Does Capital Flight Affect Macroeconomic Performance in Nigeria?

This Study examined the effect of capital ight on macroeconomic performance in Nigeria for the period 1981 to 2019. It also ascertained the determinants of capital ight in Nigeria for the period 1981 to 2019. The error correction model was used for this study because the unit root test revealed all variables were stationary at rst difference. This study utilized secondary data obtained from the World Bank dataset. The ndings showed that external debt in the current period and the rst lag, external debt in the current period, foreign direct investment in the current period, current account balance in the current period, interest rate in the current period and reserves in the rst lag are signicant determinants of capital ight in Nigeria. Also, the study revealed that capital ight negatively affects economic growth and investment in Nigeria. The study therefore recommends amongst others that external debt and foreign direct investment should be used for productive purposes such that capital ight as a result of inow of funds from abroad is impossible and that stable exchange rate policies should be adopted to avoid devaluation which is a determinant of capital ight in Nigeria.


Introduction
According to Saheed (2012), capital ight is described as a movement of domestic saving from under developed economies away from nancing domestic real investment for a foreign nancial investment in developed economies of the world leaving the economic growth and development of the under-developed economies at base. The out ow of capital from under developed nations brings about declining in capital available for investment purposes that could promote economic growth and development. Moreover, where such phenomenon happens, developing nations are forced to obtain foreign borrowings to supplement their domestic funds in other to achieve economic development hence, the burden of debt servicing which may eventually plunge the nation to persistent bondage of poverty (Ayadi, 2008).
There is a general presumption in the literatures that capital movements from capital-scarce countries such as those in the developing world to higher-wage areas of advanced countries are unexpected and unusual. A reason for this labeling is that capital ight means loss of resources to the domestic economy, and therefore, loss of opportunities. It is paradoxical that resources are owing out of developing countries rather than to them even though it is in the developing countries that resources are needed the most to stimulate economic growth and development. Capital ight also means loss of resources for debt servicing, thereby making the burden of external debt more substantial. Since in the developing countries, institutions are fragile or missing, the economic and social costs of capital ight can be large and affect the rest of society which carries a disproportionate burden of the external debt since capital ight usually undertaken by the elite. In fact, the elites are usually able to evade these costs because they are able to transfer their wealth overseas (Bakare, 2011).
Capital ight whether normal or abnormal has a damaging effect on the economy of the source or domestic country. It is generally known that shortage of funds to nance economic development is a major challenge confronting the African continent. Thus, encouraging the in ow of foreign capital through foreign investment cannot be overemphasized in order to bridge the existing resource gap in developing countries. Many developing countries have resorted to external borrowing as a means of bridging their saving-investment gap (Bredino et al, 2018).
In a low income nation like Nigeria where capital ight exists, the country is bound to experience macroeconomic instability. This instability can be in the form of budget de cits, current account de cits, hyperin ation as well as decreasing terms of trade. This will then lead to a contraction in economic activities and lack of opportunities for pro table investment in the country. Capital ight poses serious threats to economic growth in any country due to the fact that it increases unemployment rate, discourages both domestic and foreign investment and it leads to a rise in consumer prices. It is against this backdrop that this study aims at examining the determinants of capital ight in Nigeria as well as

The Tax Depressing Theory
This theory postulates that capital ight leads to potential loss of revenue because wealth held abroad are beyond the control of the domestic government and cannot be taxed. High expected tax rates might reduce the net expected returns to domestic investment and the volatility of the tax rates might raise investment risk which then leads to lower risk-adjusted returns to domestic investment (Ndikumana and Boyce, 2002). The fall in government revenue will complicate the task of political and economic engineering to stimulate growth and development. This leads to a reduction in debt servicing ability of the government which causes an increase in the debt burden and constrains economic growth and development.

Empirical Review
Ogbenro (2019) examined the impact of capital ight on economic growth in Nigeria for the period 1990 to 2017. The ADF test was employed in testing for stationarity of the time series. The ordinary least square (OLS) econometrics method of data analysis was used for this study. The T-test showed the existence of a positive relationship between the proxies of capital ight and GDP serving as proxy for economic growth. It was recommended that policy-makers and the relevant authorities should pay more attention to the issue of capital ight and foreign debt servicing in order to stem its counter-productive impacts on economic growth. Igwemma (2016) investigated the effect of capital ight on the Nigerian economy from 1986-2016. Data for the variables of this study were sourced from the World Bank Development Index, CBN Statistical Bulletin and the Economic and Financial Crimes Commission Bulletins. The variables were found to be integrated of mixed order hence the Bounds test was used to test for co-integration. The simultaneous equation model reveals a negative and signi cant relationship between capital ight and economic growth. The implication of these ndings is that capital ight had negatively affects Economic growth in Nigeria with Foreign Medical and educational Expenses and Looted Funds being the key channels through which huge capital leaves the country. It was recommended the government should ensure good governance and prosecution of corrupt o cials in order to discourage capital ight and encourage domestic investment. Obidike (2015) examined the effect of capital ight on the economic growth of Nigeria. Following the result of the Augmented Dickey-Fuller (ADF) test, the Autoregressive Distributed Lagged model (ARDL) was used in the study. The outcome of the Auto Regressive Distributed Lagged (ARDL) model revealed that capital ight has signi cant effect on economic growth. It was recommended that government should take serious steps to improve the security of life and property in the country as insecurity poses a problem to investment. Also, the public resource managers should partner with anti-graft agencies to ensure that all the channels through which money is laundered are stopped.
Ayodele (2016) examined the effect of capital ight on the economic growth of Nigeria. The simple linear regression model was employed to analyze the data and it was discovered from the analysis that there exists a very high and signi cant relationship between GDP and capital ight. It was therefore recommended that the Nigerian economic and political environment should be made investment friendly so as to attract investors. Kabiru (2018) examined the effect of capital ight on investment in Nigeria from 1990 to 2014. The study used capital ight, foreign direct investment, current account balance, external debt, external reserves and real exchange rate as the variables for this study. The study revealed that there a negative and insigni cant relationship between capital ight and real investment in Nigeria. The study then recommended that since a decrease in real investment causes an increase in capital ight, there is a need for the scal authorities to pursue policies that creates a favorable environment for investment.

Olawale et al (2015) examined the impact of capital ight on economic growth in Nigeria between 1980
and 2012.Ordinary Least Squares (OLS) and Error Correction Mechanism (ECM) as its main estimation techniques. The result revealed the existence of a long run relationship among the variables using cointegration. It was also discovered that capital ight had a negative impact on the economy. Based on these ndings, it was recommended that the government should create an enabling environment for investment and offer investors attractive incentives in order to reduce the occurrence of capital ight from the country.
Umoru (2013) explored empirically the effect of capital out ows on the growth rate of GDP in Nigeria. The ndings showed that capital ight adversely impacts the growth rate of GDP. There is therefore need for effective control of capital out ows and also a need to implement economic policies that will encourage domestic investment and discourage capital ight in Nigeria. Ajayi (2012) provided evidence on the impact of capital ight on investment of Nigeria for 40 years ). The study used co-integration and Error Correction Mechanism (ECM) as its main estimation techniques. It was discovered that capital ight has a negative impact on the Nigerian economy. It was recommended that funds from foreign sources should be judiciously used for productive purposes in Nigeria. It also recommended that the government should provide an enabling environment for businesses to thrive thereby encouraging foreign direct investment and discouraging capital ight.
Lionel (2019) examined the impact of capital ight on domestic investment in Nigeria between 1980 and 2017. Adopting the Auto Regressive Distributed Lag (ARDL) methodology, the study revealed that capital ight has a negative and signi cant impact on domestic investment. In particular, the long run impact of capital ight on domestic investment is more severe than its impact in the short run which implies that the continuous act of capital ight exerts a negative effect on domestic investment over time. The study recommended that the real sector of the economy must be grown to boost the value of the naira. This will reduce the occurrence of capital ight and attract investment in other sectors.

Methodology
This study utilized time series data obtained from the World Bank Development Indicator for the period 1981 to 2019.

Model Speci cation
For model one (1) (1) The error correction coe cient is given as -0.711684 and its corresponding probability value is 0.0024. This means the ECM is negative and statistically signi cant which conforms to theoretical expectations.

Error Correction Result for Model One
The R 2 is given as 0.765420 which means that about 77% of changes in the dependent variable, capital ight can be explained by the independent variables used in the model. The probability value of the Fstatistic (0.000194) suggests that all the independent variables are jointly signi cant in determining changes in capital ight. Also, the Durbin-Watson statistics at 1.984100 indicate the absence of autocorrelation. The short run result revealed that exchange rate has a positive relationship with capital ight meaning that a depreciation of the naira leads to an increase in capital ight. This relationship conforms to apriori expectations and is similar to the ndings of Ayodele (2016).External debt in the current period has a negative relationship with capital ight while in the rst lag, external debt has a positive relationship with capital ight in Nigeria which is similar to the nding of Ameen et al (2016) and Chukwuemeka (2014). Foreign direct investment has a negative relationship with capital ight in the current period while in the rst lag, the relationship is positive and insigni cant which is similar to the ndings of Saloum (2011). Current account balance has a negative relationship with capital ight indicating that a current account surplus will lead to a decline in capital ight in Nigeria. For interest rate, it has a negative and signi cant relationship with capital ight in the current period. In the lagged period however, interest rate has a positive and statistically insigni cant relationship with capital ight. Finally, the short run result indicated that reserves have a negative relationship with capital ight. This implies that an increase in reserves will lead to a decline in capital ight in the country.

Error Correction Model for Model Two (2) (Short Run Analysis)
The error correction term has a coe cient given as -0.136009 and its corresponding probability value is 0.0000. This means the ECM is negative and statistically signi cant at the 5% level of signi cance, thereby conforming to theoretical expectations. The value of the R 2 is given as 0.889096 which means that about 89% of changes in the dependent variable, GDP can be explained by the independent variables used in the model. The probability value of the F-statistic (0.00000) suggests that all the independent variables are jointly signi cant in determining the GDP. Also, the Durbin-Watson statistic has a value of 1.837050 which signi es that there is no autocorrelation.
The short run result shows that GDP in the past period determines GDP in the current period. Capital ight in the current period and the rst lag has a negative and signi cant relationship with GDP. It implies that as capital ight increases, economic growth declines. This relationship conforms to apriori expectations and is similar to the ndings of Igwemma (2016), Bakare (2011) and Ayoola (2018) where a negative relationship was found to exist between capital ight and economic growth in Nigeria. External debt also has a negative relationship with capital ight. Its relationship is however statistically insigni cant. The coe cient of -0.255434 means that if external debt increases by one per cent, GDP will decline by about 26%. External debt in the lagged period has a positive and signi cant relationship with capital ight which implies that a one per cent increase in external debt will increase GDP by about 12%. FDI has a positive and statistically signi cant relationship with GDP in the current period while in the rst lag; FDI has a negative and insigni cant relationship with reserves. This is due to the fact that the FDI in ow is used for unproductive purposes which do not contribute to economic growth and also because of corruption and conversion of these funds for personal use.

4.3.3: Residual Diagnostic Test Result
From the residual diagnostics test result presented in the From the short run result, the value of the R-squared is 0.912941 meaning that changes in investment can be attributed to changes in the independent variable by about 91%. The probability value of the F-Statistic which is 0.000000 implies that the independent variables adopted are jointly signi cant in determining investment. Also, the Durbin Watson statistic is 1.543314indicating the absence of autocorrelation in the model. The coe cient of the error correction term is given as -0.121754 and its corresponding probability value is 0.0312. This means the ECM is negative and statistically signi cant at 5% level of signi cance, thereby conforming to theoretical expectations.
The short run results further shows that investment in the lagged periods has a positive and insigni cant relationship with investment in the current period. This means that investment in the past years have a positive effect on present value of investment. Capital ight in the current period as well as its one year lag period has a negative and statistically signi cant relationship with investment. This implies that as capital ight increases, investment decreases by about 62 per cent in the current period and by about 12 per cent in the rst lag. This relationship conforms to apriori expectations and is similar to the ndings of Kabiru (2018) and Ajayi (2012). External debt in the current year has a negative and insigni cant relationship with investment in Nigeria. This means that as external debt increases, investment decreases. In the one period lag however, external debt has a positive and signi cant relationship with investment which is similar to the ndings of Ameen et al (2011). Foreign direct investment in the current year as well as the one period lag has a positive and signi cant relationship with investment in Nigeria. This relationship conforms to apriori expectations and implies that an increase in foreign direct investment into the country leads to a corresponding increase in investment in Nigeria.

Residual Diagnostics Test Result for Model Three (3)
The residual diagnostics test result presented in

Discussion of Results
The results from this study revealed that exchange rate positively affects capital ight. That is, a rise in exchange rate which is depreciation will lead to an increase in capital ight. It also shows that an increase in external debt and foreign direct investment will lead to a decline in capital ight.
Furthermore, an increase in the current account balance will lead to a decline in capital ight by about 10 per cent in the present period. Interest rate has a negative relationship with capital ight implying that an increase in the deposit rate of interest will cause capital ight to decrease. It is also evident from the results that an increase in reserves will lead to a decline in capital ight in Nigeria.
In examining the effect of capital ight on economic growth in Nigeria, the study found out that capital ight negatively affects economic growth. It also shows that external debt negatively affects economic growth in Nigeria while foreign direct investment has a positive relationship with economic growth. On the effect of capital ight on investment, empirical results from this study revealed that capital ight negatively affects investment and that external debt also negatively affects investment in Nigeria.
Foreign direct investment on the other hand has a positive relationship with investment in Nigeria.

Conclusion And Recommendations
This study examined the effect of capital ight on macroeconomic performance in Nigeria and found out that exchange rate is a positive determinant of capital ight while external debt in the rst lag, interest rate in the current period, reserves in the rst lag, foreign direct investment in the current period, current account balance in the current period and current account balance in the rst lag are negative determinants of capital ight in Nigeria. The study also found out that capital ight negatively affects economic growth and investment in Nigeria. This means that capital ight is not bene cial to the Nigerian economy as it slows down economic growth. Capital ight also affects investment which impedes economic growth and development.
It was recommended that a stable exchange rate policy should be adopted to avoid devaluation of the local currency which is a determinant of capital ight in Nigeria. Authorities should pursue policies that create favorable environment for both domestic and foreign investment while discouraging capital ight. Also, foreign investors can be offered attractive incentives in order to encourage investment in the country. External debt and foreign direct investment should be used for productive purposes such that capital ight as a result of in ow of funds from abroad is impossible.
External debts can also be reduced given the fact that external debt is a determinant of capital ight in Nigeria. There should be restrictions on external borrowing by all levels of governments, agencies and private bodies. In addition, Policy-makers as well as the relevant authorities should pay more attention to the issue of capital ight. This study revealed capital ight has a negative effect on economic growth and investment. This means as capital ight increases, the economy gets worse and investment is discouraged. Therefore, provisions should be made to discourage the movement of funds abroad which can be used to grow the economy and encourage investment. Residual Diagnostic Test Result for Model (2) Figure 3