Capital flows and financial crises: policy issues and challenges in Nigeria

Abstract

Experiences of economies that have suffered from financial crises indicates that emergence of integrated financial markets and high capital mobility made possible by the increasing globalization of world economies predisposes economies, especially developing ones to the volatility of capital flows. Also, the nature and source of capital flows plays critical role in determining the impact of its surge or sudden overflow from an economy, whereas foreign portfolio investment is adjudged the most volatile. Notwithstanding no matter the nature of capital flows (flows over a medium-to-long term); they are expected to influence the monetary aggregates, especially the economy's net foreign assets (NFA). inflation, real effective exchange rate, aggregate output (GDP) and possibly the domestic interest rates. Developing countries are attracting great amount of capital flows. Nigerian inclusive. With increasing capital flows, especially the Net Portfolio Investment (NPI) into the Nigerian economy and occupied with its underdeveloped nature, the economy may not be insulated from the ravaging impact of capital flows and/or sudden flight, if proactive policy measure were not design and implemented to forestall them. This paper underscores the relation between capital flows and/or sudden policy issues and challenges for Nigeria. It points out that it is more desirable for the country to adopt and pursue vigorously, appreciate and coherent policies that would respond to the increasing capital flows or sudden capital flight rather than procrastinating, probably to be enmeshed in crisis that often require every costly measures to solve. Consequently, it proffers policy measures that would forestall the impact of massive capital inflows and/or sudden capital flight from the Nigerian economy.