Capital flight and the real exchange rate: evidence from resource scarce MENA countries

ABSTRACT

We analyze the determinants of capital flight in three resource scarce MENA countries namely Egypt, Morocco, and Tunisia. Our methodology involves both the linear and nonlinear autoregressive distributed lag (ARDL) cointegration approaches, with a focus on asymmetric relationships between capital flight and the real exchange rate, to distinguish the impact of real appreciation and depreciation of domestic currency on capital flight. The results based on nonlinear ARDL approach using annual data between 1977 and 2019 indicate that in Egypt, financial openness is negatively related with capital flight, while real depreciation seems to increase it in the long run. Our findings also reveal that the real GDP growth rate, institutional quality as well as inflation are important factors affecting capital flight in Morocco, whereas financial openness and the real exchange rate influence capital flight significantly in Tunisia.

KEYWORDS:

• Capital flight
• real exchange rate
• institutional quality
• MENA
• ARDL

JEL CLASSIFICATIONS:

• F50
• H56
• O53
• C30

Acknowledgments

We are grateful for the anonymous reviewers for their extremely useful comments and suggestions. This work was sponsored by the Economic Research Forum (ERF) and has benefited from both financial and intellectual support. The contents and recommendations do not necessarily reflect the ERF's views.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The data for the calculation of capital for the three countries are available upon request.

2 There are indeed other databases providing information on institutional quality. For example, International Country Risk Guide index provides information on six dimensions of governance (Voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption). However, this data is not available before 1996. Similarly, there is also the Corruption Perception Index provided by Transparency International, but its data goes back to only 1995. Therefore, we decided to use the Polity variable obtained from the Polity IV database.

3 It is also possible that capital flight may actually lead to real depreciation by increasing the demand for foreign currency. However, the current paper focuses on the effect of real exchange rate on capital flight.