EFFECT OF CAPITAL FLIGHT ON DOMESTIC INVESTMENT IN NIGERIA
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Date
2018-01
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UNIVERSITY OF ILORIN
Abstract
Domestic investment has been one of the perturbing and persistent macroeconomic issues affecting Nigeria for decades. Capital flight represents forgone domestic investment in productive capacity of any economy. Against this background, the study evaluates the effects of capital flight on domestic investment in Nigeria.The objectives were to: (i) investigate the economic variables influencing domestic investments in Nigeria; (ii) evaluate the specific effects of individual components of capital flight on domestic investments in Nigeria; (iii)examine the causal relationship between domestic investments and individual components of capital flight; and (iv) examine the combined effect of foreign direct investment, exchange rate and energy infrastructure on domestic investment in Nigeria.
The underpining theory employed is the flexible accelerator theory. The study utilized time series design and annual data covering 37 years obtained from the Central Bank of Nigeria Statistical Bulletin and World Bank data base. Four models were used to capture its four specific objectives using Autoregressive Distributive Lag Model (ARDL) and Vector Error Correction (VEC) Granger causality estimate.
The findings of the study were that:
(i) capital flight (β = -0.22; p < 0.05), inflation (β = -11.36; p < 0.05), exchange rate (β = -0.09; p < 0.05) have negative influence on domestic investments while savings (β = 1.74; p < 0.05) has positive and significant influence on domestic investmentsin the long run. Cointegration exists among the variables with error correction coefficient 0.80; p = 0.0011 conforming to a priori expectation;
(ii) changes in external debt (β = -0.04; p < 0.05), current account balance (β = -0.23; p < 0.05) and foreign direct investments (β = -0.15; p > 0.05) have negative effect on domestic investments in the short run and long run. However, external reserves (β = 0.41; p < 0.05) shows a positive and significant effect on domestic investment. The error correction coefficient estimate is 0.74; p = 0.0011, significant and conform to a priori expectation;
(iii) domestic investment does not Granger-cause current account balance (chi-square = 0.47, p = 0.79). Furthermore, domestic investment does not Granger-cause change in external reserves (chi-square= 0.24, p = 0.88). There is a uni-directional relationship between change in external debt and domestic investment, which shows that external debt Granger-causes domestic investment at 0.05 level of significance;
(iv) foreign direct investment (β = 1.89; p < 0.05), exchange rate (β = 0.03; p > 0.05) and infrastructure (β = 0.07; p > 0.05). The combined effect is 87%.
The study concluded that capital flight, exchange rate and inflation influence domestic investment negatively both in the short and long run. Hence, the study recommended that the repatriation of fled capital can help boost the level of domestic investment in Nigeria. In addition, monitoring imported inflation through goods and services will result to less risk of depreciation in real value of domestic investment since low and stable inflation minimizes and stabilizes budgetary deficit and capital flight.
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Keywords
CAPITAL FLIGHT, DOMESTIC INVESTMENT, NIGERIA