DETERMINANTS OF ILLICIT FINANCIAL OUTFLOWS IN NIGERIA

Abstract

The persistence of illicit financial flows (IFFs) in Nigeria poses a significant challenge to fiscal stability, governance integrity, and long-term economic growth. Despite reforms, the scale of IFFs remains alarming, with Global Financial Integrity estimating losses of over $134 billion between 2003 and 2022. This study examined the macroeconomic and institutional determinants of IFFs in Nigeria, focusing on corruption, political risk, exchange rate, and external debt, while controlling for inflation and interest rates. Adopting a descriptive and correlational research design, the study utilised annual secondary data sourced from the Central Bank of Nigeria (CBN), Global Financial Integrity (GFI), Transparency International (TI), and the Polity IV Index, covering the period 1986 to 2023. The correlational design looks at the connections between key variables, including political risk, corruption, exchange rates, and external debt, whereas the descriptive design examines trends and patterns in IFFs. The analysis employed the Autoregressive Distributed Lag (ARDL) regression technique to capture both short- and long-run dynamics. The results show that corruption reduces IFFs in the short run (β = –1689.19, p < 0.01) but sustains them in the long run (β = –2298.09, p < 0.01), while political risk significantly increases IFFs (β = 66048.75, p < 0.01). Exchange rate depreciation exerts a negative short-run effect (β = –17400.38, p < 0.01), and external debt produces a substantial long-run adverse effect (β = –10762.76, p < 0.01). The study concludes that institutional weaknesses and macroeconomic instability jointly drive IFFs in Nigeria. Consequently, the study recommends stronger anti-corruption frameworks by completing the National Anti-Corruption Strategy (NACS) and improving interagency collaboration between the EFCC, ICPC, and NFIU, exchange rate stabilization, and debt management reforms, which should include transparent loan contracting, stringent parliamentary control over borrowing from outside sources, and improved political accountability as policy measures to curb IFFs and strengthen fiscal sustainability.