CHAPTER ONE INTRODUCTION 1.0   BACKGROUND OF THE STUDY

The extent of capital flight the world over necessitates efforts to checkmate and regulate it, especially in the developing countries where it impacts adversely on the scarce capital, which encourages deficiency of developmental resources. This anomaly has persevered since there is no strong opposition or regulations. Actually there are benefits and losses associated with capital flight but the losses far outweigh the gains, especially in the developing economies where it is so rampant. The individuals transferring and the receiving countries benefit while the citizens in the sending economies living standard are to an extent retarded from huge capital fight. This can account for persistent low living standard and lack of industrialization.

The high value of world-wide estimate of capital of $539 billion to $829 billion every year is worrisome and debilitates development intentions of the developing countries. The capital flight in countries represents a significant proportion of their gross domestic product (GDP). For instance, South Africa lost 9.2% of her GDP (US $13 billion) in 2000, China 10.2% of GDP (US $109 billion) in 1999; Chile 6.1% of GDP of(US 4.7%) in 1998 and Indonesia 6.7% of GDP (US $14 billion) in 1997. Nigeria and other sub-Saharan African countries are estimated to have lost over 1 00% of their GDP ($230 billion) since 1970.

Nigeria has been besieged by myriad of problems emanating from the attitude of leaders, ideologies pursued, policies designed and loopholes created which give rooms for action and activities that retard progress. The situation of diversion of public fund and the movement of human capital out of Nigeria has been in existence over three decades. The military leaders, the politicians and the bureaucrats who are in some cases technocrats have made things in such a way as to favour themselves and their allied organizations. thereby creating easy path of moving developmental outside the country. Between 1972 and 1978, Nigeria lost $7,573 million as a result of capital flight (TMF, 1996). Capital flight denies a developing country the essentials of development. Where huge amount of dollars, pounds or yen are illegally transferred outside Nigeria by a government official or private individual who is in a position of authority, the role such funds suppose d play in economic activity.

Banks are seen as great accomplice in money laundering and illegal capital transfer in Nigeria. A recent recall of an incident that bank may he part and parcel of illegal fund transfer of huge sums of cash using individual staff. lie recalled a recent incident where $200,000 out of $1 million allegedly being illegal fund was transferred from Abuja to Lagos got mission. The individual bank official was mandated not to reveal the total cash at the Airport. The colossal lose of cash in various sectors of Nigerian economy is alarming. For instance, states that Nigeria loses N1.5 trillion yearly on capital flight in the Maritime sector. Sectorial development and the linkages effects are thwarted by yearly lose of fund which impacts adversely on the lives of the populace.

There was also a report that annually, the sum of US $1.6 trillion to 1.44 trillion disappear without trace from developing countries and end up in tax haven or rich countries. A good proportion of this capital flight is transferred by multinational companies aiming at evading tax where they operate. This illicit capital flight is ten times the annual global aid flow and twice the amount of debt developing countries repay each year. This is highly devastating, considering the huge revenue it does deny Africans. One annoying thing is that citizens of the African countries aid in this transfer at the expense of their home economy.

On disgusting issue about illicit capital flight in Nigeria is the existence of various regulatory bodies, yet money laundering and capital flight is rising every year there are laws put in place and directed to prevent and regulate money laundering and other economic crimes, which include: the Banks and Other Financial Institutions Act 1991; the Money Laundering (Prohibited) Act 2004; the failed Banks (Recovery of Debts) and Financial Maipractices in Banks Act 1994; the Advanced Fee Fraud and Other Fraud Related Offences Act 1995 and the Money Laundering and all economic crimes is the Economic and Financial Crimes Commission (EFCC) that was established in 2004. It is really disheartening that these bodies have been in place, yet every year we have cases of capital flight.

Provisions of all that a country needs for transformation of its economy hinge on capital which is highly scarce relative to its demand. The problem of growthlessness in Nigeria is associated with poor leadership quality and corruption that give rise to mismanagement, underutilization, misallocation of resource and illegal diversion of capital, and thereby creating deficiency of capital for provision of infrastructure, industrialization and education reform. When investible capital is taken away from a country, the multiplier effect it ought to create and positive increase in aggregate economic activity, measured by real gross domestic product is entirely withdrawn.

One of the reasons for deficit financing in an economy is to accelerate economic development. In Nigeria, it is difficult to believe that the entire borrowed external funds for developmental purposes were brought into the country. To enhance productivity, borrowed funds are usually invested in productive venture capable of repayment. The reverse is the case in Nigeria over the years. This is the reason behind the articulated views that the less developed countries borrowed funds are considerably diverted into private assets in foreign countries, thereby, a large chunk of what is supposed be public fund is made to become private fund, however, leaving the entire debt burden to the country, and mischievously depict a picture of external debt that do consume public expenditure. This accounts for the accumulation of external debt in some developing countries. The excessive desire by many in position of authority to acquire foreign asserts have promoted capital flight in many developing countries. The rise in external debt over the years is associated with capital flight. Note that a rising debt burden may constrain the ability of government to undertake more productive investment programmes in infrastructure, education and public health.

1.2   STATEMENT OF THE PROBLEM

Over the years, there has been an increasing concern for capital flight in Nigeria in relation to economic growth and development, and general research work has been carried out on this problem. At the same time the prospect for solving this problem remain grim. Poor level of capital inflows reduces the level of economic growth and economy, high level of capital inflows encourages capital formation which is very essential ft)r economic growth, which enhances substantial level of investment and in turns encourages high level of returns. When there is capital outflow implies a potential lost for economic growth and development especially in a country that is heavily dependent on external financing and/or international aids or supports.

The Nigerian government in the past has initiated policies and programmes aimed at boosting foreign capital inflows and harness its proper contribution to the overall economy. These includes, the establishment of Nigerian Investment Promotion Commission (NIPC), the establishment oithc Bureau of Public Enterprises (BPE), the setting up of National Council on Privatization (NCP), Economic and Financial Crime Commission (EFCC) and other anti-regulatory agencies and economic/budgetary reforms are also targeting at promoting inflows of capital for economic growth and development of the nation’s economy. Yet these lofty objectives have turned out to be a mirage. The problem is even more severe today as attention has shifted in favour of mono-cultural economy based on oil. It is against this backdrop that this study sets to find out the macroeconomic effects of capital flight within the context of economic, social economical and other functions. On the Nigerian economy and also proffering workable solution inspite of several government efforts in attracting foreign capital inflows has not played its expected role in economic transformation in particular and economic development of the nation in general.

1.3   OBJECTIVES OF THE STUDY

The overall objective of this research is to critically examine the impact of capital flight on economic growth in Nigerian Economy. Specifically, the other objectives include:

To analyze the economic and other factors responsible for capital flight. To identify the major consequences of capital flight on the domestic economy.

iii.    To examine the linkage between capital flight and the Nigerian economy.

To identify the financial implication of persistence capital flight in the nation’s macro economy.

1.4   RESEARCH QUESTION

The following question are outlined

What are the Economic and other factors responsible for capital flight in Nigeria? What are the consequences of capital flight in Nigerian economic growth?

iii.    What are the linkage if any between capital flight and the Nigerian economy?

Are there any financial implications of persistence capital flight in the Nigerian economic growth?

1.5   RESEARCH HYPOTHESIS

To have an effective research, a test will be carried out in order to give the research work a clear understanding. The objectives of this study are guided by the following hypotheses.

Ho1: there is no significant relationship between economic growth and other factors responsible for capital flight and the Nigerian economy

Ho2: there is no significant relationship between consequences of capital flight and growth in the Nigerian economy

Ho3: there is no significant relationship between persistence financial capital flight and economic growth in Nigerian economy

Ho4: there is no significant relationship between linkages in capital flight and Nigerian economic growth

1.6   SIGNIFICANCE OF THE STUDY

The study will be of immense benefit to Nigeria’s economic policy makers as it will augment the findings of (Agu, 2006) which established that effective monetary and fiscal policies are tools of capital flight reversal in Nigeria. Moreover, the study will go a long way in providing information that will be of great relevance to researchers, government and policymakers in formulating effective macroeconomic policies on the developmental issues. Also, the study will help policy makers to carry out full implementation of already-formulated policies as well as realign some policies with a view to achieving a targeted goal.

1.7   SCOPE OF THE STUDY

The study of this project work is carried out based on the analysis and research work carried out in Nigeria banks where the impact of capital flight on the economic development was emphasis. The study covers the period from 2004 till date and choice of the period is based on data availability and to have adequate observation.

1.8   LIMITATION OF STUDY

There were a lot of limitations during the research of this proec1 work from visiting managers in different banks to searching and analyzing of data on the internet. The issue of raising money to buy data for browsing was also involved.