Impact of Capital Flight On Economic Growth In Nigeria

Abstract

The phenomenon of capital flight has become a trending macroeconomic issue
in Nigeria. This study therefore examines the impacts of capital flight on
economic growth in Nigeria. The real interest rates differential has been
identified as a major determinant of capital flight in an economy. The study
employs the vector error correction mechanism and granger causality test to
examine the relationship between capital flight, interest rates differential,
political instability and economic growth; using available data between 1980
and 2014. The results show a negative relationship exists between capital flight
and economic growth in Nigeria. The results also show a positive and
significant relationship between capital flight and interest rates differential,
explaining that the higher risk-adjusted returns abroad influence domestic
capital flight. The granger causality test explains the existence of bi-directional
relationships between political instability and capital flight; interest rates
differential and capital flight; political instability and economic growth; interest
rates differential and economic growth; and interest rates differential and
political instability. There is, however, a uni-directional relationship between
capital flight and economic growth.