In the face of capital deficiency in financing long term development, the capital-deficient economies have heavily resorted to foreign capital as the primary means to achieve rapid economic growth. In the presence of the aforementioned problems this study empirically examined the impact of selected macroeconomic variables (Exchange rate, Interest rate and Inflation) on capital inflows.
The study in specific terms employs a vector error correction to estimate the demand and supply of capital inflow. In addition, a pairwise granger causality test was conducted to explore the causal link between the macroeconomic variables and capital inflow. Interestingly, it was observed from the causality test that there was neither bidirectional nor unidirectional causality between the two but rather an independent relationship.
The findings from the vector error correction established there is no significant short-run relationship among the variables both from the demand and supply side but in the long run the relationship is significant. The results from VECM assert that the values of lagged of interest rate, exchange rate, inflation rate and other macroeconomic variables as an insignificant factors affecting the rate of capital inflow in Nigeria.
Based on the outcome of the results it was therefore suggested that care should be taken when attracting capital inflow to Nigeria (either foreign direct investment or external debt) and it should be directed to more productive sectors of the economy. Particularly, these investments should be able to create jobs, develop local skilled labour and stimulate and transfer new technologies. The government should also provide incentives in order to encourage foreign investments into labour intensive and pro poor sectors of the economy.