Effectiveness of capital restrictions on capital outflows in Nigeria

Abstract

The paper assesses the effectiveness of capital restrictions on capital outflows in Nigeria using quarterly data from 2010Q1 to 2021Q3. Johansen cointegration established no association among the variables in the long run. Vector Autoregressive methodology, specifically, the Toda Yamamoto model, was accepted given the significance of the unit root and cointegration tests. Granger causality test shows bidirectional causality between foreign direct investment and other investment outflows. Also, capital restrictions cause changes in other investment outflows at the 95 percent confidence interval. Impulse response functions reveal that imposition of capital restrictions causes rising outflows across all categories observed (foreign portfolio investments, foreign direct investment, other investments, and total capital outflows). An implication of this for policymakers is that an additional imposition of capital or foreign currency restrictions would cause a decrease in external competitiveness and an improvement in international competitiveness only when outflows begin to increase, which implies a possible over-reliance on capital exports over trade in the Nigerian economy. As a result, a generous amount of funds will be lost to competing economies.