The main objective of the paper is to investigate the implications of corruption on employment in Nigeria. To achieve this, a model of unemployment is built using corruption, economic growth and foreign direct investment as independent variables. Time series data covering the period of 1996 to 2021 was used. From literature, it is discovered that these two variables might be indirectly related through economic growth and FDI. The VAR model was done on the data to get out the indirect relationship. Findings of the work revealed that, corruption elicits negative positive impact on unemployment showing that employment level in the country declines as corruption permeates the economy. And that, other variables pass through corruption to unemployment. Consequently, it was recommended that any attempt of the government to boost employment in Nigeria could be tantamount to futility if the menace of corruption is not dealt with head-on.
This paper explores the means to promote Sustainable Development Goal (SDG) 8 (decent work and economic growth) in Nigeria drawing from the Human Resource Management Perspective. SDG 8 is focused on promoting inclusive and sustainable economic growth, full productive employment, and decent work for all. Economic growth refers to an increase in a country’s GDP; and decent work refers to adequate opportunities for work, remuneration, safety at work, and healthy working conditions. It connotes a job with better working conditions that promote workers’ competence, efficiency, and greater output. Society has lots of benefits when more people become productive and contribute to the economy, and Human Resource Management has some roles to play in bringing about this. This paper’s findings indicate that Human Resource Management can ensure decent work and economic growth through human resource procurement for inclusion and diversity, protection of workers’ rights, provision of safe and inclusive working environment, opportunities for training and development, and driving business initiatives hinged on the imperatives of decent work for economic growth. The paper concludes that a country with decent work opportunities will enjoy greater productivity, leading to economic growth. Therefore, the paper recommends that organizations should participate in achieving the Sustainable Development Goal (SDG) 8 relating to decent work and economic growth by fostering better Human Resource Management practices in the areas of human resource procurement, protection of workers’ rights, provision of a safe and inclusive working environment, training and development initiatives and business activities that drive worker commitment for attaining the SDG 8.
The debate over tax policy continues to dominate economic policy discussions in the media, academia, and civil society advocacy (Mcbride, 2012). This observation stems from the fact that taxes are not only the largest source of revenue for governments, states, or municipalities, but also a tool for enacting fiscal policy and influencing positive behavior change (Cobham & Jansk, 2018; Merriman & David, 2015). The tax system of a country has a significant impact on other macroeconomic indicators (Pjesky & Rex, 2006). There is a relationship between tax composition and the level of economic growth in both developed and developing economies (Shuai, Xiaobing & Christine 2013). Indeed, it has been argued that a country’s tax base and tax policy objectives have a very strong foundation on the level of economic growth (Mbanefoh, 2012). Similarly, the economic criteria used to evaluate a tax structure, as well as the relative importance of each tax source, change over time. During the colonial era and immediately following Nigeria’s political independence in 1960, for example, the sole goal of tax revenue was to raise revenue. Later, the emphasis shifted to infant industry protection and income redistribution goals. Many countries impose national taxes, and similar taxes may be imposed at the state or local levels.
Various tax structures have been used to raise revenue for the Nigerian state over the years. These structures, according to Akanbi (2018), include, but are not limited to, petroleum profit tax, corporate income tax, capital gains tax, stamp duty, and value added tax. While petroleum profit tax is levied on the income of companies engaged in petroleum operations, corporation tax is levied on the taxable income of a company for a specific period, usually one year. In particular, capital gains tax is a tax levied in Nigeria on gains or profits realized from the sale or exchange of capital assets, whereas stamp duty tax, which is governed by the Stamp Duties Act (SDA) of 1939, is charged as a flat rate or percentage of the transaction/instrument value, taking the nature of the instrument into consideration (Amah, 2021). Furthermore, according to Alexander, Keyi, and Alfa (2018), value added tax (VAT) is a consumption tax levied on all goods and services produced in or imported into the country. VAT, which is currently charged at the rate of 7.5% is payable by individuals, companies, and government agencies. In this study the researcher critically examines the effect of the aforementioned tax structures on economic growth in Nigeria taking into cognizance the various revenue contributions of these tax structures towards the growth and development of the Nigerian state.
Contrary to what has been suggested in the literature, taxation has a negative impact on economic growth. Imposing a carbon tax, for example, may have a negative impact on economic growth by raising fuel prices (Zhou, Shi, Li, & Yuan, 2011). This is similar to the situation in Nigeria, where multiple taxation systems and high tax rates have been dubbed the bane of the Nigerian tax system. Nigeria’s tax policies and taxation structure result in multiple taxation on businesses forcing the majority to lose money or fail (Azubike, 2009). Because taxation is a liability for businesses, it is advantageous for the business manager to pursue options that will reduce his/her tax liabilities, which will inevitably have a negative impact on the business’s financing, investment, and operations (Ebiringa, & Emeh, 2012; Fagbemi, Uadale & Noah 2010). Furthermore, raising tax rates has the same effect as raising the cost of goods (Reed, Robert & Cynthia 2004). There have been numerous studies on the effect of taxation on economic growth in Nigeria, with varying results. However, Amah (2021), Ahmad, Sial, and Ahmad, 2016; Dladla and Khobai, 2018 demonstrate that taxation has no significant relationship with economic growth. As a result of the uncertainty about how taxes affect economic growth, several empirical studies have been conducted, to which this study intends to contribute. However, the most distinctive aspect of this study is that, as previously observed, previous related studies in Nigeria focused only on a few components of tax structure in attempting to determine the effect of tax composition on economic growth. But this study has focused on a wider range of tax components to include petroleum profit tax, company income tax, capital gains tax, stamp duty tax, and value added tax aimed at evaluating their effects on economic growth of Nigeria.
REVIEW OF RELATED LITERATURE
Economic Growth
Economic growth, according to John (2022), is the process by which a nation’s wealth increases over time. He also stated that, while the term is frequently used in discussions of short-term economic performance, it generally refers to an increase in wealth over a long period of time in the context of economic theory. Economic growth, according to UK Essays (2018), is the increase in the level of potential output in the economy over time. The author went on to explain that there are three types of economic growth: actual growth, potential growth, and trend growth. Roser (2021) defines economic growth as an increase in the quantity and quality of economic goods and services produced by a society. Edeme (2018) stated that economic growth is the capacity to produce goods and services (gross domestic product), compared from one period of time to another.
Petroleum Profit Tax and Economic Growth
The Petroleum Profit Tax Act is the tax code that governs the taxation of companies involved in petroleum operations (Adedeji & Oboh, 2012). The Act defines petroleum operations as “obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental there to and sale of or any disposal of chargeable oil by or on behalf of the company”. As a result, the definition only applies to the upstream sector of the petroleum industry; thus, only companies in the upstream sector are included. The Petroleum Profit Tax Act, Cap P13 LFN 2004, governs petroleum profit taxes (PPT) (as amended). Companies that pay petroleum income tax are exempt from paying Companies Income Tax on the same income. For joint ventures in their first five years of operation, the rate is 65.75%. Joint ventures that have been in operation for more than five years, on the other hand, are subject to 85% of chargeable profit. Furthermore, under a production sharing contract, companies are liable for 50% of chargeable profit. The returns for each accounting period must be submitted no later than two months after the accounting period begins. Furthermore, final returns for each accounting period must be filed within five months of the expiration date. Equally important, failure to submit the returns as at when due attracts N10,000 for the first month and N2,000 for every day the failure continues.
According to Onyemaechi (2012), the impacts of the oil industry on the Nigerian economy can be seen in terms of revenue generation and sharing among Nigerian states, with a multiplier effect on infrastructure development. According to Onaolapo Aworemi and Ajala (2013), petroleum entails the extraction of oil, production, and distribution to refineries in order to ensure a satisfactory level of disposal to the general public.
The government must reframe and restructure the Nigerian economy by collecting profit taxes from the oil industry (Ojo, 2008). According to Adereti, Sanni, and Adesina (2011), petroleum profit tax was used to regulate the economy, necessitating a new study on tax performance in an economy with unstable oil supply. The revenue generation is the primary aim of government with a multiplier effect of providing social amenities to the citizens (Okoye, 2019). Adegbie and fakile (2011) researched on petroleum profit tax alongside with Nigerian economic while applying chi-square and multiple regressions’ analyses. The studies, Ojo (2008) and Adereti et. al. (2011) above discussed that petroleum profit tax ensured development in Nigeria while World Bank Group (2020) discussed that Nigeria recorded minimum revenue compared to its aggregate income with a negative relationship.
Company Income Tax and Economic Growth
According to Taiwo, Illori, and Emenike (2019), companies Income Tax (CIT) is a tax on the profits of incorporated entities in Nigeria that also includes the tax on the profits of non-resident companies doing business in Nigeria. The tax is paid by limited liability companies, including public limited liability companies, and is known as corporate tax. The Companies Income Tax Act (CITA) of 1979 established CIT, which derived from the Income Tax Management Act of 1961. It is one of the taxes administered and collected by the Federal Inland Revenue Service (‘FIRS’ or ‘the Service’) and has significantly contributed to the Service’s revenue profile. Income Tax (CIT) is governed by Companies Income Tax Act (CITA), Cap C21, LFN 2004 (as amended), with a rate of 30% of total profit of a company. Some profits are exempted from CIT provided they are not derived from trade or business activities carried out by the company e.g Cooperative Society.
According to Joseph and Omodero (2020), every company must pay provisional tax no later than three months after the start of each year of assessment, in an amount equal to the tax paid in the previous year of assessment. For newly incorporated companies, the due date for filing returns is within eighteen months of incorporation or no later than six months after the end of its accounting period, whichever is earlier. However, for existing businesses, the deadline for filing returns is six months after the end of the fiscal year. Companies that have been in operation for more than four years are subject to minimum tax, unless specifically exempted by the tax law. More so, Onoja and Ibrahim (2020) submitted that, Minimum Tax under CITA arises where: a company makes a loss; a company has no tax payable and Tax payable is less than minimum tax. In 2016, the revenue target for Companies Income Tax in Nigeria was N1.877 trillion representing approximately 40% of the total projected tax revenue of N4.957 trillion for that fiscal year (Akhor & Ekundayo, 2016).
Empirical Review
Ezekwesili and Ezejiofor (2022) investigated the impact of tax revenue on Nigeria’s economic growth. The specific goals are to determine the effect of tax revenue on Nigeria’s inflation rate and the effect of tax revenue on Nigeria’s interest rate. The data came from the Central Bank of Nigeria (CBN), the Statistical Bulletin, and the National Bureau of Statistics’ Annual Abstract of Statistics (NBS). With the help of E-view 9.0, regression analysis predicts the value of one variable based on the value of another variable and explains the effect of changes in the values of one variable on the values of the other variables. The findings conclude that tax revenue has no significant effect on Nigeria’s inflation and interest rates. From 1994 to 2018, Egolum and Celestine (2021) investigated the impact of Value Added Tax on Economic Development in Nigeria. They developed two hypotheses using a time series research design, and the data for their study came from the CBN statistical bulletin, the Federal Inland Revenue bulletin, and the Joint Tax Board bulletin for the study period. The Pearson coefficient of correlation and simple regression analysis were used to test the hypotheses they developed using E-Views 9.0 statistical software. Their findings revealed that, at a 5% significance level, Value Added Tax has a positive and statistically significant relationship with economic development (as measured by Gross Domestic Product and Total Government Revenue). Nweze, Ogbodo, and Ezejiofor (2021) investigate the effect of tax revenue on per capita income in Nigeria. This study made use of time series data and an ex-post facto research design. Secondary data were obtained from the Central Bank of Nigeria (CBN), the Statistical Bulletin, the Federal Inland Revenue Service (FIRS), the World Bank Statistical Bulletin, and the National Bureau of Statistics’ Annual Abstract of Statistics (NBS). The study variables were described using descriptive statistics, and the hypothesis was tested using Ordinary Least Squares (OLS) regression analysis. According to the study, tax revenue has a significant positive effect on Nigeria’s per capita income.
From 1998 to 2014, Ojong, Ogar, and Arikpo (2016) investigated the impact of tax revenue on the Nigerian economy. The study’s objectives were to investigate the relationship between petroleum profit tax and the Nigerian economy, the impact of corporate income tax on the Nigerian economy, and the effectiveness of non-oil revenue on the Nigerian economy. The data was obtained from the Central Bank Statistical Bulletin and extracted using the desk survey method. The relationship between dependent and independent variables was established using the ordinary least squares of multiple regression models. The findings revealed a significant relationship between petroleum profit tax and Nigerian economic growth. It demonstrated that there is a significant relationship between non-oil revenue and Nigerian economic growth. The study also discovered that there is no statistically significant relationship between corporate income tax and the growth of the Nigeria economy. Etale and Bingilar (2016) investigated the impact of corporate income tax and value-added tax on economic growth (as measured by GDP) in Nigeria. Secondary time series panel data for the period 2005 to 2014 were obtained from the Central Bank of Nigeria’s Statistical Bulletin (CBN). For data analysis, the study used the Ordinary Least Squares (OLS) technique based on the computer software Windows SPSS 20 version, where GDP, the dependent variable and proxy for economic growth, was regressed as a function of company income tax (CIT) and value-added tax (VAT), the independent variables. According to the findings of the study, both corporate income tax and value-added tax have a significant positive impact on economic growth. Appah and Ebiringa (2012) investigated the impact of Nigeria’s Petroleum Profit Tax on economic growth. From 1970 to 2010, data from the CBN and FIRS were collected and analyzed using a granger causality model. Economic growth and the Petroleum Profit Tax have a long-run equilibrium relationship, according to the findings. The Petroleum Profit Tax was also discovered to have a negative impact on Nigeria’s GDP. Omojumite and Iboma (2012) investigated the productivity of Nigeria’s tax system from 1970 to 2010. They developed ten models for the study (one of which tested the relationship between the Petroleum Profit Tax and economic growth) and used the Ordinary Least Square Method to estimate the data. To capture changes in the Nigerian macroeconomic environment, the data set was divided into three periods. The analysis revealed that, despite having positive elasticity coefficients, the elasticity of all tax systems, including the Petroleum Profit Tax, was less than one. In conclusion, regardless of the level of data aggregation, the Nigerian tax system is less fruitful. Ogbonna and Ebimobowei (2011) conducted a study on the impact of petroleum profit tax revenue on the economy of Nigeria for the period 1970 to 2010. The study showed that a strong correlation exists between petroleum profit tax revenue and GDP. They concluded that oil-based revenue if invested efficiently in the economy will to a large extent make material difference on GDP.
METHODOLOGY
Research Design
This study utilized longitudinal research design. The choice of the design is based on the idea that the method provides discovery on trends and pattern of change. This will be important in establishing the possible effect of tax composition revenue on economic growth over a time. The study employed time series data covering a period 1999 to 2020.
Source of Data
The relevant data will be collected from Central Bank of Nigeria Statistical Bulletin (various years), Central Bank of Nigeria Annual Report and Statement of Accounts, Bureau of National Statistics and Federal Inland Revenue Service (FIRS) reports of various years. Data involving Gross domestic product GDP and all the different tax composition for this study were retrieved from these various sources.
Model Specification
The econometric models of the study were modified from the studies by Ilaboya et al. (2017), Ogbeide (2017). The general econometric model for the study was specified thus;
LOGPPT = Natural Logarithm of Petroleum Profit Tax
LOGCIT = Natural Logarithm of Company Income Tax
∆ = First Difference Operator
μt = White-noise Disturbance Error Term
t = Time
i = Denotes the lag(s) being considered:
β0-β2 = Parameter Coefficients
ECT = Error Correction Term
Apriori expectation; β1, β2 > 0
Method of Data Analysis
The explanatory variables in this study consist of annual data on petroleum profit tax, company income tax, capital gain tax, stamp duty and value added tax with the dependent variable being growth in Gross Domestic Product (GDP) as a proxy for economic growth. Autoregressive Distributive Lag (ARDL) regression analysis technique developed by Pesaran, Schuermann, and Weiner (2004) is used in this study. This analysis technique calculates the impact and uses a limit testing strategy to determine whether the variables in the model have a long-term relationship. The dynamics of both short-run and long-run parameters, as well as the speed of adjustment when there is a shock, are estimated simultaneously using this analysis technique. Since robust lag lengths are critical to this strategy, it avoids the problem of over-parameterization. This was analyzed with STATA 16.
Decision rule
Accept the null hypothesis if the P Value is greater than 0.05 and then the alternate hypothesis will be rejected.
DATA ANALYSIS AND RESULT
Table 1 Unit Root Test Result
H0: There is no Stationarity
At Levels-I(0)
Interpolated Dickey-Fuller Critical Values
Variables
DF t-statistics
MacKinnon p-value
1%
5%
Decision
GDP Growth
-2.060
0.2608
-3.750
-3.000
Accept H0
Petroleum Profit Tax
-0.835
0.8087
-3.750
-3.000
Accept H0
Company Income Tax.
-1.227
0.6621
-3.750
-3.000
Accept H0
At 1st difference – I(1)
GDP Growth
-3.154
0.0228
-3.750
-3.000
Reject H0
Petroleum Profit Tax
-3.154
0.0228
-3.750
-3.000
Reject H0
Company Income Tax.
-3.310
0.0144
-3.750
-3.000
Reject H0
Table: 1: Dickey Fuller (DF) Test for Stationarity
Source: Author’s compilation 2022 from STATA 16 Output (Appendix A)
In testing for time series properties of the variables in the model, we performed a univariate regression analysis using conventional Dickey Fuller Unit Root Tests in order to ascertain whether each of these variables has unit root (non-stationary) or does not have unit root (stationary series). Following the summary results of the unit root tests presented in Table 1 above, it is clearly shown that the variables considered are a mixture of stationary at levels {I(0)} and non-stationary at difference {I(1)} series. Therefore, given this scenario, there is need to test for the presence of long-run relationship among the variables in the model, which the ARDL regression technique is capable of capturing.
Error Correction Model (ECM)
Unlike the cointegration procedure developed by Johansen and Juselius (1990), the Autoregressive Distributed Lag (ARDL) method aids in the identification of the cointegrating vector (s). The inclusion of unrestricted lag of the regressors in a regression function is simply referred to as the Distributed lag Model. In other words, each of the underlying variables is represented by a single long run relationship equation. If only one cointegrating vector (i.e. the underlying equation) is identified, the cointegrating vector’s ARDL model is reparametrized into ECM. The reparametrized result provides both short-run dynamics (traditional ARDL) and long-run relationships of variables in a single model. The re-parametrization is possible because the ARDL is a dynamic single model equation and of the same form with the ECM. In testing for the long-run contribution of each of the explanatory variables on the dependent variable of concern, long-run estimates of the relationship being analyzed are presented in the table below:
Variables
LOGPPT
LOGCIT
Gross Domestic Product Growth Model
Long Run Effect
Coefficient
10.659
-0.603
t_ Statistics
-2.65
(-0.49)
Probability_t
{0.021)
{0.630)
No. of Obs = 20
Prob. F statistics = 0.0000
R2 = 0.8833
Note: t -statistics and its associated probabilities are represented in () and {}
Source: Author’s compilation 2022 from STATA 16 Output (Appendix A)
Autocorrelation
If the assumption of independent errors of the classical linear regression model is violated, in particular if the error terms are correlated across consecutive observations, then the problem of autocorrelation arises. The main problem that arises is that the standard errors of the estimated coefficients are higher, which in turn means that the confidence interval for the estimates are wider. This implies that the researcher is more likely to find an insignificant relationship even when there is a statistically significant relationship between the variables. There are several tests that one can use to detect the presence of auto correlation, however, we employed the Durbin Watson test for autocorrelation. The Durbin-Watson test statistic tests the null hypothesis that the residuals from an ordinary least-squares regression are not auto correlated against the alternative that the residuals follow an AR (1) process. The Durbin-Watson statistic ranges in value from 0 to 4. A value near 2 indicates non-autocorrelation; a value toward 0 indicates positive autocorrelation; a value toward 4 indicates negative autocorrelation. The results obtain from the test reveal a value of 1.79. This reveals the absence of autocorrelation as the value is closer to 2.
Test of Hypotheses
We specifically interpret the ARDL estimator as recommended by Pesaran, Shin, and Smith (2001). The Fisher Statistics (15.52) and corresponding probability value (0.000) show a 1% statistically significant level, indicating that the entire model is fit and can be used for interpretation and policy recommendation. Furthermore, an R2 value of 0.8833 indicates that all of the independent variables in the model explain approximately 88% of the variation in the dependent variable. This also means that the error term explains only about 22% of the variation in the dependent variables.
Hypotheses 1: Petroleum profit tax has no significant effect on economic growth of Nigeria.
The ARDL model presented above reveal the result of the variable of petroleum profit tax (LOGPPT) as follows: for the long run effect (Coef. = 10.659, t = 2.65 and P -value = 0.021); and no short run effect. Following the results above, it is revealed that the effect of petroleum profit tax on economic growth is positive and statistically significant in the long run at 5% level. We also find from the results that there is no short run effect of petroleum profit tax on economic growth. This finding is inconsistent with the stated null hypothesis which leads to its rejection. Hence, petroleum profit tax has a significant positive effect on economic growth of Nigeria during the period under study.
Hypotheses 2: Company income tax has no significant effect on economic growth of Nigeria.
The ARDL result presented above reveal the result of the variable of company income tax (LOGCIT) as follows: for the long run effect (Coef. = -0.603, t = -0.49 and P -value = 0.630); and no short run effect. According to the findings, the effect of corporate income tax on economic growth is negative and statistically insignificant, whether at the 5% or 1% level. The results also show that there is no short-run effect of corporate income tax on economic growth. This finding is consistent with the stated null hypothesis, so it is accepted. As a result, during the study period, corporate income tax had no significant effect on Nigeria’s economic growth.
The findings of this study differ from mainstream traditional economic theory, which promotes the theory of high-income tax rates as necessary conditions for long-term economic growth (Simon & Adudu, 2015). According to this study, lower corporate income taxes can influence economic growth, which is consistent with endogenous growth models. As a result, higher tax rates discourage saving, resulting in stagnant development. As a result of this research, it is possible to conclude that while higher petroleum profit tax revenue promotes economic growth, higher corporate income tax revenue surprisingly stalls economic growth in Nigeria during the period under consideration.
Recommendations
Based on the findings of this study, it is strongly recommended that:
i. Given the dwindling revenue from petroleum-related sources, the government pursue a strategic pursuit of broadening the economy in order to boost economic growth and development.
ii. The Federal Inland Revenue Service (FIRS), which is responsible for administering taxes owed to the federal government of Nigeria, should completely reorganize the tax administrative machineries in order to close tax evasion and avoidance loopholes. This measure will help to improve the performance of corporate income tax administration in Nigeria.
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The study examined the effect of capital flight on economic growth in Nigeria and the study proxies capital flight using net foreign investment and gross domestic product. These methodologies are superior to the OLS for many reasons. The study employed a descriptive and time series research design, which is a very important in determining the relationship between time-series variables. The population of the study consist of all data on capital flight and economic growth from Central Bank of Nigeria Statistical Bulletin. For the purpose of the research, a sample size from 1981 to 2019 is selected from the CBN Statistical Bulletin in order to determine the relationship between the variables. The Descriptive Statistics, Correlation Matrix and Fully Modified Least Squares regression technique were adopted to analyse the relationship between the variables. The results reveal that the effect of NFI on RGDP is negative and across all the estimations and significant in DOLs at 5% and FMOLS at 10%. Based on the findings of the study, the recommendation is to keep an eye on net foreign investments, make sure that more investments are brought into Nigeria, and make sure that these channels for foreign investment are not used to transfer capital to other countries.
Keywords: Capital flight, Net foreign investment and economic growth
INTRODUCTION
Through Direct Portfolio Investment (DPI) or Foreign Direct Investment (FDI), successive Nigerian governments have continued to advocate for capital influxes as a means of boosting economic growth. This is based on the requirement of obtaining sufficient funding to supplement the limited current financial position with financial growth. According to Murphy (2004), capital flight is the movement of money and investments outside of a country to a location where individuals believe the assets will be safe for their use, with the intention of concealing the capital from authorities. It is viewed as the massive transfer of currency from one nation to another, which represents the outflow of financial resources.
According to England, Oputa, Ogunleye, & Omotosho (2007), capital flight includes all illegal flows that are designed to disappear from records in the country of origin as well as earnings on the stock of illegal capital movement outside of a country that typically do not return to the country of origin as in the case of Nigeria. When economic fundamentals are deemed unsuitable for investment within the domestic economy, economic agents divert their capital away from domestic economies in order to avoid extremely high losses on their domestic assets. According to research, investors will move their capital away from nations with high sovereign risk and uncertainty in order to avoid investing in economic climates that are uncertain.
According to Onwioduokit (2007), capital flight, whether normal or abnormal, has a negative impact on the economy of the source or domestic nation. Domestic investment is significantly and negatively impacted by capital flight. According to World Bank (1985), the implication is that the movement of capital abroad leaves little or no resources for financing domestic investment. It is generally acknowledged that the African continent faces a significant challenge due to a lack of funds to finance economic development. Hence uplifting consistent activity and inflow of unfamiliar capital by the method of unfamiliar speculation can’t be over stressed to connect the current asset hole in the underdeveloped nations. If it were possible, the economic burden of capital flight would be lifted, leaving more resources available for poverty alleviation. According to Orji, Ogbuabor, Kama, and Anthony-Orji (2020), capital flight has a negative impact on economic growth. Wujung and Mbella (2016) likewise tracked down a negative huge connection between capital flight and economy development; Lawal, Kazi, Adeoti, Osuma, Akinmulegun, and Ilo (2017), who discovered a negative impact between the variables, also supported this. Makwe and Oboro (2019) discovered a strong connection; Bredino, Fiderikumo, and Adesuji (2018) discovered a negative effect. According to Adedayo and Ayodele (2016), the variables have a significant positive effect. This suggests that the Nigerian economy benefits from an increase in the exchange rate as a result of the increase in capital flight into the economy. This study aims to determine the effects of capital flight—foreign direct investment, interest rates, and foreign reserves—on economic expansion as a result of the preceding. The research critically examines the effect of capital flight on economic growth in Nigerian, using net foreign investments and Gross Domestic Product in Nigeria.
LITERATURE REVIEW
Capital Flight
Capital flight does not generally have a defined definition; However, its activities can be traced all the way back to the 17th century. Because there are many different definitions of capital flight, calculating it will produce different results. Because the term has been used interchangeably between developed and developing nations, the lack of a widely accepted definition of capital flight has resulted in a controversy. As a result, some schools of thought classify capital outflows from developed nations as foreign direct investment, whereas residents of emerging nations classify the same activity as capital flight (Ajayi, 2003). However, it is important to emphasize that the purpose for which an inflow or outflow has been used is what makes the difference. The assertion that foreign investors from advanced nations are swayed by better opportunities elsewhere and that investors from emerging nations are presumed to be evading the perceived high risk associated with investments, which is a characteristic of some emerging nations, is the foundation of the aforementioned dichotomy. It is a common belief that all investors, regardless of whether they are from a developed or developing nation, are rational and will base their decisions on the relative returns and risks associated with investing.
According to Schneider (2013), capital flight is the portion of resident capital outflow that is driven by political and economic uncertainty. Mahon (1996) argues in his own contribution that capital flight is a means of safeguarding savings from the depredations of corrupt politicians. According to Otene (2010), capital flight is the movement of large sums of money between nations in order to escape political or economic turmoil or seek higher returns. Helleiner (2005) defines capital flight as “an outflow of capital that is not part of normal commercial transactions” from a nation with a relatively low capital stockpile. According to Chipalkatti and Rishi (2001), capital flight is defined as any private capital outflows that result in the acquisition of foreign assets by a nation’s citizens. The motivations of capital holders form the basis of this definition. It assumes that an individual does not have complete control over capital, but rather that it is subject to intricate and adaptable social control. The behavior of a risk-averse individual who diversifies their wealth to maximize returns is directly linked to capital flight. As part of portfolio diversification, this informs the decision to hold assets overseas (Lensink, Hermes, & Murinde, 1998).
This decision is influenced by the amount of wealth, risk and uncertainty, differences in return rates between domestic and foreign asset holdings, and other factors. Macroeconomic instability, political instability, capital stock, and real interest rate differentials, which occur when aggregate domestic demand exceeds aggregate domestic supply structurally, influence individual portfolio diversification decisions. Capital flight, as defined by Ramachanran (2006), refers to the exodus of a nation’s wealth, savings, and financial and capital assets. A country’s macroeconomic instability can manifest itself in a variety of ways, including the following: Current account deficits and budget deficits rise, exchange rate overvaluation occurs, and inflation rises. Expectations of tax-like distortions like exchange rate devaluation rise as a result of macroeconomic instability.
Nigeria Economy
The overall economic activity in Nigeria has experienced crises that have had devastating effects on global commodity prices as a result of the global economic recession. These crises have presented the economy of Nigeria with a number of obstacles. This subsequently created structural imbalances occasioned by the collapse of oil prices which adversely affected the Nation’s revenue (Obansa, Okoroafor, Aluko, & Eze, 2010).
Every attempt by Nigerian policymakers to contain these waves of external shocks has been accompanied by the implementation of one economic reform or another. The Structural Adjustment Program (SAP) was launched by the Nigerian government by the middle of 1986.The SAP’s goal was to resolve the crises and get the economy moving in the right direction. There were a number of different kinds of corrective actions taken, including financial sector reform policies. The National Economic Empowerment and Development Strategy (NEEDS), which was launched in 2004, is another policy response that has been used in the last ten years with a similar goal (Obansa, Okoroafor, Aluko, & Eze, 2010). This all-encompassing policy aims to reduce unemployment, particularly among young people, and the economy’s ever-increasing cost of living. Currently, the slogan for the economic development blueprint is “vision 20:20” (Eze; 2013). Policymakers and development partners have focused primarily on macroeconomic policy and economic growth in relation to interest rates, exchange rates, and inflation rates. Despite the significant progress made during the 1980s’ economic reforms, particularly in the financial system, there were still numerous unresolved economic issues; In particular, the interest rate has remained extremely high, which has had devastating effects on borrowing costs and investment costs in Nigeria. This has discouraged foreign investment (Hakkio, 2000; Jelilov, 2016).
Foreign Direct Investment and Economy Growth
According to Farrell (2008), a company’s use of technology, capital, management, and entrepreneurial skills to operate and provide goods and services in a foreign market is referred to as “foreign direct investment.” Nigeria is the third economy in Africa to welcome FDI, following Ethiopia and Egypt. The United States, the United Kingdom, China, the Netherlands, and France are among the nations that invest in Nigeria (UNCTAD (2018). Nigeria’s FDI flows in 2017 decreased by 21% to reach 3.5 billion USD. This could be due to political instability, widespread corruption, a lack of transparency, or poor infrastructure. Foreign direct investments have a negative impact on growth in the primary sector, a positive impact in manufacturing, and an ambiguous impact in the service sector. Using the Error Correction Model, Akinlo (2004) investigated how foreign direct investment affected Nigeria’s economic growth between 1970 and 2001. According to the findings, financial development had a significant negative effect on growth, possibly as a result of the high level of capital flight it generates. Private capital and foreign capital had little effect on economic growth and were not statistically significant.
Using multiple regression models, Onu (2012) investigated the effect of FDI on Nigeria’s economic growth between 1986 and 2007. Even though its contribution to GDP was very low during the time period under review, the analysis revealed that FDI has the potential to benefit the economy. Abbes, Guelli, Seghir, and Zakarya (2014) examined the FDI-economic growth causal interactions: a panel co-integration and Granger causality test case study of 65 nations. The panel co-integration revealed a disparity result during the study period, while the results demonstrate a unidirectional causality between foreign direct investment and gross domestic product. Using the ordinary least squares regression method, Adeleke, Olowe, and Fasesin (2014) investigated the impact of foreign direct investment on Nigeria’s economic growth from 1999 to 2013.The findings showed that Nigeria’s economic growth is positively impacted by inflows of foreign direct investment, which is statistically significant. John (2016) also used a multiple regression approach to examine the impact of foreign direct investment on Nigeria’s economic growth from 1981 to 2015. According to the study, foreign direct investment has a positive and significant impact on economic growth as measured by gross domestic product in Nigeria. Additionally, it was discovered that the exchange rate has a positive but not significant impact on GDP.
Empirical Review
Orji, Ogbuabor, Kama, and Anthony-Orji (2020) looked into how capital flight affected Nigeria’s economic growth. Data from the CBN statistical bulletin covering the years 1981 to 2017 were used in the analysis. The study used the Autoregressive Distributed Lag (ARDL) bounds test method. According to the study, both short-term and long-term economic growth are significantly hampered by capital flight. Money supply, credit to the private sector, and domestic investment are additional variables that have been found to have a significant impact on economic growth. The goal of the study by Anetor (2019) was to look at the macroeconomic factors that caused capital flight from Sub-Saharan African (SSA) countries between 1981 and 2015.The autoregressive distributed lag (ARDL) model was used in conjunction with secondary data from the World Bank Development Indicators (WDI) to identify the macroeconomic factors that influence capital flight from the SSA region. Economic expansion was found to have a significant negative relationship with capital flight in both the long run and the short run, according to the study’s findings. Between 1990 and 2017, Makwe and Oboro (2019) looked at how capital flight affected Nigeria’s economic growth. Cointegration analysis was used to analyze the data for both the short run and the long run, and ADF tests were used to test for the time series’ stationarity. Time series data covering these study periods were used. The ordinary least square (OLS) econometrics approach was utilized by the researchers for the purpose of data analysis. The results of the T-test showed that the proxies of capital flight and the gross domestic product, which is a proxy for economic growth, had a strong relationship. The work by Adedayo and Ayodele (2016) provides an empirical analysis of the impact that capital flight has on the economy of Nigeria. Secondary data from the National Bureau of Statistics and the Central Bank of Nigeria’s Statistical Bulletin of various issues were used in the study. The sample period from 1980 to 2014 is the subject of the empirical measurement. A Standard Least Square (OLS), Increased Dickey-Fuller unit root test and Co-mix test were embraced to do a broad examination of the embraced factors which incorporate GDP, Capital Flight and Swapping scale. The findings demonstrated that the variables have a significant positive influence. This suggests that, during the time period under consideration, the Nigerian economy will benefit from an increase in the exchange rate as a result of an increase in capital flight into the economy. Bredino, Fiderikumo, and Adesuji (2018) investigated how capital flight affected Nigeria’s economic expansion. Predicting the impact of capital flight on economic expansion has not been very successful using traditional methods. The model assessed to cover the period 1980 – 2012 was dissected utilizing joined worldwide strategy, Fake Brain Organization (ANN) as a prescient procedure and old style methods like Standard Least Square (OLS) and co-incorporation/mistake rectification techniques. According to the findings of the study, capital flight has a negative effect on GDP, while exchange rate has a positive effect on GDP, which is in line with expectations. The study by Obidike, Uma, Odionye, and Ogwuru (2015) looked at how capital flight affected Nigeria’s economic growth. It was decided to use the Autoregressive Distributed Lagged model (ARDL). Capital flight has a negative and significant impact on economic growth, as the Auto Regressive Distributed Lagged (ARDL) model revealed. The model’s parameters were found to be stable over time in the CUSUM and CUSUMSQ tests. Between 1980 and 2012, Nwakoby, Ajike, and Ezejiofor (2017) looked at how Nigerian government financial incentives affected small and medium-sized businesses (SMEs) and economic expansion between 1999 and 2015.The significant impact of SMEs’ output on the country’s economic growth was determined using straightforward regression analysis. Gross Domestic Product and loans to small and medium-sized businesses were the two variables used. According to the study, the output of SMEs in Nigeria and the expansion of the economy are significantly influenced by government spending, loans, and other credit options. Olawale and Ifedayo (2015) investigate the effects of capital flight on Nigeria’s economic expansion. Co-integration, Ordinary Least Square (OLS), and Error Correction Mechanism (ECM) were the primary estimation methods utilized in the study. During the study year, findings showed that capital flight, foreign reserve, external debt, foreign direct investment, and current account balance all cointegrate with GDP in Nigeria. Additionally, it was discovered that the economy was adversely affected by capital flight.
METHODOLOGY
The study employed a descriptive and time series research design, which is a very important in determining the relationship between time-series variables.
The population of the study consist of all data on capital flight and economic growth from inception to the 2019 period in the Central Bank of Nigeria Statistical Bulletin. For the purpose of the research, a sample size from 1981 to 2019 is selected from the CBN Statistical Bulletin in order to determine the relationship between the variables. Data are quarterly data from 1981 to 2019 from Central Bank of Nigeria Statistical Bulletin (various issues).
The data were selected from the CBN Statistical Bulletin 2019 and the National Bureau of Statistics 2019.
Method of Data Analysis
The Descriptive Statistics, Correlation Matrix and Fully Modified Least Squares regression technique were adopted to analyse the relationship between the variables. Preliminary tests to know the normality and stationarity of the data are conducted through Jarque- Bera, Skewness, Kurtosis tests, and the unit root test. The test for the Jarque-Bera, Skewness and Kurtosis tests is to find out whether that the data are normal. This is because it includes macroeconomic variables that determine the economic growth in Nigeria.
Model Specification
In order to achieve the broad objective of this study, the model of John (2016) was adapted.
In his study of the effect of foreign direct investment on economic growth in Nigeria, the model was specified as:
NEG = CF …………………………………………………….….. i
Where
NEG = Nigeria Economy Growth
CF = Capital Flight
NEG is measured by RGDP and CF is measured by NFI,
Further, equation i is expanded below to capture the objectives of the study;
GDP = f (NFI, EDS, ER, CAB) …………………………….. ii
The econometric form of the functional model is specified as:
GDP = μ0 + μ1NFI + εt
Where
GDP = Gross Domestic Product
NFI = Net foreign investments
μ1 = Shift Parameters ε = error term
t = time series
ANALYSIS OF RESULT
Table 1. Descriptive Statistics
GDP
NFI
Mean
34690.67
-8918.853
Maximum
71387.83
19793.32
Minimum
13779.26
-99332.80
Std. Dev.
20237.78
23028.95
Skewness
0.673787
-2.231932
Kurtosis
1.880848
8.520117
Jarque-Bera
4.986242
81.89638
Probability
0.082652
0.000000
Observations
39
39
Source: Researcher’s compilation (2021). (GDP = Gross Domestic Product; NFI = Net foreign investments; EDS = External debt servicing; ER = External reserves; CAB = Current account balance)
The mean for GDP stood a 34690.67bn with a standard deviation of 20237.78 and maximum and minimum values of 71387.83bn and 13779.26bn. The standard deviation is large which suggest huge year on year fluctuations in GDP and the variable appears to be positively skewed (0.673). The p-value for the Jacque-bera statistics stood at 0.083 which indicates that the series is normally distributed and the presence outliers is unlikely. The mean for NFI stood at -8918.853bn with a standard deviation of 23028.95. The maximum and minimum values stood at 19793.32 and -99332.8 respectively and negatively skewed (-2.23). The p-value for the Jacque-bera statistics stood at0.065 which indicates that the series is normally distributed and the presence outliers is unlikely.
Table 2: Pearson Correlation
Probability
GDP
NFI
RGDP
1
Prob.
(0.6332)
NFI
-0.10467
1
Prob.
(0.5260)
Source: Researchers compilation (2021).
The Pearson correlation results show the relationship between the dependent and independent variables as can be seen from the results, shows that RGDP is negatively correlated with NFI (r=-0.10467) though not significant at 5% (p=0.5260). The inter-correlations between the explanatory variables are quite low and hence there are no multicollinearity threats which may bias the results.
Test of Hypotheses
H01: There is no significant relationship between net foreign investments and the growth of the Nigerian economy
Table 3: Co-integrating Regression
Variable
Canonical Cointegration regression (CCR)
Dynamic Least Squares (DOLS)
Fully-Modified OLS (FMOLS)
C
5537.481 (3084.7) {0.0821}
5164.172 (3066.93) {0.10955}
5756.477 (3194.69) {0.0810}
NFI
-0.1311 (0.07852) {0.1046}
-0.2413 (0.0940) {0.0194}
-0.12791 (0.0641) {0.0547}
@Trend
1099.194 (288.086) {0.0006}
1102.772 (357.003) {0.0063}
1060.65 (305.398) {0.0015}
R2
-2.815
0.977
0.922
R2 Adjusted
-15.394
0.956
0.910
Source: Researchers compilation (2021).
The Cointegrating equation is estimated using recently developed econometric methodologies, namely: fully modified ordinary least squares (FMOLS) of Phillips and Hansen (1990), dynamic ordinary least squares (DOLS) technique of Stock and Watson (1993) and Conical Cointegration Regression (CCR) of Park (1992). These methodologies provide a check for the robustness of results and have the ability to produce reliable estimates in small sample sizes. CCR, DOLS and FMOLS are superior to the OLS for many reasons so let me give you the key ones: (1) OLS estimates are super- consistent, but the t-statistic gotten without stationary 0r I(0) terms are only approximately normal. Even though, OLS is super-consistent, in the presence of “a large finite sample bias” convergence of OLS can be low in finite samples (2) OLS estimates may suffer from serial correlation, heteroskedasticity since the omitted dynamics are captured by the residual so that inference using the normal tables will not be valid -even asymptotically. Therefore, “t” statistics for the estimates OLS estimates are useless (3) DOLS & FMOLS take care endogeneity by adding the leads & lags (DOLS). In addition, white heteroskedastic standard errors are used. FMOLS does the same using a nonparametric approach.
The effect of NFI on RGDP is negative and across all the estimations and significant in DOLs at 5% and FMOLS at 10%. Hence; CCR (-0.1311, p=0.1046), DOLS (-0.2413, p=0.0194) and FMOLS (-0.1279, p=0.0547). This implies that increases in NFI have a significant negative impact on growth. The effect of EDS on RGDP is positive and across all the estimations and significant at 5%; CCR (0.569, p=0.0019), DOLS (0.745, p=0.0016) and FMOLS (0.59122, p=0.00177). This implies increases in external reserves as a positive and significant impact on growth. The finding is in line with theoretical expectations as reserves constitute an economic savings that can be used when necessary to stimulate the economy. Reserves are also an indication of the ability of the control to estimate its debt cover and hence can determine the riskiness of debt growth to economic stability.
The effect of NFI on RGDP is negative and across all the estimations and significant in DOLs at 5% and FMOLS at 10%. Hence; CCR (-0.1311, p=0.1046), DOLS (-0.2413, p=0.0194) and FMOLS (-0.1279, p=0.0547). This implies that increases in NFI have a significant negative impact on growth. Hence the null hypothesis that there is no significant relationship between net foreign investments and the growth of the Nigerian economy is rejected at 5%.
CONCLUSION AND RECOMMENDATION
The study examined the impact of capital flight on economic growth in Nigeria and the study proxies capital flight using net foreign investment. The Cointegrating equation is estimated using recently developed econometric methodologies, namely: fully modified ordinary least squares (FMOLS) of Phillips and Hansen (1990), dynamic ordinary least squares (DOLS) technique of Stock and Watson (1993) and Conical Cointegration Regression (CCR) of Park (1992). These methodologies are superior to the OLS for many reasons. The results reveal that the effect of NFI on RGDP is negative and across all the estimations and significant in DOLs at 5% and FMOLS at 10%. Hence; CCR (-0.1311, p=0.1046), DOLS (-0.2413, p=0.0194) and FMOLS (-0.1279, p=0.0547).
This implies that increases in NFI have a significant negative impact on growth. Based on the findings of the study, the recommendation is to keep an eye on net foreign investments, make sure that more investments are brought into Nigeria, and make sure that these channels for foreign investment are not used to transfer capital to other countries.
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This study examined the effect of external reserves on economic growth in Nigeria. The study employed a descriptive and time series research design, which is very important in determining the relationship between time-series variables. Data were on capital flight and economic growth from inception to the 2020 period in the Central Bank of Nigeria Statistical Bulletin. The Descriptive Statistics and Least Squares regression technique were adopted to analyze the variables. The results show that external reserve has a negative and insignificant effect on gross domestic product. It has the expected theoretical sign as debt servicing acts as a drag on economic growth because it diverts the availability of public funds for investments purposes to payments of debt. In light of the study’s findings, the study also recommended that reserves be encouraged at this time because they are important for macroeconomic stability and must be addressed in order to improve Nigeria’s economic growth.
As politicians, corporations, and foreign investors massively move funds out of the country, the Nigerian economy is losing a lot of money. According to a survey of public payments made by the Central Bank of Nigeria (CBN), $22.1 billion left the country over the course of five weeks, or an average of $4.5 billion per week. Foreign exchange outflows increased to $5.35 billion for the week ending November 30, 2014, compared to approximately $3.083 billion for the week ending July 31, 2014 (CBN Statistical Bulletin 2014). The naira exchange rate, which had been stable prior to the 2015 elections, is said to have fallen as a result of capital flight. Although the Central Bank of Nigeria (CBN) has said that currency speculators who buy and hold currency to sell at a later date at a higher rate in order to make money are to blame for the collapse of the naira, Nigerians themselves are to blame for the movement of funds out of the country by purchasing dollars with their naira and moving them offshore. Nigeria’s foreign reserves are said to have been depleted as a result of capital flight, weakening the naira.
At $5.4 billion in 1999, Nigeria’s foreign exchange reserves increased dramatically to $51.3 billion at the end of 2007 and $53.0 billion in 2008.However, the reserves fell further from $38.138 billion at the end of April 2014 to $33.04 billion in February 2015 due to the 2008 crash in the international price of crude oil and the global financial crisis that followed (World Bank, 2015).
With these brief records, one can then speculate on the actual quantity that traveled from Nigeria’s shores to developed nations via legal and illegal routes. Since Nigeria’s economy relies more heavily on foreign direct investment (FDI) than on domestic investment, the prevalence of capital flight is even more concerning. Researchers are now looking into the effects of capital flight on the domestic economy as a result of this fact. Even though there is a lot of literature on the ongoing debate about the connection between capital flight and domestic investment, little has been written about doing an analysis of a specific country like Nigeria.
The term “foreign direct investment” (FDI) refers to investments made by individuals or corporations in a nation other than the investor’s home nation for the purpose of starting a business or purchasing an asset there. According to John (2016), foreign direct investment is viewed as the transfer of capital and technology from a developed or developing nation to another. According to Farrel (2008), “foreign direct investment” refers to a company’s use of technology, capital, management, and entrepreneurial skills to operate in a foreign market and provide goods and services. Nigeria is the third economy in Africa to welcome FDI, following Ethiopia and Egypt. The United States, the United Kingdom, China, the Netherlands, and France are among the nations that invest in Nigeria. According to UNCTAD (2018), political instability, widespread corruption, a lack of transparency, and subpar infrastructure may have contributed to a 21 percent decline in Nigeria’s FDI flows in 2017. However, this study tends to re-examine the impact of external reserves on economic growth in Nigeria.
LITERATURE REVIEW
The process of maximizing a nation’s external resources to meet its economic needs is known as foreign reserves management. The management of foreign reserves is the sole responsibility of the Central Bank in Nigeria. Monetary gold, a reserve position at the International Monetary Fund (IMF), the holding of special drawing rights (SDRs), and foreign exchange, which are convertible currencies of other nations, are all components of foreign reserves (CBN, 1997).According to Aluko (2007), the Nigerian economy has recently benefited significantly from external reserves. It has increased the amount of money in circulation, which has had a positive effect on economic activity because more money could be invested in productive endeavors. In turn, employment was created, output increased, and consumption increased. The people’s standard of living significantly improved as a result of their multiplier effects on the economy and effective financial resource management. In addition, there was an increase in the manufacturing sector’s contribution to GDP, which had been decreasing. Obaseki (2007) made the observation in a related study that the applications of external reserves cannot be overstated. The majority of external obligations must be settled in foreign currency. As a result, reserves grow in importance as a means of financing external imbalances. Intervention in the foreign exchange market, protection against unanticipated volatility, and preservation of natural wealth for future generations are additional uses for external reserves.
The government, according to Benigno and Fornaro (2012), induces a real exchange rate depreciation and a reallocation of production toward the tradable sector, which boosts growth, by accumulating foreign reserves. Central banks must switch from holding their external reserves in the conventional gold reserve assets to a basket of foreign currencies and securities in order to implement currency diversification. The majority of nations’ monetary authorities are influenced by historical, economic, and political fundamentals when determining the basket of foreign currencies to hold. Although Central Banks’ investment in foreign currencies and securities is a general economic objective of currency composition of reserves to maximize returns on financial resources, the monetary authorities frequently minimize profitability and focus on their liquidity requirements, particularly when they are experiencing balance of payments disequilibrium (Nwafor, 2017). At the time the Central Bank of Nigeria (CBN) was established, legislation made it relatively difficult to diversify the reserve assets away from gold (10%) and pounds sterling (90%) until the CBN Act was changed in 1962, the dollar assets did not even count as part of the official reserve holdings. Thusly, in the 1960s, outside of the country, most real resources were held in pounds consequently adjusting to the plan of authentic Trade Framework (Nwafor 2017).
From 1959 to 1970, assets in US dollars made up 12.5 percent of the external reserve, while the pound sterling averaged 78.4 percent. The country’s foreign reserves are currently held by the central bank in major currencies like: the Euro, the US dollar, the Japanese yen, the British pound, the Swiss Franc, and the currencies of other trading partners. However, due to the fact that Nigeria’s crude oil exports are invoiced in the US dollar and the majority of its obligations, such as external debt service, foreign exchange intervention, and other service obligations, are also denominated in the US dollar, over 90% of Nigeria’s foreign reserves are denominated in the US dollar (Nda, 2006).
EMPIRICAL REVIEW
In the year 2020, Orji, Ogbuabor, Kama, and Anthony-Orji looked into how capital flight affected Nigeria’s economic growth. In doing the examination, information from CBN factual release was utilized for the period 1981 to 2017. The study used the Autoregressive Distributed Lag (ARDL) bounds test method. According to the study, both short-term and long-term economic growth are significantly hampered by capital flight. Money supply, credit to the private sector, and domestic investment are additional variables that have been found to have a significant impact on economic growth. From 1981 to 2015, Anetor (2019) investigated the macroeconomic factors that led to capital flight from Sub-Saharan African (SSA) nations. The autoregressive distributed lag (ARDL) model was used in conjunction with secondary data from the World Bank Development Indicators (WDI) to identify the macroeconomic factors that influence capital flight from the SSA region. The study’s findings demonstrated a significant negative relationship between economic expansion and capital flight in both the long and short term. Between 1990 and 2017, Makwe and Oboro (2019) looked at how capital flight affected Nigeria’s economic growth. Cointegration analysis was used to analyze the data for both the short run and the long run, and ADF tests were used to test for the time series’ stationarity. Time series data covering these study periods were used. The ordinary least square (OLS) econometrics approach was utilized by the researchers for the purpose of data analysis. The results of the T-test showed that the proxies of capital flight and the gross domestic product, which is a proxy for economic growth, had a strong relationship. The work by Adedayo and Ayodele (2016) provides an empirical analysis of the impact that capital flight has on the economy of Nigeria. Secondary data from the National Bureau of Statistics and the Central Bank of Nigeria’s Statistical Bulletin of various issues were used in the study. The sample period from 1980 to 2014 is the subject of the empirical measurement. The adopted variables, which include Gross Domestic Product, Capital Flight, and Exchange Rate, were subjected to a comprehensive analysis using the Ordinary Least Square (OLS), Augmented Dickey-Fuller unit root test, and Co-integration test. The findings demonstrated that the variables have a significant positive influence. This suggests that, during the time period under consideration, the Nigerian economy will benefit from an increase in the exchange rate as a result of an increase in capital flight into the economy. Using data from 1981 to 2015, Lawal, Kazi, Adeoti, Osuma, Akinmulegun, and Ilo (2017) used the Autoregressive Distributed Lag (ARDL) model to examine the impact of capital flight and its determinants on the Nigerian economy. Current account balance, capital flight, foreign direct investments, foreign reserve, inflation rate, external debt, and real gross domestic product were among the variables. The finding suggests that Nigeria’s economic expansion is hindered by capital flight. Wujung and Mbella (2016) looked into the connection between capital flight and Cameroon’s economic growth from 1970 to 2013. They found evidence supporting a negative significant relationship between capital flight and economic development in Cameroon over the study period using the Fully Modified Least Squares (FMOLS) method. Exports and external debt are two additional variables that have a significant negative impact on economic development. The real interest rate, on the other hand, was found to be positively correlated with economic growth. Between 1980 and 2012, Olawale and Ifedayo (2015) looked at how capital flight affected Nigeria’s economic growth. Co-integration, Ordinary Least Square (OLS), and Error Correction Mechanism (ECM) were the primary estimation methods utilized in the study. During the study year, findings showed that capital flight, foreign reserve, external debt, foreign direct investment, and current account balance all cointegrate with GDP in Nigeria. Additionally, it was discovered that the economy was adversely affected by capital flight. Over the course of 30 years, from 1981 to 2010, Olugbenga and Alamu (2013) conducted an in-depth investigation into the effects of capital flight on Nigeria’s economic expansion. The dynamic relationship between capital flight and economic expansion was examined using the Johansen co-integration test. The outcomes demonstrate that the variables have a long-term co-integration. In addition, the notion that capital flight has a negative effect on economic expansion is only true in the short term. In addition, it was discovered that capital flight has a positive and significant long-term impact on Nigerian economic growth. The research was carried out in China by Lan, Wu, and Zhang (2010) using the ARDL bounds testing procedure and annual data that spanned the years 1992 to 2007.They discovered that capital flow would be affected by changes in the domestic economy and political environment. These included economic policy shifts and political instability like social unrest.
METHODOLOGY
The study employed a descriptive and time series research design, which is a very important in determining the relationship between time-series variables. The population of the study consist of all data on capital flight and economic growth from inception to the 2020 period in the Central Bank of Nigeria Statistical Bulletin. Data are quarterly data from 1981 to 2020 from Central Bank of Nigeria Statistical Bulletin.
Method of Data Analysis
The Descriptive statistics and Least Squares regression technique were adopted to analyze the relationship between the variables. Preliminary tests to know the normality and stationarity of the data are conducted through Jarque- Bera, Skewness, Kurtosis tests, and the unit root test. The test for the Jarque-Bera, Skewness and Kurtosis tests is to find out whether that the data are normal. This is because it includes macroeconomic variables that determine the economic growth in Nigeria.
Model Specification
In order to achieve the broad objective of this study, the model of John (2016) was adapted.
In his study of the effect of foreign direct investment on economic growth in
Nigeria, the model was specified as:
NEG = CF …………………………………………………..……………… i
Where
NEG = Nigeria Economy Growth
CF = Capital Flight
NEG is measured by GDP and CF is measured by EXR,. Further, equation i is expanded below to capture the objectives of the study;
GDP = f (EXR) ……………………………………………..………………..ii
The econometric form of the functional model is specified as:
GDP = μ0 + μ1EXR + εt
Where
GDP = Gross Domestic Product
EXR = External reserves
μ0 = Constant
μ1 = Shift Parameters
ε = error term
t = time series.
ANALYSIS OF RESULT
Table 1. Descriptive Statistics
GDP
EXR
Mean
34690.67
17959.32
Maximum
71387.83
53000.36
Minimum
13779.26
224.4
Std. Dev.
20237.78
17479.61
Skewness
0.673787
0.622229
Kurtosis
1.880848
1.787424
Jarque-Bera
4.986242
4.905902
Probability
0.082652
0.086039
Observations
39
39
Source: Researcher’s compilation (2022).
GDP had a mean of $34690.67 billion, a standard deviation of 20237.78 billion, and maximum and minimum values of 71387.83 billion and 13779.26 billion, respectively. The large standard deviation suggests significant GDP variations over time, and the variable appears positively skewed (0.673).The Jacque-bera statistics’ p-value of 0.083 indicates that the series is normally distributed and that outliers are unlikely to occur. With a standard deviation of 17479.61, the EXR mean was 17959.32bn.Positively skewed (0.62), the maximum and minimum values were 53000.36 and 224.4000, respectively. The Jacque-bera statistics’ p-value of 0.086 indicates that the series is normally distributed and that outliers are unlikely to occur.
Test of Hypothesis
H01: There is no significant relationship between external reserve and the growth of the Nigerian economy
Table 2: Co-integrating Regression
Variable
c
(CCR)
(DOLS)
(FMOLS)
5537.481
5164.172
5756.477
-3084.7
-3066.93
-3194.69
EXR
{0.0821}
{0.10955}
{0.0810}
-1.037
-1.33157
-1.0188
R2 Adjusted
-2.815
0.977
0.922
-15.394
0.956
0.91
Source: Researchers compilation (2022).
In small sample sizes, these methods can produce accurate estimates and provide a check for results’ robustness. There are many reasons why CCR, DOLS, and FMOLS are superior to OLS; let me list the most important ones:1) The t-statistic obtained without stationary 0r I(0) terms is only approximately normal, despite the extremely consistent OLS estimates. OLS estimates may suffer from serial correlation and heteroskedasticity because the omitted dynamics are captured by the residual, so inference using the normal tables will not be valid—even asymptotically—despite the fact that OLS is super-consistent in the presence of “a large finite sample bias.” (2) As a result, the OLS estimates’ “t” statistics are useless. (3) DOLS and FMOLS deal with endogeneity by adding leads and lags (DOLS).White heteroskedastic standard errors are also utilized. FMOLS uses a nonparametric method to accomplish the same thing.
The outcomes for the impact of EXR on Gross domestic product is negative and immaterial across every one of the assessments; FMOLS (-1.0188, p=0.2978), CCR (-1.037, p=0.320), and DOLS (-1.332, p=0.3762).The expected theoretical sign for the variable EXR is that debt servicing slows economic expansion because it diverts public funds intended for investments to debt payments. The direction of the relationship is in line with the debt overhang hypothesis, which states that debt servicing can lead to a situation in which debt obstructs economic growth, particularly in developing economies.
Across all estimations, the effect of EDS on RGDP is negative and insignificant; FMOLS (-1.0188, p=0.2978), CCR (-1.0360, p=0.320), and DOLS (-1.332, p=0.3762).The expected theoretical sign for the variable EXR is that debt servicing slows economic expansion because it diverts public funds intended for investments to debt payments. As a result, the null hypothesis that there is no significant connection between Nigeria’s expanding economy and its external reserve is accepted.
CONCLUSION AND RECOMMENDATION
Across all estimations, the effects of EDS on RGDP are negative and insignificant. The expected theoretical sign for the variable EDS is that debt servicing slows economic expansion because it diverts public funds intended for investments to debt payments. In light of the study’s findings, the study also recommended that reserves be encouraged at this time because they are important for macroeconomic stability and must be addressed in order to improve Nigeria’s economic growth.
References
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