IMPACT OF CAPITAL FLIGHT AND EXCHANGE RATES ON DOMESTIC INVESTMENT IN NIGERIA

Abstract

The importance of capital flight and exchange rate on domestic investment has been realised by successive administrations in Nigeria. Yet, the continued occurrence of capital flight in Nigeria has aggravated the shortage of resources for development and indirectly led to a decline in domestic investment. Hence, the need to examine the impact of capital flight and exchange rates on domestic investment in Nigeria. Specifically, this study examined the effect of capital flight on domestic investment in Nigeria; evaluated the impact of exchange rates on domestic investment in Nigeria as well as examined the direction of causality between capital flight and domestic investment in Nigeria. In line with the objectives, autoregressive distributed lags (ARDL) model and the Pairwise Granger Causality Test were used to analyse the time series data collected from 1981 to 2016 from the Central Bank of Nigeria Statistics Bulletin. The study revealed that there is existence of a significant relationship between exchange rates and domestic investment in Nigeria at 5% significance level. Furthermore, the study revealed that capital flight is a significant determinant of domestic investment at 5% significance level. Finally, the study revealed that there exists a uni-direction causality between capital flight and domestic investment. The study concluded that capital flight and exchange rates have a negative impact on domestic investment in Nigeria. The study therefore, recommends that since exchange rates are known to affect domestic investment therefore the exchange rates should be managed in a way that it will be favorable to domestic investment in Nigeria