CAPITAL FLIGHT AND ECONOMIC GROWTH IN NIGERIA (1970 -2011)

CAPITAL FLIGHT AND ECONOMIC GROWTH IN NIGERIA (1970 -2011)

ABSTRACT

This study examines the determinants of capital flight in Nigeria and their effects on economic growth between 1970 and 2011. In analyzing the determinants of capital flight, eight (8) variables classified as political, economic and institutional were employed. These include: Degree of Openness, Inflation rate, Gross capital formation, Change in External debt, Deposit rate, Credit to Private sector, Interest rate differentials and Government consumption expenditure (GOCE). Six models were formulated models; model 1, 3, and 4 examined the determinants of capital flight in the Pre and Post-SAP era while model 2, 5 and 6 examined the effect of capital flight on the economy in the Pre and Post-SAP era with Gross Domestic Product as the dependent variable and Change in External debt, Direct Foreign Investment, Current Account Balance, Change in External Reserve and Change in Net Foreign asset of Domestic Financial Institutions as explanatory variables. The study employs the residual method of capital flight estimates while data were sourced from the Central Bank of Nigeria’s Statistical Bulletin, the Nigeria Stock Exchange Fact Books and IMF’s Financial Reports. The Ordinary Least Square Method of Regression analysis and Co-integration Technique were employed to estimate and test the formulated models and hypotheses. Findings from the analyses reveal that both short and long run relationships between the dependent and independent variables. Specifically, the results reveal that Change in External Debt, Inflation rate, Political and Institutional risks constitute the major determinants of capital flight in Nigeria over the period of study. The post-SAP analysis shows that Change in External Debt and Inflation rate greatly induced capital flight which adversely affected the economy. Statistically, the test of hypotheses conducted at 95% level of confidence shows the significance of the variables. The results also show that Change in external debt negatively impact economic growth, while Direct Foreign Investment, Change in Foreign Asset of Domestic Banking System and Change in External Reserve positively impact the economic growth. The study established a link between External debt, poverty and economic growth. It was also revealed that capital flight was more prevalent in Nigeria during the period of transition from one regime of government to another due to political crises and uncertainty. The study recommends among others that Government should provide economically viable environment that will encourage investment while statutory agencies like the Economic and Financial Crime Commission and the Independent Corrupt Practices and Other Related Offences Commission should be adequately funded and empowered to handle financial crimes. Finally, it was recommend that serious and sincere effort should be made by the government to recover stolen and ill-gotten wealth by public officers and the proceeds recover from corrupt officials should be ploughed back into the economy while the government should implement policies that are suitable for the Nigerian environment. One of the major contributions of the study to knowledge is that it confirmed that economic, political and institutional factors are the main determinants of Capital Flight in Nigeria.

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