metadata: authors: 0: author: Ajayi,Simeon Ibidayo
count: Nigeria
docna: 0: docna: An economic analysis of capital flight from Nigeria
docty: Policy Research Working Paper
subtopic: Consumption,Fiscal & Monetary Policy,International Trade and Trade Rules,Trade and Services,Inflation,Macroeconomic Management
teratopic: Finance and Financial Sector Development
abstracts: cdata!: Unlike Latin America, there have been no
            detailed estimates of capital flight or its determinants in
            Africa. The author addresses this problem and, using several
            concepts, provides "bands" or a "range"
            for capital flight in Nigeria. A significant proportion of
            capital flight can be estimated from recorded data in the
            balance of payments and debt statistics - but these
            estimates are only as good as the data are reliable.
            Significant amounts of capital flight, relative to external
            debt, took place between 1970 and 1989. Trade-faking was an
            important vehicle: exports were under-invoiced to the tune
            of about US $8.1 billion and imports were over invoiced
            about US $6.0 billion. Econometric analysis shows that the
            culprit to be domestic macroeconomic policy - in the form of
            inflation, exchange rate misalignment, fiscal deficit, and
            the lack of opportunities for profitable domestic
            investments - combined with the relative attractiveness of
            foreign investments. Eliminating distortions in the economy
            could minimize substantially externally held foreign claims
            and minimize capital flight. Among things that need to be
            done: (a) ensure that the nation's currency is not
            overvalued; (b) establish an integrated, unified tariff
            structure to reduce the rewards for trade-faking; (c)
            establish fiscal discipline, to maintain macroeconomic
            stability and reduce inflation; (d) ensure a positive real
            rate of interest - high enough to attract funds but not so
            high as to stifle investment initiatives; (e) adopt a
            realistic exchange rate determined by market forces; and (f)
            foster attitudinal changes that contribute positively to
            honest government.
geo_reg_key: 1927320,517191
repnme: repnme: An economic analysis of capital flight from Nigeria
display_title: An economic analysis of capital
            flight from Nigeria
listing_relative_url: /research/1992/10/699573/economic-analysis-capital-flight-nigeria
topicv3: Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698,Trade in Services m1326928 780,Balance of Payments m1326965 441,Macroeconomic and Structural Policies
            m1327380 439
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: Africa
no_of_pages: 82
author_keys: 0: author_key: 645242
model_extractions: <!-- Start of picture text --> Policy Research<br>Country Operations<br>WPS 993<br><!-- End of picture text --> This paper-a product of the Office of the Director, Westem Africa Department-is part of a larger effort in the department to examine the issues of debt, macrostability, and resource flows in the region. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Ofelia Miranda, room J6-255, extension 34877 (October 1992, 78 pages).

part of a larger effort Unlike Latin America, there have been no detailed estimates of capital flight or its determinants in Africa. Ajayi addresses this problem and, using several concepts, provides "bands" or a "range" for capital flight in Nigeria. A significant proportion of capital flight can be estimated from recorded data in the balance of payments and debt statistics - but these estimates are only as good as the data are reliable.

Significant amounts of capital flight, relative **to** external debt, took place between 1970 and 1989. Trade-faking was an important vehicle: exports were underinvoiced to the tune of about US$8. i billion and imports were overinvoiced about US$6.0 billion.

Econometric analysis shows the culprit to be domestic macroeconomic policy - in the form of inflation, exchange rate misalignment, fiscal deficit, and the lack of opportunities for profitable domestic investments - combined with the relative attractiveness of foreign investments.

Eliminating distortions in the economy could minimize substantially extemally held foreign claims and minimize capital flight. Among things that need to be done:

* Ensure that the nation's currency is not overvalued.

* Establish an integrated, unified tariff structure to reduce the rewards for trade-faking.

* Establish fiscal discipline, to maintain macroeconomic stability and reduce inflation.

* Ensure a positive real rate of interesthigh enough to attract funds but not so high as to stifle investment initiatives.

* Adopt a realistic exchange rate determined by market forces.

* Foster attitudinal changes that contribute positively to honest govemment.

**The Policy Research Working PaperSeriesdissemiinates theridingsofworkunder way in theBank. Anrjectiveof the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent of ficial Bank policy.**

**Produced by the Policy Research Dissemination Center**
# AN ECONOMIC ANALYSIS OF CAPITAL

## FLIGHT FROM NIGERIA

### **S. MI AJAYI**

DEPARTMENT OF ECONOMICS **UNIVERSITY** OF IBADAN IBADAN3 **NIGERIA** I' This paper was compicted under the World Bank Visiting Research Fellow Progra.m. First, I am grateful to the staff of AF4DR and others who participated at the seminar at which the original draft of this paper was presented. Second, I thank those who participated at the seminar I also gave at the Macroeconomics and Growth Seminar sponsored by CECMG. I thank Miguel Kigucl for making that seminar possible. It is impossible to list the names of al the people who assisted in giving infonnation and data. Of special note however is my gratitude to the following for comments and assistance: Ajay Chhibber, Santiago Montenegro, Bob Warner, John Underwood, Ibrahim Elbadawi, Miguel Kiguel, 0. Adamolckun, A. Yeats, and F.L. Osunsade. The individual comments received as well as those at the seminars havc bcen useful in improving the quality of this paper.