AN INVESTIGATION OF THE RELATIONSHIP BETWEEN CAPITAL FLIGHT AND EXTERNAL DEBT IN NIGERIA 1970 – 2002

AN INVESTIGATION OF THE RELATIONSHIP BETWEEN CAPITAL FLIGHT AND EXTERNAL DEBT IN NIGERIA 1970 – 2002

Abstract:

Nigeria’s huge external debt burden has been a major obstacle to economic growth since a huge amount of foreign exchange is devoted to debt servicing annually. The growth of external debt stock and service has reached a level where it constitutes a threat to the provision of basic needs, socioeconomic development and poverty alleviation programmes of the federal government. It also encourages capital flight This thesis investigates the relationship between capital flight and external debt in Nigeria in the period 1970-2002 It also explores the conceptual issue in capital flight, emphasizing several dimensions of capital flight . It also discusses the possibility of halting capital flight in order to promote economic growth in Nigeria. . An econometric test was conducted, a stationary test was carried out prior to carrying out causality test. Ordinary least squares (OLS) was used for estimation of parameters. The results of stationary test indicated that data were stationary at levels for capital flight and terms of trade. For external debt, foreign exchange reserve, inflation, exchange rate, interest rate and domestic investment data were stationary at 1st difference. For gross domestic product, it was stationary at 2nd difference. The causality tests revealed that a bi-directional relationship exists between capital flight and external debt. This implies that external debt facilitated capital flight and vice verse. However, the strength from capital flight to external debt was weaker than from external debt to capital flight. It implies that, programmes to reduce external debt should be well looked into if capital flight is to be reduced. The OLS results indicated that capital flight tends to fall with increase foreign reserve, interest rate, direct investment, gross domestic product growth rate. Also capital flight tends to rise with increase in exchange rate misalignment, external debt, political instability, inflation and deterioration in terms of trade. . It is therefore recommended that, government should articulate good debt management polices, reform the economy and reduce external debt. It should also design policies that could increase foreign reserve, interest rate, direct investment and ease constraints in the financial system. Government should also design policies to reduce exchange rate misalignment, political instability, inflation and deterioration in terms of trade in order to reduce capital flight.

AN INVESTIGATION OF THE RELATIONSHIP BETWEEN CAPITAL FLIGHT AND EXTERNAL DEBT IN NIGERIA 1970 – 2002

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