EFFECT OF CAPITAL FLIGHT ON FOREIGN EXCHANGE RATE IN KENYA

Joseph Macheru Ngunjiri (Corresponding Author)

Phd Student, College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Prof. Willy Muturi

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

Dr. Tobias Olweny

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

CITATION: Ngunjiri, J., M., Muturi, W., Olweny, T. (2018). Effect of Capital Flight on Foreign Exchange Rate in Kenya. International Journal of Finance and Accounting. Vol. 7 (7) pp 1 – 16.

ABSTRACT:

Financial globalization has opened up avenues for domestic savings to flee the economy. This has accelerated capital flight and affected foreign exchange rate. While foreign exchange rate fluctuations are expected to leverage the effect of capital flight, it has instead led to increased capital flight manifested through external debt repayments, foreign portfolio and direct investments outflows as well as profit repatriations and impacted heavily on the foreign exchange rate. This study employed the panel data model to investigate the effect of capital flight on foreign exchange rate in Kenya for the period 1986 to 2016 and found that there was a positive and insignificant effect of external debt repayments and profit repatriations on foreign exchange rate. Outward foreign direct investment had a negative and insignificant effect on foreign exchange rate. Foreign portfolio investments outflows had a negative and significant effect on foreign exchange rate in that a 0.015% decrease in foreign portfolio investment outflows led to a 1% rise in foreign exchange rate. The study found that all the proxies of capital flight aggregated in the constant C had a positive and significant effect on foreign exchange rate, in that a 0.039% increase in capital flight led to a 1% rise in foreign exchange rate in the same year. The results of this study will benefit policy makers by providing them with data-based evidence that will guide them in making appropriate policies that discourage capital flight and institute proper management of foreign exchange rate in Kenya.

Keywords: [Capital Flight, Foreign Exchange Rate, Financial globalization, Panel Data Model]

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