The Role of Capital Flight and Remittances in Current Account Sustainability in Sub‐Saharan Africa

  The literature on capital flight and remittances is copious, as a plethora of studies in recent years have focused greater attention on the determinants and impact of capital flight and remittances in the development process. These issues are particularly pertinent to Africa in view of its relatively high incidence of capital flight in the presence of foreign exchange constraints, limited foreign capital inflows, external indebtedness and high dependence on overseas development assistance. The principal aim of this paper is to estimate the extent and magnitude of capital flights from Africa and remittance inflows to Africa, and to assess their role in current account sustainability. The paper employs standard methodological approaches to estimating capital flight and remittances for selected African countries and analyses their relationships with current account balance and key economic indicators. The findings from the statistical exercises in the paper yielded a number of important results:•  The magnitude of capital flight from Africa has increased considerably in recent years, with widespread fluctuations and volatility. •  The volume of remittances into Africa has increased dramatically but steadily. •  There is a negative association between balances on current account and capital flight, implying that capital flights tend to worsen current account difficulties. •  There is a positive relationship between remittances and current account, suggesting that remittances could play an important role in mitigating current account problems. •  The link between remittances and economic growth is positive, albeit insignificantly in the statistical sense, suggesting some evidence of the crucial role of remittances in the economic growth and development process. •  External debt and capital flight are positively intertwined, providing support to the so‐called ‘round‐tripping’ or ‘back‐to‐back’ hypothesisThe policy implications of these findings are that in spite of the good progress made by many African countries towards economic and political reforms, more innovative policy thinking and reform deepening must be initiated to create a conducive environment for private sector participation in general and foreign capital (including capital flight reversal) in particular. Similarly, there is a need for incentivising and mainstreaming remittances into national development strategies with the view to promoting the growth‐enhancing effects of remittances. A wide range of policy options and forward thinking analyses were advanced in the paper.