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Determinants Of Capital Flight In Nigeria

– Determinants Of Capital Flight In Nigeria –

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The verity that capital formation is a key to economic development is incontrovertible. Yet capital scarcity is norm in most developing nations like Nigeria. With this in view, this study examines the determinants of capital flight in Nigeria.

In executing this crucial study, annual time series data, between 1980 and 2014 is used and error correction model (ECM) is employed after Augmented Dickey Fuller (ADF) unit root tests as well Johansen cointegration analysis has been applied to the variables.

In identifying the determinants of capital flight in Nigeria, the study employs the Residual method of measuring capital flight. Of the six variables modeled as the determinants of capital flight in Nigeria; exchange rate, real interest rate, external debt stock, economic openness and political instability are found to account for capital flight.

Real gross domestic product is found not to be a significant determinant of capital flight in the country. The study recommends policy options aimed at abating capital flight as well as raising investment levels in the country.


Background to the Study

According to (Ajilore, 2010) capital flight refers to any illicit movement of capital away from a domestic to a foreign economy. (Ndikumana and Boyce, 2002) also defined capital flight as residents’ capital outflows, excluding recorded investment abroad. ( Schneider , 2003) defines it as that part of outflow of resident capital that is motivated by economic and political uncertainty.

This implies that such political uncertainty will involve likely change of government or governmental policies as denoted by country instability and all forms of minor and major changes in the political circumstance of the country.

According to (Noor et al, 2015), the movement of capital from domestic to foreign economy could be normal or economically good if it is of capital export or foreign direct investment. These flows of capital abroad, which are subjected to regulation and do not endanger national economy, would foster economic growth of a nation.

However, the illicit movement of capital away from domestic to foreign economy would worsen the capital scarcity problem especially in emerging economies; thus, contributing to economic contraction as well as collapse of the financial markets.

Generally, the illicit movement of capital abroad, which is also called capital flight, escapes government taxation and is motivated by economic and political uncertainties.

There are benefits and losses associated with capital flight but the losses far outweigh the gains, especially in the developing economies where it is so 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 fight.

This can account for persistent low living standard and lack of industrialisation. Capital flight and other illicit financial flows constitute a major constraint to development financing in Africa, a continent that continues to lag behind in most measures of human development (Ajayi and Ndikumana, 2014).


Agenor, P. (2000). The Economics of Adjustment and Growth. Enugu, Academic Press.

Al-Fayoumi, N., Alzoubi, M. & Abuzayed, B. (2011). Determinants of Capital Flight:Evidence from MENA Countries. Retrieved from

Ajayi, S. (1995). Capital Flight and External Debt in Nigeria.  African Economic  Research journal.5(35).

Ajayi, S. (1997). An Analysis of External Debt and Capital Flight in the Severely  Indebted Low Income Countries in Sub-Saharan Africa. IMF Working Paper, 97(68).

Ajayi, S. I. and Ndikumana, L. (Eds.). (2014). Capital Flight from Africa: Causes, Effects and Policy Issues. Oxford: Oxford University Press, forthcoming.

Ajilore, T. (2010). An Economic Analysis of Capital Flight from Nigeria.  International Journal of economics and finance, 2(4).

Antzoulatos, A. & Sampaniotis, T. (2001). Capital Flight in the 1990s – Lessons  from E. Europe. Department of Banking and Financial Management, University of Piraeus, Greece and Office of the Prime Minister, Greece.

Beja, E., Pokpong, J. & Jared, R. (2005). Capital Flight from Thailand: Capital  Flight and Capital Controls in Developing Countries. Thailand, Edward Elgar Publishing.

Beja, E. (2007). Brothers in distress: revolving capital flows of Indonesia,  Malaysia, and Thailand. Journal of Asian Economics, 18(5).

Boyce, J. & Ndikumana, L. (2001). Is Africa a Net Creditor? New Estimates of Capital Flight from Severely Indebted Sub-Saharan African Countries. Journal of Development Studies. 3(8).

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