Capital Flight and Exchange Rate Volatility in Nigeria: The Nexus

Abstract

This paper attempts to ascertain the relationship that exists between capital flight and exchange rate volatility in Nigeria. The study adopted an ex-post facto research design. The study employed the parametric statistical techniques of Ordinary Least Squares (OLS) since the data (secondary data) used is quantitative in nature. To capture the relationship between capital flight and exchange rate in Nigeria, the empirical model that accommodates the capital flight and exchange rate nexus was specified. The coefficient of capital flight was positively signed and statistically very highly significant at 1%. This implies that every unit increase in capital flight will lead to increase in exchange rate in Nigeria. This means that exchange rate is influenced by the volume of capital flight in Nigeria. The study recommends among others that a stable exchange rate regime should be established through a drastic reduction in capital flight and increase capital inflows in the form of foreign private investments.

Keywords: Capital flight, Exchange Rate, Hot Money Approach, Volatility, Trade Mis-invoicing, Balance of Payment.