International Journal of Humanities and Social Science Vol. 2 No. 13; July 2012 247 Impact of Capital Flight on Exchage Rate and Economic Growth in Nigeria Saheed, Zakaree S., PhD Ayodeji, S. Department of Economics and Management Sciences Faculty of Arts and Social Sciences Nigerian Defence Academy Kaduna, Kaduna State, Nigeria. Abstract Capital flight has been a source of major concern in developing countries, especially in Africa, where there is shortage of capital essential for development. Capital flight from resource starved countries to economically advanced countries is viewed as a diversion of domestic savings away from financing domestic real investment and in favor of foreign financial investment. consequently, the pace of growth and development of the economy is retarded. More so, since it involves transferring capital to foreign countries, it encourages increasing demand for foreign currency, especially dollar, which tends to exert pressure on exchange rate.The objective of this paper is to examine the impact of capital flight on exchange rate and economic growth in Nigeria, using OLS method to analyse the secondary data obtained through the Central Bank of Nigeria, National Bureau of Statistics and other sources. The findings indicate that capital flight has a positive and statistically significant impact on the exchange rate in Nigeria, and in contrast to previous work, capital flight has a positive effect on economic growth in Nigeria. Based on the findings, recommendations were made on how to check the menace of capital flight in developing countries, especially Nigeria. Among such recommendations is the need for further training for the Nigerian customs so as to improve their effectiveness in tackling cases of misinvoices in import and exports. Key Words: Capital flight, Economic growth, Exchange rate, Investment and foreign 1.0 Background Information The speed and magnitude of capital flight tend to hold that the causative factors of capital flight are not purely economic, but a correspondence between political decisions and the economic environment, just like the definition holds an element of political sentiment. For instance, according to Ajayi (1997), capital shift out of developed countries is regarded as capital outflows, because the investors from developed countries are responding to investment opportunities while those from developing countries are said to be escaping the huge risks perceived at home, hence regarded as capital flight. In whichever way it is viewed, Capital flight takes place through transferring a part of domestic private savings abroad, the persistence of which can lead to a serious decline in domestic savings and when this occurs, banks domestic resources in form of savings fall, curtailing the bank‟s ability to provide credit. The impact of this is staggering, especially for Africa, as it drains foreign reserves, heightens inflation, reduces tax collection, cancels investment and undermines free trade (Global Financial Integrity, 2010). Besides removing resources that could otherwise be used for poverty alleviation and economic growth, it tends to restrict the capacity and ability of affected countries to mobilize domestic resources and access foreign capital necessary to finance economic growth and development. Consequently, capital flight contributes to the retardation of economic growth and development of developing countries. According to Ndikumana and Boyce (1998;2001), the capital flight from Zaire (Congo DR) between 1968 and 1980 was estimated atUSD12 billion, and the amount of capital flightfrom 25 low-income African countries within the sub-Saharan region for 1970 to 1996, after adjusted for trade misinvoincing, is estimated at USD193 billion. The Global Financial Integrity (2010), in its study which covers 1970-2008, estimated the volume of illicit flows out of Africa to be closer to USD1.8 trillion.