CAPITAL FLIGHT

It is simply, moving out the large sum of money from the nation. 

In other words, it is moving out large amount of capital from your home country to foreign country. 


The reasons could be :

• Political instability 

• Currency devaluation 

• Defective system of capital control

• Legal instability

• Type of exchange rate system adopted by the country for international trade.

• The rise of digital money

• Increased Money Laundering activities 

• Fear of increased Capital Gains Tax (CGT) 

• Fear of decreasing the strength resource of the Nation for which it is recognized. 

Capital flight can be legal or illegal. If the government, through its stringent rules that discourages the movement of capital from their country- then the capital flight could be said to be legal. However, if foreign investors tries to create a situation of capital blocks through restrictions of trade activities it would be called as illegal capital flight. 

Generally, illegal capital flight is increased if the governmental laws, rules and controls- are more stringent and rigid in nature. If we analyze the situation of 1970-1980 of India capital flight, we can find that, there were billions of dollar currency moving out of the country. The researchers found that, the main reason behind it was stringent rules in relation to currency controls. 

Similarly, Due to high inflation and devalued currency - Argentina has faced a huge capital flight for years. 

The deep rooted economic and political difficulties have given the birth to the situation of capital flight. The situation of civil war has encouraged the capital flight in Pakistan, Nigeria and others.

When we talk about the exchange rate system in international trade, we can find three exchange rate system.They are :

• Floating Exchange Rate System

• Fixed Exchange Rate System

• Controlled Exchange Rate System 

Nepal has adopted Pegged Exchange Rate System. This has also been one of the reason of capital flight for the country. Researchers has agreed that,  pegging with Nepalese currency has led to the appreciation of currency in line with Indian currency. On contrary, it has also increased trade deficit as well as Forex currency reserve of Nepal. 

Most of the commercial banks in Nepal provides interest from 3-5 % to their depositors whereas, India provides 8-9% interest to their savers. This has encouraged Nepalese depositors (both households and business persons) to swift their deposits to India. Similarly, textiles, automobiles, agriculture or electronics- the imports based economy has placed a burden of capital flight for Nepal.


In order to control the situation of capital flight, most of the nations has made a currency control laws as to - utmost currency amount that could be taken out of the country. Different countries has also made laws to encourage Foreign Direct Investment rather than Foreign Portfolio Investment. 

In conclusion,

Capital Flight not only decreases the purchasing power of the country but also makes imports and foreign facilities expensive.

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