Determinants of Capital Flight in the East African Community

Shem J Otieno ,Symon Kiprop ,Augustus Muluvi

doi:10.7176/jesd/12-10-01

Abstract

The region has lost an immense amount of capital that has led to sluggish regional integration in terms of capital formation and productive capabilities. Albeit most of these countries are in the ranking list of the huge volumes of capital flight, East Africa has never been considered as a sub-region in the capital-related studies. Cognizant of this, this paper intends to contribute to this body of knowledge by filling a noticeable gap. This paper examined the determinant of capital flight from East African Community countries that include Kenya, Tanzania, Uganda, Rwanda, and Burundi using panel data for the years 1988 to 2018 using the real gross domestic product, interest rate differential, external debt, corruption index, and exchange rate as explanatory variables. Secondary data obtained from EAC member countries National Bureau of Statistics. Levin-Lin-Chu panel unit root test was carried out and capital flight and Exchange rate found to be stationary at level. The fixed effect regression results showed that corruption, external debt, and the exchange rate had a positive and statistically significant effect on capital flight while real GDP had a negative and statistically significant effect on capital flight. Thus, policymakers should endeavor to achieve a broad investor base for its domestic and foreign obligations, with due regard to cost and risk, and should treat investors equally. In addition, there is a need to harmonize the judiciary and the executives in EAC to facilitate the fight against corruption which is a major concern for a capital flight. Key w ords: Capital flight, External debt, Exchange rate, GDP, Corruption, EAC DOI: 10.7176/JESD/12-10-01 Publication date: May 31 st 2021

Highlights

After the 1990s, Sub-Sahara African countries prescribed to liberalize their capital accounts and followed a number of standard policy solutions in order to attract foreign capital inflows to finance investment as well as their rising debt stocks (Forson et al, 2017)
5 Conclusion and Recommendations 5.1 Conclusion The fixed effect regression results showed that external debt and exchange rate had a positive and statistically significant effect on capital flight while real GDP had a negative and statistically significant effect on capital flight
Interest rate differential was found to have a positive but statistically insignificant effect on capital flight. This showed that East African Community (EAC) regions have to work hard in implementing both monetary and fiscal policies that www.iiste.org will reduce capital flight

Summary

Introduction

After the 1990s, Sub-Sahara African countries prescribed to liberalize their capital accounts and followed a number of standard policy solutions in order to attract foreign capital inflows to finance investment as well as their rising debt stocks (Forson et al, 2017). This was accompanied by high value of external debt that kept increasing as a result of low capital formation in 1988. According to Ndoricimpa (2018), political instability and corruption that rocked the country in 2014 led to increased capital flight which was averagely above 10 percent of the total real GDP from the year 2014 to 2018. Investors have certain utility functions that may outweigh distribution of returns concerns This theory is well expounded in determining how interest rate differentials, Real GDP, and both non-economic risks influence the magnitude of Capital flight in an economy. The regional block was chosen since the countries have had a long history of budget deficit given that lots of capital flew from the region while their external debt almost equal to capital flight from the region

Panel Unit Root Test

Hausman Test

Determinants of Capital Flight in EAC

Conclusion and Recommendations