The role of capital flight and remittances in current account sustainability in Sub-Saharan Africa

The role of capital flight and remittances in current account sustainability in Sub-Saharan Africa

Published Jan 2005

Author

M. Salisu

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Policy implications for reversing the capital flight out of Sub-Saharan Africa

The aim of this paper is to estimate the extent and magnitude of capital flights from Africa and remittance inflows to Africa, and to asses their role in current account stability. Some of the findings include:

  • the magnitude of capital flight from Africa has increased in recent years, with widespread fluctuations and volatility
  • the volume of remittances into Africa has increased rapidly but steadily
  • the association between balances on current account and capital flight is negative, while it is positive for remittances
  • the link between economic growth and remittances is positive, but statistically insignificant
  • external debt and capital flight are positively correlated

Some policy implication based on these findings include:

  • the large estimates of capital flight suggest that there is great potential for capital flight reversals. Policies encouraging a return of this capital should therefore be implemented
  • this will require speeding up and deepening of economic and political reforms that will create a conducive environment for domestic and foreign private sector participation
  • to attract the ‘abnormal’ component of capital flight, SSA governments should provide policy incentives such as an amnesty period during which a reversal of the ‘abnormal’ capital flight will not be punished
  • policy makers should recognise the importance of remittances by mainstreaming remittances in national development strategies through provision of less costly and hassle free methods of transmission
  • the channelling of remittances into productive investments largely depends on the existence of a conducive macroeconomic and political environment
  • African policy makers must focus more attention on addressing supply constraints that inhibit the growth of inter- and intra-Africa trade by accelerating and diversifying exports, increasing the value-added content of Africa’s exports, reducing intra-regional trade barriers, strengthening the financial market to facilitate trade and monetary transactions, and building a sustainable capacity to negotiate effectively in the international trading system

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