipline, serious and commitment on the part of government and its functionaries. Also, the Federal Government should intensify effort in the recovery of looted funds in foreign accounts and its anti-corruption campaign as this will improve the country’s image and attract inflow of funds from abroad for investment purposes in Nigeria.
Keywords: Capital Flight, Economic growth, Gross Domestic Product, Residual approach.
1.1 Background to the Study
Capital flight is the outflow of capital in the form of massive transfer of currency from one country to another. It has often been regarded as the economic responses to the portfolio choices of wealth residents of some debtor countries in recent years. Hence, capital flight is the transfer of funds from one economy to another due to economic or political reasons. In the words of Kindle Berger, Capital flight is an illegal movement of capital from one country to another. Indeed it is an abnormal flow of capital as it is not sanctioned by the government, this is because exchange of capital controls imposed by the particular country is not adhered to.
Obadan(2004) have attributed capital flight to macroeconomic mismanagement, policy distortion exchange rate misalignment and budget deficit respectively. The massive capital flight from the country has often been linked to globalization and to large balance of payment which in turn give rise to massive waves of currency speculation.(Ajayi 1992,1997)said one important economic consequences of globalization for developing countries has been the massive and unprecedented outflows of foreign private capital.FDI inflow is supposed to be the essential source of private finance for developing contries.FDI is the net addition to investible resources in host countries and thus helps to increase their rate of growth of GDP. The most captivating fact is that since FDI inflows and portfolio investment are subject to many of the same push factors such as globalization, financial integration ,technological innovation, large market size, high per capital income, favorable investment climate and economic political and social stability, the aggregate private capital flows into Africa countries is quite low. Thus, it is rather disturbing to not that official capital flow particularly official development assistance has continued to decline since the early 1980’s.(Wertz and Lizane(1998),Collier et al (2001).
Capital flight from developing countries including Nigeria not only aggravates the shortage of resources for development, it indirectly leads to decline in growth. Growth is reduced partly because investment has been diverted abroad and also because necessary imports are limited by the foreign exchange drain from both the flight itself and the fact that earnings on such assets are often not repatriated,(Pastor 1990).
Capital flight leads to a net loss of investment and growth. Given that it is a diversion of domestic savings away from real domestic investment, the pace of growth and development is retarded,(Deppler and Williamson(1987).The Nigerian economy is opened to world trade and this is yet to enhance better resource allocation, greater competition, innovation and the transfer of technology. However, such globalization has intensified access to foreign savings with the outflow of capital being on the increase. It is basically true that outflows of funds from those debt ridden economies would further increase their external indebtedness, worsen their external reserves, balance of payment position, reduce domestic savings and future growth potentials.
Capital flight is different from capital export which is a normal phenomenon. It can foster growth and generate employment in addition to providing solutions to other national economic problems,(Grigoryev & Kosarev 2000).According to Ajayi(2005)Causes of capital flight include varying risk perception, exchange rate misalignment, financial sector constraints, fiscal deficits, weak institutions, macroeconomic policy distortions, corruption among others.
In Nigeria, the determinants of capital flight include domestic inflation in the source country, capital availability, parallel market premium and competitive growth rate of the economy,(Onwiodukit,2007). The extent of capital flight the world over necessitates efforts to checkmate and regulate it, especially in the developing countries where it impacts adversely on the scarce capital, which encourages deficiency of growth resources. There are benefits and losses associated with capital flight but the losses far outweigh the gains, especially in the developing economies where it is rampant. The individuals transferring and the receiving countries benefit while the citizens in the sending economies living standard are to an extent retarded from huge capital flight. This can account for persistent low living standard and lack of industrialization.
Between 1972 and 1978,Nigeria lost $7,573 million as a result of capital flight.(IMF 1996).Capital flight denies a developing country the essential of growth. The colossal lose of cash in various sectors of Nigerian economy is alarming ,for instance Nigeria loses N1.5 trillion yearly on capital flight in the maritime sector,(The Guardian Nigeria 2013).Sectorial growth and the linkages effects are thwarted by yearly lose of fund which impacts adversely on the lives of the populace.
A good proportion of this capital flight is transferred by multinational companies aiming at evading tax where they operate. This illicit capital flight is ten times the annual global aid flow and twice the amount of debt developing countries repay each year. This is highly devastating, considering the huge revenue it costs us. One annoying thing is that citizens of developing countries aid in this transfer at the expense of their home economy. In similar vein, the CBN Governor Sanusi pointed out that from 2008 to 2009,Nigeria has lost a colossal sum of $20 billion due to capital flight. Whereas, the total net flow of capital into Nigeria is very small when compared to the amount of capital taken away.(CBN Bulletin 2008).
It is also pertinent to mention that the carted away capital in any way denies the country the tax revenue that is supposed to be gained if such fund is in circulation. So, the loss is a thing to really worry about us every effort is necessary to see how the developing economy can re-position to tackle the problem of growth. The capital flight in Nigeria just for half a decade is enough to revise the epileptic power supply and poor education sector in Nigeria. Unwanted economic abnormalities, growth disequilibrium and financial constraints can be rectified with considerable control of capital flight.
In the last quarter of 2012,a total of US$13.894 billion went out of Nigerian economy. While about US$757 million went out in September 9,2012.The amount of foreign exchange flowing out of the country rose to US$1.359 billion in the week ending.(IMF 2012).On February 23,2015,Capital flight hit the economy by US$22.1 billion outflow in 5 weeks. This has resulted in crash of Naira-US exchange rate which had remained stable before the election and the crash of international crude oil price. But CBN has attributed to the collapse of Naira at the interbank to currency speculators who buy and hold currency for them to sell at a future date to make some gain. The movement of funds out of the country comes by way of Nigerian residents buying up dollars with their Naira and moving it offshore. Capital flight has led to the depletion of Nigeria’s foreign reserve, thus weakening the Naira.
1.2 Statement of Problem
Over the years, there has been an increasing concern for capital flight in Nigeria in relation to economic growth and development. Poor level of capital inflows reduces the level of economic growth and would said to be a disincentive to economic development in any economy, high level of capital inflows encourages capital formation, which is very essential for the economic growth which enhances substantial level of investment
In Nigeria, one of the unresolved and perturbing macro economic problems for the past decades is the growing rate of capital flight. furthermore the problem of massive movement of funds massively out of the country has undoubtedly contributed to the regeneration of the growth of capital flight and threatening the growth of the economy. According to the former CBN governor Sanusi, over $20 billion left the country from 2008-2009 as a result of capital flight can adversely affect a country’s economic growth.
Capital flight give rise to a net loss in the total resources available for domestic savings and investments in the economy. Since domestic savings and investment are so important to growth, such an economy is retarded from what it would otherwise have been. Capital flight reduces domestically available investible capital, given that inflows of foreign direct investment(FDI)should implement domestic capital, capital flight has constituted a problem. Capital flight being a challenge to domestic investment is exacerbated by the process of financial globalization that enables capital to move freely between countries. Since capital seeks the best avenue where it can earn the highest return, the domestic investment environment has not been clement enough for investment.
Capital flight has been regarded as a major factor contributing to the mounting foreign debt and inhibiting development efforts in third world countries. Similarly, the outflow of capital may augment foreign finance problems of heavily indebted poor countries, if creditors like IMF and other donors are de -motivated to give further assistance as a result of capital outflow. That is the damaging effects of capital flight have made foreign leaders to hesitate to increase credits to the debtor countries, this indeed affects Nigeria. In the same vein, the debt serving capacity of a country is constrained as capital flight erodes the foreign exchange base of a nation.
Therefore the focal point of this research is to investigate the impact of capital flight in the economy and to determine the major variables that influences capital flight.
1.3 Objectives of the Study
The main objective of the study is to critically examine the impact of capital flight on the economic growth of Nigeria economy. This study intends to:
a.To know the impact of capital flight on the economic growth of Nigeria.
b.To know the determinants of capital flight.
1.4 Statement of Hypothesis
1.HO1-There is no significant impact of capital flight on Nigeria’s economic growth.
2.HO2-There is no significant relationship between the determinants of capital flight and Nigerian economy.
.1.5 Significance of the Study
This study was of benefit to Nigeria’s economic policy makers. The study will go a long way in providing information that was of great relevance to researchers, government and policy makers in formulating effective macroeconomic policies on the developmental and growth issues.
Moreover, this research work would provide tangible information that will not only be useful to the public, researchers and policy makers but also the federal government could be adequately motivated for policy reversal. Nigeria is presently overwhelmed with infrastructural deficit that has impeded the development of the country and its transformation into an industrial economy. In addition, the economy has constantly lost resources to capital flights over the years. The study will help bring policy makers back to the issues that need to be addressed in order to attract further capital inflows in FDI and retain resident capital domestically and thereby reduce capital flight in Nigeria.
1.6 Scope of the Study
This study will cover the period from 1981 to 2015 with available data using ordinary least square technique(OLS).