Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

摘要

This study investigates the impact of exchange rate misalignment on outward capitalflight in Botswana over the period 1980–2015. The study uses the autoregressive distributed lag(ARDL) approach to cointegration and the Toda and Yamamoto (1995) approach to Granger causality.Botswana’s currency misalignment was caused by current account imbalances. The most importantdeterminant of capital flight from Botswana is trade openness, which indicates that exportablecommodities are misinvoiced leading to net capital outflows. Our main findings show that in thelong-run, when the currency is overvalued, the volume of capital flight through trade misinvoicingdeclines and increasing foreign reserves does not reduce outward capital flight. However, whenthe currency is undervalued, the volume of capital flight through trade misinvoicing increases andforeign reserves reduce outward capital flight. Investors respond more to prospects of devaluationthan to inflation. Botswana should tolerate overvaluation of the pula of only up to 5%. When the pulais overvalued beyond 5%, capital flight increases substantially. The government has to formulatetrade regulations and monitor imported and exported commodities. Botswana should also implementcapital controls to limit capital smuggling and maintain monetary autonomy.