Impact of Capital Flight on Exchange rate in Nigeria

Abstract

The study examined capital flight and real exchange rate in Nigeria from 1990 to 2014. The study used five independent variables (capital flight, foreign direct investment, current account balance, foreign borrowing and external reserves) and one dependent variable (real exchange rate). Test carried out include unit root test, co-integration test, causality test and ordinary least square. The study revealed that: There is positive significant relationship between foreign borrowing and real exchange rate in Nigeria, there is negative and insignificant relationship between capital flight and real exchange rate in Nigeria, there is positive and insignificant relationship between foreign direct investment and real exchange rate in Nigeria, there is negative insignificant relationship between current account balance and real exchange rate in Nigeria, and there is positive insignificant relationship between foreign reserves and real exchange rate in Nigeria. Based on the findings, the study recommends that, real exchange rate depreciation and appreciation can cause an increase in capital flight, there is a serious need by the fiscal authorities to pursue policy that creates less exchange rate uncertainties and should also ensure that real exchange rate movements are stable and this can also be complemented by closely observing the general rise in the price level.