Chapter

8 Capital Flight from Uganda, 1971–94: Estimates, Causes, and Consequences

Editor(s):
Mohsin Khan, and Simeon Ajayi
Published Date:
May 2000
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Author(s)
Razaq A. Olopoenia

One of the major characteristics of the economic crisis in Africa in the past two decades is external disequilibrium, manifested in persistent current account deficits in virtually all sub-Saharan African economies currently implementing structural adjustment programs. These programs usually require capital inflows from abroad as a precondition for success. Yet little attention has been given to one aspect of external flows that may play a significant role in the external sector disequilibrium. Capital outflows, in the form of flight capital from Africa, have received less attention in the analysis of the continent’s external debt problems. Exceptions to this general omission are the studies by Ajayi (1990) on capital flight from Nigeria, Ng’eno (1992) on Kenya, and Chang and Cumby (1991) on a number of African countries.

This chapter attempts to contribute to our understanding of capital flight from Africa by providing some estimates of capital flight from Uganda. Like many countries in sub-Saharan Africa, Uganda has experienced a fairly long period of macroeconomic disequilibrium. The country’s macroeconomic situation in the past two decades has been marked by high inflation, currency overvaluation, and negative real GDP growth. Although policy reforms have succeeded in controlling inflation, reducing the overvaluation of the currency, and reversing the trend of real output growth, the problems of fiscal imbalance, reduced export earnings, and a large current account deficit have persisted. Until recently, the macroeconomic and political environment in the country was characterized by many of the features identified in the literature as likely to encourage capital outflows (see Dooley and others, 1986; Lessard and Williamson, 1987; Khan and Ul Haque, 1985; and Pastor, 1990). It is therefore reasonable to expect that Uganda has experienced some capital flight in the recent past.

This paper attempts to assess the extent of capital flight from Uganda during 1971–94. In this period, the country experienced economic and political crises as well as regime changes. It is likely that the behavior of capital outflows would be different for some of these episodes of economic and political change. In particular, the degree of capital outflow was more likely to have been different before 1990 than after. The years between 1971 and 1990 were marked by either economic distortions or political instability, or both. Although political stability was, by and large, restored by 1990, economic reforms had not yet established a firm base. Since 1991, many elements of the reform package have been steadily implemented; by 1993, these had started to show positive results. One would therefore expect both political stability and economic reform to have significant effects on the nature of capital flows into and out of the country.

This chapter first reviews the various definitions and the implied measures of capital flight in the literature and then attempts to estimate capital flight from Uganda using those definitions and measures that can be applied within the constraints of the available data. In addition, it investigates the causes and consequences of capital flight out of Uganda during 1971–94. The chapter also reviews the theoretical explanations of capital flight in the literature. This is followed by a discussion of developments in the Ugandan economy, particularly those that suggest the likelihood of capital flight. Estimates of capital flight from Uganda are also reported. The chapter then discusses the significance of capital outflows from Uganda, as well as the results of some tests of hypotheses about capital flight with Ugandan data. The chapter concludes with a summary of the findings and their policy implications.

Definitions, Measurement, and Causes of Capital Flight

Definitions and Measurement of Capital Flight

The recent literature on capital flight recognizes the diversity of definitions and related measures of the phenomenon (Khan and Ul Haque, 1985; Ajayi, 1990; Pastor, 1990; and Ng’eno, 1992). The question “what is capital flight?” leads to different concepts and measurements. Some analysts prefer a narrow definition of capital flight as a short-term speculative outflow of funds, which Cuddington (1986) identifies as the prototypical form of capital flight. Others define capital flight as all outflows of capital that represent that part of a country’s total wealth that is not available for servicing a country’s external debt or for development financing because residents acquire assets abroad (Khan and Ul Haque, 1985; and Chang and Cumby, 1991).

The variety of definitions of capital flight arises because in a world of varying country-specific risks, optimal portfolio selection rules suggest that rational agents prefer assets with low risk and high returns in an attempt to protect the value of their wealth. Thus, if the risk of holding a domestic asset is high in a developing country, owners will prefer to hold foreign rather than domestic assets. Hence, the outflow of capital from developing to developed countries would be the normal response. Thus, it has been suggested that the term capital flight is a “pejorative description of natural, economically rational responses to the portfolio choices that have confronted wealthy residents of some debtor countries in recent years” (Lessard and Williamson, 1987, p. 201).

A contrary view is that, as far as capital outflows from developing countries are concerned, all such outflows that are not in response to national needs should be treated as capital flight. This position is usually justified on the basis of the scarcity of capital, especially in the form of foreign exchange, in these countries. Given this scarcity, it is presumed that the rate-of-return differential on investment between developing and developed countries would suggest that the flow of capital should be from the latter to the former. Also, the likely consequences of capital outflows from the developing countries have been invoked in support of this definition of capital flight. Among these are the negative domestic growth effect of the diversion of investment abroad, and the “perverse” combination of external debt accumulation and private asset acquisition abroad, the earnings from which are often not available for servicing the country’s external debt. In addition, such private foreign asset accumulation is likely to undermine the rationale for resolving the debt problem either through the provision of new credit or through debt relief, because new resources made available in the process of resolving the debt problem might be used to finance private acquisition of foreign assets by domestic residents (Pastor, 1990).

Cumby and Levich (1987) pragmatically suggest that “any specification of capital flight ought to be consistent with the economic or policy question under consideration” (p. 49). Given the economic problems confronting many debt-burdened developing countries, this guideline would support the broader definition of capital flight, which is based on the difference between the sources and uses of foreign exchange. This definition is adopted in Dooley and others (1986), Morgan Guaranty Trust Company (1986), Lessard and Williamson (1987), and Pastor (1990). It is also one of the definitions used in Ajayi (1990).

At least two definitions of capital flight attempt to reflect this broader development perspective. The first attempts to distinguish between “normal” capital flows and capital flight. Normal capital outflows are defined as that portion of private residents’ acquisitions of external claims associated with repatriated interest earnings. Capital flight is then defined as the difference between total private capital outflows and the part of those outflows for which interest income is identified and reported in the balance of payments (Khan and Ul Haque, 1985). A similar definition is found in Dooley (1986).

While focusing broadly on the same development-related implications of capital flight, Pastor (1990) adopts a wider concept of capital flight. His concept embraces all nonrepatriated external claims by domestic residents. The two approaches start from a common base of private capital outflows, but Pastor (1990) attempts to capture all non-repatriated foreign assets of domestic residents. Thus, capital flight in this context is defined as the stock of gross capital outflows over some period (as in Khan and Ul Haque, 1985), plus the difference between the implied earnings on this stock and the reported income of residents from foreign investment. This approach views capital flight as that part of the stock of domestic residents’ claims on foreigners that is not available for use in the domestic economy. This definition embraces both recorded and unrecorded private capital outflows.

Cuddington’s narrow (1986) definition of capital flight, which focuses on speculative short-term capital while accepting the “normality” of capital outflows, differs from the Khan and Ul Haque (1987) definition. It defines capital flight as the sum of short-term capital outflows and net errors and omissions as reported in the balance of payments. The justification is that this measures transactions that are unaccounted for through the normal channels. This introduces a legal dimension to the concept of capital flight. Yet another approach to the measurement of capital flight from developing countries is based on nonbank cross-border deposits by residents of the country. It is suggested that this measure is more reliable because the deposits are directly and openly reported. Their use thus avoids the problems inherent in indirect estimates (Khan and Ul Haque, 1985, p. 611).

Each of these definitions of capital flight has its shortcomings. The narrow definition, which restricts capital flight to short-term capital movements plus net errors and omissions, suffers from two limitations. First, it focuses too narrowly on the legality of capital outflows. Even then it fails to embrace all illegal outflows. It neglects the problems of trade misinvoicing, which would normally be considered illegal. Neglecting such activities would either underestimate a surplus or overestimate a deficit in the current account. These “errors” in the recorded current account would be reflected in reserve movements. Thus, this approach, which attempts to measure discrepancies between the recorded current account balance and changes in reserves as part of capital flight, would underestimate such outflows by relying on reported net errors and omissions, whose estimate would be distorted by trade misinvoicing. It also ignores the long-term components of capital outflows by focusing on short-term capital movements. Yet in the circumstances of many African countries, the long-term dimension of capital flight is as important an economic and policy question as the short-term one, if not more so. One of the major problems facing these countries is that of a low rate of investment, and one of the common policy issues is how to attract foreign investment into these economies.

The definition based on the distinction between normal and abnormal private capital outflows may not be the most appropriate from the perspective of the relevant policy issues for most developing countries. This is particularly true of most African countries, whose needs involve the resolution of the growth-cum-debt problem. For such economies a broader definition of capital flight would seem more germane. The nonbank cross-border deposit approach is an inadequate concept of capital flight for a number of reasons. Even though such flows are openly reported, the measure may not provide a reliable estimate of such deposits. Some deposits may be held in nonreporting institutions (Vos, 1990), or the nationalities of the depositors may be hidden by “arm’s-length transactions.” Domestic residents of a country may hold foreign assets in the form of real estate, bonds, equities, and other business investments in foreign countries that would be excluded from cross-border bank deposits (Khan and Ul Haque, 1987).

The broader definition may be appropriate for the economic and policy questions facing most developing countries, but like the others it does not take trade misinvoicing into account. Chang and Cumby (1991), using a similar definition, attempt to adjust their estimates for trade misinvoicing. But their estimates result in a distribution that makes it hard to conclude whether or not this has been a consistent channel of capital flight in these countries (p. 167).

Associated with each of the definitions of capital flight surveyed thus far is a particular approach to its measurement, and the difficulty of defining capital flight renders its measurement even more difficult. One characteristic of capital flight is the multiplicity of channels through which it can occur, and these are mostly difficult to identify. Even when some can be identified, transactions through them are unrecorded, which makes accurate direct measurement impossible. Hence, attempts to estimate capital flight usually rely on indirect methods.

With the exception of the definition that focuses on private nonbank cross-border deposits, all the definitions lead to indirect measurements based on estimates from the balance of payments accounts. The cross-border bank deposits approach, because of its shortcomings, can only provide a baseline indicator of capital flight, as it is likely to give the lowest estimate for most developing countries.

Reference to the relevant balance of payments items for the estimation of capital flight facilitates a discussion of the various alternative measures of the phenomenon commonly used in the literature. The review of the methods of estimating capital flight that follows is based on the list of possible elements of capital flight in Table 1.

Table 1.External Debt and Balance of Payments Items for Capital Flight Estimation
External debt
AChange in long-term debt
BChange in short-term debt
Balance of payments
CCurrent account balance
DNet foreign direct investment
EPortfolio investment
FChange in private banks’ net foreign assets
GPrivate nonbank short-term capital (net)
HChange in reserves
IErrors and omissions

Cuddington (1986) measures capital flight as the sum of all short-term private capital outflows and net errors and omissions in the balance of payments accounts. This gives a measure of capital flight (KF) from the entries in Table 1 as follows:

Although this method corresponds to the hot money definition of capital flight, it is narrower than a more logical definition of hot money as “capital that flees” a country. The logic behind the hot money concept of capital flight would suggest that its measurement should include movements of portfolio capital. This view is, in particular, supported by recent developments in international capital markets. Witness the outflow of portfolio investment from Mexico during the first quarter of 1995 in response to economic policy failure (The Economist, March 11–17, 1995). Thus, this estimate of capital flight, apart from the conceptual issues mentioned above, does not in fact capture all outflows that may qualify as capital flight even under the hot money definition. In addition, it does not adjust for the distortions that trade misinvoicing may introduce into the reported net errors and omissions in the balance of payments accounts. There are also the measurement problems that arise when cross-border smuggling and parallel markets in foreign exchange are used as channels for capital flight. Khan and Ul Haque (1987) identify the particular case of the “Hundi” market in the Middle East.

Estimates of capital flight based on the concept of normal capital outflows define such outflows as all private acquisitions of foreign assets that generate reported interest earnings for residents. The measurement of normal private capital outflows is derived indirectly, by estimating the stock of external claims that would have earned the interest income on foreign investment recorded in the balance of payments. The measurement of capital flight under this approach involves two steps: First, gross private capital outflows are estimated on the basis of the sources and uses of foreign exchange. This approach measures gross private capital outflows as the difference between the sum of changes in external debt and net foreign direct investment on the one hand, and that of the current account balance, changes in official international reserves, and the net foreign asset position of domestic banks on the other. Thus gross private capital outflow (GPCX) for each period is estimated, using the entries in Table 1, as follows:

In the second stage of the estimation, gross private capital outflows are cumulated over some period. The difference between this stock of external claims and the stock of external claims on which interest income is reported is considered capital flight. This represents the difference between gross private capital flows and normal capital flows. The estimate of the stock of normal capital requires the use of some measure of the foreign interest rate in the estimate of normal capital outflows from the foreign interest earnings of residents.

Some estimates of gross private capital outflow (for example, those of Khan and Ul Haque, 1987) do not include net foreign direct investment as a source of foreign exchange. Others, such as the World Bank (1985), Erbe (1985), Morgan Guaranty Trust Company (1986), and Chang and Cumby (1991), do. The estimates of capital flight in these studies, however, differ from those based on the concept of normal capital outflows. They do not subtract an estimate of normal capital outflows from the gross estimates derived on the basis of the sources-and-uses approach. The estimate of capital flight under that approach is simply the difference between inflows of funds and their uses through current account deficit financing and official and private banks’ foreign asset accumulation.

Pastor (1990) measures capital flight by first estimating gross outflows, using the sources-and-uses approach. He then estimates the stock of external claims of residents over some period using the following formula:

where CSt is the stock of private residents’ external claims at time t, GPCXt is gross private capital outflows at time t, measured by Equation (2) above, r* is an appropriate foreign interest rate, CSt-1 is the stock of private external claims in the previous period, and FIIt is foreign investment income inflows at time t.

This formula does not just measure just the stock of external claims arising from private capital outflows by taking the existing stock of such claims and current outflows. It also adds estimates of potential interest income to the stock of capital outflows. The difference between this value over a given period and the reported repatriated investment income is then taken as an estimate of capital flight over the period. This approach requires the choice of an initial value of the stock of external claims, to which is added each year’s outflow of capital derived by the residual approach in order to obtain an estimate of the stock of private residents’ external claims at any given time. The initial stock is simply assumed to be equal to the external assets implied by the reported interest income and some measure of the international interest rate for the initial year.

This leads to an underestimation of the initial stock of capital outflows. It assumes that the reported private investment income from abroad reflects all such incomes. Even if the interest earnings in the first year are fully reported, the interest rate proxy may be different from the actual rate of interest. The underestimation of the initial stock may lead to a situation in which the reported repatriated income exceeds the estimated potential earnings. This would lead to an underestimation of capital flight as defined under this method. Pastor (1990) suggests an adjustment that either uses a reinitialization of the previous year’s stock or simply sets the earnings differential to zero and adds the current year’s capital outflow estimate. Whereas the second method preserves the initial downward bias, the first involves a process that may lead to an overestimation.

The estimate of the sources of funds requires care in the measurement of changes in external debt (Chang and Cumby, 1991). There is a need to decide what to include in external debt. Should the measurement be based on long-term obligations alone, or should it include short-term debt? Should long-term debt include public and publicly guaranteed debt as well as private nonguaranteed debt? The addition of the latter would lead to an estimate of the change in gross private sector foreign assets. This would normally be matched by a corresponding increase in private liabilities. If such liabilities are expected to be serviced and repaid by the private sector, the corresponding acquisition of assets should not be counted as capital flight (Chang and Cumby, 1991). However, if the public sector ultimately assumes the responsibility for the servicing and repayment of such liabilities, the asset acquisition associated with them would properly be considered capital flight.

If short-term debts are obligations of the public sector, they should be included in the measure of the stock of external debt. Also, the use of the debt stock would include significant currency revaluation effects if a large proportion of the debt is in currencies other than the U.S. dollar, in which the debt data are reported.

The problems of debt discovery, interest rescheduling, and the transfer of private sector obligations to the public sector have been suggested as reasons for preferring the use of the stock rather than the flow of external debt to obtain the change in debt. The estimates of sources of foreign exchange used in the measurement of capital flight in this study are therefore based on the stock of external debt.

Determinants of Capital Flight

A number of factors have been suggested in the literature as the major theoretical explanation for capital flight. Major contributions to the discussion include Khan and Ul Haque (1985), Cuddington (1987), Lessard and Williamson (1987), and Pastor (1990). The discussion that follows relies mainly on the work of Khan and Ul Haque and that of Pastor. The theoretical explanation for capital flight focuses on the motives for the substitution of foreign for domestic assets in a resident’s wealth portfolio. Such asset substitutions are influenced by the overall domestic investment climate as well as the external position of the economy. The profitability of domestic investment and the performance of the external sector depend on developments in the macro-economy. These are in turn determined by both internal and external factors. Accelerating domestic inflation imposes an implicit inflation tax on domestic currency assets. The choice between foreign assets and domestic real investment or financial assets would depend on the rate of return on foreign assets (adjusted for expected currency devaluation) relative to that on the alternative domestic assets. If the domestic currency is perceived to be overvalued in terms of the real exchange rate, there would be a strong expectation of future depreciation. This would encourage movement out of domestic assets into foreign ones, even in the absence of inflationary pressure.

Both the monetary and the fiscal policy stance of the government will, to a large extent, determine the inflation trends. A growing fiscal deficit financed by money creation, or the possibility of its being monetized in the near future, would precipitate inflationary expectations, with a resultant movement of assets out of domestic currency. An expansionary monetary policy independent of the public sector deficit would have similar consequences for inflation.

Financial repression in an inflationary environment often leads to low or even negative real interest rates. This reduces the attractiveness of domestic financial assets. The control of interest rates may make domestic nominal rates lower than those on foreign financial assets. The underdevelopment of domestic capital markets reduces the opportunity to protect private wealth against domestic inflation. In such an environment the incentive to acquire foreign assets will be strong. The external position of a country can be a major source of the motive for capital flight. When a country suffers a persistent balance of payments deficit, failure to take corrective policy actions leads to a loss of confidence in the economy. Balance of payments problems may be due to external shocks (such as a deterioration in the terms of trade) or inappropriate macroeconomic policies. The external imbalance will be exacerbated by the need to meet foreign debt obligations. The deficits would lead to external debt accumulation while constraining the economy’s capacity to service existing debt. Sooner or later, policymakers would be forced to adopt corrective measures. The expectation of such policies would encourage domestic residents to move their wealth into foreign assets in an attempt to protect their value against the expected devaluation.

The attempt to avoid domestic taxation is one of the motivations identified in the literature as a cause of capital flight (Khan and Ul Haque, 1987; Pastor, 1990). If the tax system is based on taxation by origin rather than by residence, both the foreign assets held by domestic residents and the incomes therefrom would be outside the jurisdiction of domestic fiscal authorities. Hence, expectation of tax increases would be a powerful incentive for the export of capital. A persistent public sector fiscal imbalance would be a strong indicator of future tax hikes and therefore a likely cause of capital flight.

In the analysis of the causes of the capital flight, the phenomenon of two-way flows has recently attracted attention. The determinants of capital flight identified above cannot provide a convincing rationale for the phenomenon of “simultaneous foreign borrowing and investment at home and abroad” (Khan and Ul Haque, 1985, p. 607). Some authors assume an agent separation framework, with the government borrowing abroad to finance its budget while private agents acquire foreign assets. Khan and Ul Haque have argued that unless the government’s fiscal position is independent of developments in the economy (which cannot be the case), this approach cannot provide a valid rationale for the two-way flow of capital between developed and developing countries. They propose an explanation based on the assumption of unequal uncertainty associated with domestic and foreign investment. The degree of uncertainty (which they label “expropriation risk”) associated with domestic investment is higher because of the inadequacy of institutions to facilitate market transactions and the instability of political and economic regimes—both of which raise transaction or insurance costs, or both, in developing countries.

Pastor (1990) emphasizes two dimensions of external loans that, he argues, encourage the two-way flow. First, foreign loans receive favored treatment from local authorities through the implicit or explicit public guarantee of such loans. Domestic investment is not protected by the public sector against failure. In addition, a portion of the resident investors’ domestic assets may be acquired through direct or inflation taxes in the event of a debt crisis. The public guarantee of private external debts makes the two-way flow profitable to the private investor, especially in a regime of currency overvaluation. Investors can finance domestic investment with external loans while simultaneously acquiring foreign assets with their own domestic resources. The domestic resource costs of both transactions are reduced by overvaluation.

Success of the domestic investment (which implies that investors would pay back the foreign loan) would only involve a loss equal to the differential between the rate of interest on the external loan and the deposit rate abroad. This would, however, be compensated for by the profitability of the domestic investment. If the domestic investment fails, external debt repayment could be avoided either through declaration of bankruptcy or assumption of the external obligation by the government. In either case the private external liabilities are transferred to the society. The availability of foreign loans provides the liquidity that facilitates this hedging operation by the private sector. A similar argument is advanced by Cuddington (1987), which emphasizes the liquidity aspect, and by Lessard and Williamson (1987), in which both the “discriminatory treatment” and the “possibility of a crisis” arguments are articulated. The possibility of a crisis arises from the fact that foreign credit availability, by encouraging private hedging, raises external debt, which may eventually lead to currency devaluation, higher taxes, and domestic inflation. The analysis presented above on the determinants of capital flight suggests that an understanding of the phenomenon requires exploring the role of both internal and external factors.

The basic model used to explain capital flight in this study draws mainly from the model presented in Pastor (1990). The model emphasizes two groups of determinants of capital flight: the overall domestic investment climate (Pastor, 1990, p. 7) and external factors. However, the model is designed to be parsimonious in view of the likely problem of degrees of freedom in estimating the model. The following key variables are considered as the determinants of capital flight in the econometric analysis:

  • the domestic inflation rate;

  • a measure of financial incentives in the domestic economy;

  • a measure of domestic currency overvaluation; and

  • the growth rate of the domestic economy relative to that of the likely destination of exiting residents’ capital.

Macroeconomic Developments in Uganda from 1970 to 1993

From the early 1970s until recently, the Ugandan economy experienced traumatic developments as a result of political instability and economic mismanagement. Although Uganda was one of the most vibrant economies in Africa during the early post-independence years, the country’s GDP declined during most of the 1970s and the first half of the 1980s. Plagued by distortions arising from government intervention in the economy—exchange and price controls, financial repression, public sector monopoly in the marketing of major export commodities, and the like—the economy experienced persistent macroeconomic disequilibrium between 1973 and 1986. This disequilibrium was marked by excessive money financing of public sector deficits, a high rate of growth of the money supply, and one of the highest inflation rates on the continent, reaching over 100 percent in some years. During the period export revenue fell to nearly 50 percent of its 1970 level (World Bank and United Nations Development Program, 1990). Parallel-market activities dominated foreign exchange transactions. For a while during this period, the country could only import goods and services on a cash-and-carry basis—declining export earnings meant that import volume was limited to what foreign exchange earnings could finance. Lack of imports of capital and intermediate goods led to declining output. The economic situation was further compounded by several shocks: the expulsion of Asians, the war to overthrow Idi Amin, and the civil war during the early 1980s.

These developments would no doubt have created a strong motivation for capital flight out of Uganda. Although the ongoing adjustment programs have reversed most of the negative trends of the recent past, the economy still experiences persistent balance of payments disequilibria. This has been aggravated by the adverse trend in the terms of trade of the last several years. This has exacerbated the incipient debt crisis, which is currently obscured by the favorable attitude of international donors toward the country (see Mbire and Atingi, 1994; see also Table 5 and the Appendix to this chapter for the trend in Uganda’s external debt accumulation). Although investment picked up from a low of about 6 percent of GDP on average for 1976–80 to an average of about 13 percent over 1987–93, gross domestic saving was negative from 1984 up to 1993, resulting in a domestic saving gap averaging a little over 20 percent of GDP between 1984 and 1993 (Mbire and Atingi, 1994; see also Table 7 below).

The low levels of domestic saving and investment, the persistent balance of payments deficits, and the heavy reliance on external financing as the basis of the economic turnaround that Uganda is currently experiencing provide the rationale for an exploration of capital flight from the country. It is hoped that such an exploration will reveal the extent of the problem, its causes, and the effects on the economy. An understanding of the phenomenon will permit the design of appropriate policies that may succeed in permitting Uganda to ameliorate the flow and explore the possibilities of tapping domestic residents’ accumulated assets abroad, to help resolve the country’s debt-growth conflict.

Capital Flight from Uganda

Estimates of Capital Flight

The estimates of capital flight reported in this section are based on the following four approaches:

  • the “normal” capital flow method;

  • the Pastor (1990) method;

  • the hot money approach; and

  • the cross-border deposit approach.

The steps followed in the application of each of these methods are described below.

The cross-border deposit approach simply measures capital flight as the change in such deposits over a given period. The hot money approach measures capital flight as the sum of net private short-term capital movements and net errors and omissions in the balance of payments. Two variants of the hot money approach are reported in Table 2. The first is based on Equation (1) in the text; it adds both private nonbank and banking sector short-term capital movements to net errors and omissions. The second excludes commercial banks’ net foreign asset movements from the computation of private net short-term movements; these are reported in the last two columns of Table 2.

Table 2.Uganda: Alternative Estimates of Capital Flight 1971–94(In millions of U.S. dollars)
Normal External Claim BasisPastor (1990) Unrepatriated External Claim BasisHot Money Approach
IIIIIIIVIIIIIIIVIII
1971–30.5–27.9–30.5–27.9–19.0–14.4–19.0–14.4–2.9–7.5
197231.634.131.834.14.06.84.27.044.842.3
197336.935.336.935.347.846.847.846.850.952.5
197422.121.522.421.819.719.920.120.220.721.3
1975–67.5–74.2–66.1–73.2–54.3–60.4–53.3–59.4–30.1–23.4
197681.070.282.081.667.066.368.567.832.933.7
197793.683.7129.0119.1131.5121.6167.2157.319.529.4
1978–28.6–12.9–36.5–20.8–4.311.0–8.86.1–47.5–31.8
1979287.4298.8301.9313.3224.8236.9243.8255.8209.3197.9
1980–185.0–148.0–166.1–166.1–66.5–60.4–36.2–33.764.864.6
198135.138.73.26.849.495.167.573.659.856.2
198252.844.761.953.8100.3100.3121.2116.016.624.7
198325.524.514.313.383.989.184.185.035.636.6
1984182.8103.0195.3195.5241.4248.1264.9267.0–24.7–24.9
1985167.0258.5169.8181.3279.1299.6298.4312.7–8.8–20.3
1986189.0183.0213.0207.0307.4311.5348.2345.9–93.587.5
1987425.5415.3426.4416.2517.3516.5536.9530.049.860.0
1988–207.9–192.7–190.1–174.913.238.352.870.8–110.0–125.0
19893.13.128.228.2262.5279.0321.7327.779.479.0
1990112.7109.0149.5145.8429.5445.9511.6515.26.310.0
1991–38.8–55.8–3.2–20.2277.6278.6357.4346.53.820.8
199212.5–8.3–10.7–31.5268.4261.2287.6270.9–20.30.5
1993–441.8–457.1–471.1–486.4–244.4–231.7–227.4–241.2
1994223.0190.9454.5472.8
Source: Author’s calculations.
Source: Author’s calculations.

The estimates based on the normal capital flow concept and on Pastor’s method involve two steps. First, total private gross capital outflows (GPCX) are estimated using the sources-and-uses method. Four different estimates of private gross capital outflows are shown in Table 3. These are based on different definitions of the sources and uses of foreign exchange. GPCX I estimates the sources of foreign exchange as the change in long-term external debt and net foreign direct investment inflow, and counts only current account deficit financing and changes in official foreign exchange reserves as the uses of foreign exchange. GPCX II uses the same definition of sources of foreign exchange as GPCX I but adds commercial banks’ net acquisition of foreign assets as part of the uses of foreign exchange. GPCX III is based on the same definition of the uses of foreign exchange as GPCX I but adds changes in short-term external debt to the sources of foreign exchange. GPCX IV uses the same definition of the sources of foreign exchange as GPCX III; its definition of the uses is the same as that used in the computation of GPCX II.

Table 3.Uganda: Alternative Estimates of Private Capital Outflows, 1971–94(In millions of U.S. dollars)
Gross Private Capital Outflows (GPCX Residual Method)Hot Money Approach
GPCX IGPCX IIGPCX IIIGPCX IVIII
1971–18.2–13.6–18.2–13.6–2.9–7.5
19725.27.75.47.944.842.3
197349.447.849.447.850.952.5
197415.615.015.915.320.721.3
1975–59.9–66.6–58.9–65.6–30.1–23.4
197665.464.666.866.032.933.7
1977126.8116.9162.2152.319.529.4
1978–16.7–1.0–24.6–8.9–47.5–31.8
1979196.5207.9211.0222.4209.3197.9
1980–131.3–131.1–112.4–112.464.864.6
198138.241.86.39.959.856.2
198249.841.758.950.816.624.7
198331.630.620.419.435.636.6
1984182.8183.0195.3195.5–24.7–24.9
1985180.0191.5182.8194.3–8.8–20.3
1986191.0185.0215.0209.0–93.587.5
1987382.5372.3383.4373.249.860.0
1988–179.9–164.7–162.1–146.9–110.0–125.0
19893.13.128.228.279.479.4
1990112.7109.0149.5145.86.310.0
1991–13.3–30.322.35.33.820.8
19927.4–13.4–15.8–36.6–20.30.5
1993–386.7–402.0–416.0–431.3
1994165.4–133.3
Source: Author’s calculations.
Source: Author’s calculations.

The computation of the four variants of private gross capital outflow can be derived from the entries in Table 1 as follows:

The data used in the derivation of all four variants of private gross capital outflows of Table 3 are found in Table 4.

Table 4.Uganda: External Debt and Balance of Payments Flows Used in Capital Flight Estimations, 1971–94(In millions of U.S. dollars)
Change in Long-Term External DebtChange in Total External DebtNet Foreign Direct Investment BalanceCurrent Account BalanceChange in Reserves1Change in Private Banks’ Net Foreign AssetsPrivate Short-Term Capital Flow (net)Net Errors and OmissionsForeign Investment and Income Inflow
197134.434.4–1.2–85.834.4–4.60.66.93.1
19725.15.3–11.916.4–4.4–2.5–2.3–40.02.4
1973–0.8–0.8–1.443.08.61.6–11.4–41.14.1
197425.826.11.7–24.112.20.61.2–22.54.3
19755.66.62.1–56.1–11.56.7–1.629.34.0
197633.434.81.243.2–12.40.8–11.921.82.8
197758.493.80.868.1–0.59.9–7.5–21.92.8
1978121.7113.81.1–137.42.115.7–44.075.83.4
1979118.9133.4–166.439.536.5–11.4–26.4171.55.9
198092.2111.10.0–88.226.1–0.20.064.52.0
198165.133.20.07.7–34.6–3.6–18.0–38.21.4
1982154.2163.30.0–69.9–34.58.10.0–24.70.8
1983132.4121.20.0–72.2–28.61.00.0–36.60.0
198452.865.30.0103.526.5–0.23.321.60.0
1985158.1160.90.04.617.3–11.572.5–52.20.0
1986158.6182.60.0–3.836.26.0117.6–40.11.5
1987514.8515.70.0–112.0–20.310.2–86.426.42.9
198812.930.70.0–195.22.4–15.2–29.9154.90.0
1989260.8285.90.0–259.51.80.0–41.4–38.00.0
1990370.8407.51.0–263.35.23.7–19.59.50.0
1991169.2203.81.0–169.8–12.717.0–21.40.62.8
1992157.6131.43.0–99.6–50.620.8–9.59.04.1
1993–197.5–226.33.4–135.7–57.45.16.4
1994356.3324.24.5–27.7–167.7–33.614.0
Source: Author’s calculations based on data in Appendix Table A1.

A positive entry indicates a decrease in reserves, that is, the use of reserve assets to finance the balance of payments, and a negative entry indicates an increase in reserves, that is, the use of foreign exchange inflows to acquire reserve assets.

Source: Author’s calculations based on data in Appendix Table A1.

A positive entry indicates a decrease in reserves, that is, the use of reserve assets to finance the balance of payments, and a negative entry indicates an increase in reserves, that is, the use of foreign exchange inflows to acquire reserve assets.

To estimate capital flight as defined under the normal capital flow concept, the GPCX series are cumulated over a given period to obtain the total stock of external claims by Ugandan residents. These are reported in Table A2 in the Appendix. The columns in that table under “gross private capital outflows” are the stock of total external claims derived on the basis of the four variants of the GPCX series defined in Equations (4) through (7), respectively. From each of these the changes in the stock of external claims implied by the interest income inflow in the balance of payments is deducted to obtain the adjusted stock of the normal capital flow. The adjusted stock of external claims corresponding to the different measures of private gross capital outflow is reported in the first four data columns of Table 5.

Table 5.Uganda: Adjusted Stock of External Claims, 1971–94(In millions of U.S. dollars)
“Normal” Capital Flow BasisPastor (1990) Basis
IIIIIIIVIIIIIIIV
19718.813.48.813.422.326.922.326.9
197240.447.540.647.726.333.726.533.9
197377.382.877.583.074.180.574.380.7
197499.4104.399.9104.893.8100.494.4100.9
197531.930.133.831.639.540.041.141.5
1976112.9110.3115.8113.2106.5106.3109.6109.3
1977206.5194.0244.8232.3238.0227.9276.8266.6
1978177.9181.1208.3211.5233.7138.9268.0272.7
1979465.3479.9510.2524.8458.5475.8511.8528.5
1980280.3295.1344.1358.7395.3415.4475.6494.8
1981315.4333.8347.3365.5444.7510.5543.1568.4
1982368.2378.5409.2419.3545.5610.8664.3684.4
1983393.7403.0423.5432.6629.4699.9748.4769.4
1984576.5506.0618.8628.1870.8948.01,013.31,036.4
1985743.5764.5788.6809.41,149.91,247.61,311.71,349.1
1986932.5947.51,001.61,016.41,457.31,559.11,659.91,695.0
19871,358.01,362.81,428.01,432.61,976.62,075.62,196.82,225.0
19881,150.11,170.11,237.91,257.71,987.82,113.92,249.62,295.8
19891,153.21,173.21,266.11,285.92,250.32,392.92,571.32,623.5
19901,265.91,282.21,415.61,431.72,679.82,838.83,082.93,138.7
19911,227.11,226.41,412.41,411.52,957.43,116.83,440.33,485.2
19921,239.61,218.11,401.71,380.03,225.83,378.03,727.93,756.1
1993797.8761.0930.6893.63,001.43,146.33,500.53,514.9
19941,020.81,121.53,455.93,973.3
Source: Author’s calculations.
Source: Author’s calculations.

The estimation of the stock of external claims based on Pastor’s (1990) framework uses Equation (3). The series was initialized using the 1970 implied stock of external claims derived from the inflow of interest income reported in the balance of payments. The four variants of the adjusted stock of external claims are derived from the Pastor (1990) basis gross capital outflow of Equations (4) through (7) above.

Both procedures for deriving the adjusted stock of external claims described above require the use of an “appropriate” foreign interest rate. Ideally, the interest rate used should be a weighted average of the interest rates of the countries in which the residents’ external claims that generated the reported interest income are located. In the absence of information about the geographical sources and the distribution of Uganda’s inflows of interest income from abroad, U.K. treasury bill rates (IMF, International Financial Statistics, line 60C) were used as a proxy. To the extent that this proxy is different from the actual rates of return generating the reported interest income, the estimates of the normal stock of external claims in Table A2 in the Appendix will be incorrect. When the normal stock of external claims is underestimated, the adjusted stock of the normal capital flow basis will be overestimated, and vice versa. The same is also the case for the estimates based on Pastor’s (1990) stock adjustment method.

The capital flight series derived through both the normal external claim and the Pastor (1990) basis are reported in Table 2. These series are derived as the difference in the adjusted stock of external claims over the period. Thus, the series in Table 2 are the annual changes in the corresponding entries of Table 5.

These estimates are only as good as the data on which they are based. First, the use of a proxy interest rate in the stock adjustment process introduces a downward bias in the estimates of capital flight for those years when the proxy rate is lower than the actual rate of return, and an upward bias when it is higher.

However, all the estimates of capital flight reported in Table 2 suffer from a number of fundamental problems common to all data series on African economies. The reliability of trade data is quite low. Four data sources—the Bank of Uganda, the Ugandan Revenue Authority, the Ugandan Ministry of Finance and Planning, and the IMF’s Direction of Trade Statistics Yearbook—report conflicting series on trade transactions for the country. Data on foreign direct investment and on interest income inflow are not regularly reported by the national or international organizations that normally publish such data. The same problem bedevils external debt series. Here the problem of availability and reliability is more serious for short-term external debt series.

The poor quality of the data compounds the basic problems encountered in any attempt to measure capital flight. The nature of capital flight compels one to resort to indirect methods of estimation that are inherently inaccurate. When such methods have to rely on data of poor quality, the problem of estimation becomes magnified. This is particularly true of this study. The quality of balance of payments statistics in Uganda has deteriorated since the 1970s as a result of economic mismanagement and the breakup of the East African Community. Although an effort is under way to improve the quality of the database, the exercise has just begun. As a result, the data on which this chapter is based still suffer from all the problems highlighted above. For example, no data are reported for foreign direct investment and interest income inflows for many of the years covered in this study. An attempt was made to check the validity of the reported net foreign investment inflow in the balance of payments using data from IMF (1994) and the definition of the overall balance in the introduction to that publication. Although nearly all the entries were confirmed, large discrepancies were observed for 1973 and 1980 (Appendix Table A1). In view of these problems, the estimates of capital flight reported in Table 2 have to be interpreted with caution.

There is also the problem of trade misinvoicing. An attempt to check the trade flow data for misinvoicing produced no evidence of systematic misinvoicing of the type that would suggest its use as a channel for capital flight. Chang and Cumby (1991) reached the same conclusion for Uganda, among other African countries, for the period 1972–87. For this chapter the reported values of imports by country of origin and by Uganda were compared for the period 1989–93. The same was done for reported export values by country of destination and by Uganda. All reported import and export value series were obtained from the Direction of Trade Statistics Yearbook. The trading partner countries covered accounted for a little over 90 percent of Uganda’s imports and nearly 80 percent of its exports over 1980–93. The ratios of import values reported by Uganda to those reported by trading partners and of exports to the values reported by Uganda do not significantly differ from Uganda’s c.i.f.-f.o.b. factor as reported in the International Financial Statistics Yearbook. Because of these findings, the estimates of capital flight are not adjusted for trade misinvoicing.

In general, the various capital flight estimates in Table 2 are not significantly dissimilar. In particular, all the estimates indicate wide variations in both the magnitude and the direction of capital flight over the 24 years covered by the study. The four variants of capital flight estimated on the normal external claims basis exhibit patterns of capital outflow that reflect the different definitions of the losses of foreign exchange on which their computations were based. Thus, variants I and III, and II and IV, respectively, exhibit positive capital outflows in 67 percent and 65 percent of the total number of years of observation. The same is true of the estimates based on the Pastor (1990) concept of capital flight as unrepatriated external claims of residents. Variants I and III of those estimates indicate positive capital outflows 79 percent of the time, whereas variants II and IV show positive capital outflows 83 percent of the time. The two versions of the hot money approach produced positive capital outflows over 64 percent of the period for which relevant data are available.

In terms of the magnitude of capital outflows, the hot money approach in general produced the lowest estimates, except for 1988. Estimates based on the Pastor concept of unrepatriated external claims are generally higher than those derived on the basis of the normal stock of external claims. These characteristics of the different estimates are not surprising.

By definition, the hot money measure is narrower than the other two. And the concept of capital flight as the change in the stock of unrepatriated external claims is broader than the definition based on normal capital flows. Hence, the results presented in Table 2 are consistent with the definitions underlying their estimation. The degree of capital flight has varied over the years in all the estimates presented. Capital inflows (that is, the negative outflows in Table 2) ranged from about 6 percent of imports in the late 1970s to about 70 percent in 1993. Capital outflows ranged from the equivalent of 7 percent of imports in 1974 to over 70 percent in 1979. Capital outflows during the periods 1976–79 and 1981–87 correspond to periods of political and economic instability. The period 1972–74 was characterized by persistent capital outflows, which, although small relative to the average outflows of the 1980s, represented an average of about 12 percent of imports or about 10 percent of exports of goods and services. This period corresponds to the expulsion of Ugandan Asians and the declaration of “economic war” by the Amin regime.

All the estimates indicate a significant tendency to reverse capital flight in the 1990s. The only exception to this trend was in 1994, when all the estimates reported show significant capital outflows. This is perhaps explained by developments in the world coffee market and the consequent mild coffee export boom experienced by Uganda at a time when coffee export marketing had been liberalized.

The results for 1980 deserve some comment. All the estimates, except the two hot money variants, indicate reverse capital flight for that year. Yet the available evidence suggests significant capital repatriation from Uganda during that year. The author’s estimate of this repatriation is on the order of $167 million. The negative entry for that year may be due to the fact that one “source” of foreign exchange, as defined by the sources-and-uses approach, turned into a “user” of foreign exchange of such magnitude that it exceeded both the flow of external loans and the use of foreign exchange reserves.

In general, however, the estimates of capital flight seem to be strongly influenced by the availability of external loans and the performance of the current account. The estimates of the adjusted stock of external claims (Table 5) based on the normal capital flow concept are all similar to that reported in Chang and Cumby (1991) for Uganda. For the period up to 1987, the estimates of the four variants of normal capital flow range from $1.36 billion for variant I to $1.43 billion for variant IV. Chang and Cumby (1991) report an estimate of $1.4 billion for Uganda in their study of capital flight for a group of African countries.

Table 4 clearly indicates a strong tendency for Ugandan residents to accumulate assets abroad, especially after 1976. If one accepts the hypothesis that the social rate of return on capital at home is higher than the returns from investment abroad, this tendency would have implications for the development of the economy. One may argue that the hypothesis might not have been true during most of the years covered in this study because of the then-prevailing political and economic instability, but the same cannot be said for the 1990s. Under the current regime of political stability and economic reform, there is a strong case to be made for the repatriation of these assets. The other dimension of the problem is the likelihood that the earnings on these assets are not fully reported. Preliminary investigation suggests that this is a very strong possibility. Balance of payments data from both the World Bank (1993) and the IMF (1994) indicate that, between 1982 and 1990, a net investment income inflow was reported only once, in 1990. Yet the estimates of the stock of foreign assets held by Ugandan residents during this time span ranged between $368.2 million and $1.3 billion. The implication is that the government was denied the tax revenue that would have accrued from this foreign investment income had such earnings been repatriated through the official channel.

Finally, it must be noted that the adjusted stock of external claims in Table 5 represents a significant proportion of the country’s stock of external debt for most of the years covered in this study. As a proportion of long-term external debt, variant I of the estimates on a normal capital flow basis ranges from the equivalent of only 5 percent of external debt in 1971 to as much as 86 percent in 1979. Although residents’ external claims declined as a proportion of the foreign debt in the 1980–83 period, possibly because of the IMF-supported stabilization program then in place, they increased during the second half of the 1980s, accounting for as much as 72 percent of the external debt in 1987. The period 1984–87 was marked by civil war and abandonment of the IMF-supported program. The ratio of external claims to long-term foreign debt declined consistently from 1988 to 1993, when it was down to 30 percent or less than half its 1987 level. The trend of private external debt provides further evidence to support the hypothesis that capital flight is influenced by both political stability and macroeconomic performance. The downward trend in the ratio of external claims to long-term foreign debt during 1988–93 reflects an improvement of the economy, which in turn permitted the conscientious implementation of a program of economic reform and recovery.

Causes of Capital Flight

One of the objectives of this chapter is to attempt an explanation of the phenomenon of capital flight from Uganda. The discussion of the determinants of capital flight suggests a model that tries to explain the trends of capital flight by the performance of the macroeconomy. Also, the analysis of the trends in the ratio of the stock of external claims to the stock of long-term foreign debt indicates that capital flight appears to have responded to macroeconomic developments in Uganda. To quantify these observations, an attempt was made to estimate a simple econometric model of capital flight from Uganda. The basic model used in this exercise is of the following general form:

where CF is some measure of capital flight, P* is the domestic rate of inflation, g is the growth rate of domestic GDP, and e* is the parallel exchange rate premium as a proxy for currency overvaluation. The basic model was estimated for the flows of capital flight reported in Table 2. The estimates were based on variant I of the estimates based on the normal stock of external claims in that table. Various attempts to estimate Equation (8) for this series failed to produce any good econometric results. The explanatory variables were not significant in the various combinations in which they were tried. The explanatory power of the regressions was also very low and not significant. When used as the only explanatory variable, only the domestic rate of inflation turns out to be a significant determinant of capital outflow. The regression result for this bivariate model is:

R2 = 0.16; F(1, 22) = 4.1 (0.06); SEE = 0.55

D-W = 2.32.

The capital flow series were deflated with data on exports of goods and services. Although inflation thus explains only 16 percent of the variation in capital outflows, the statistical properties of this equation are acceptable. The same outcome was obtained when the ratio of the adjusted stock of external claims to the stock of external debt was used as an indicator of capital flight. The regression of this index of capital flight on domestic inflation produced the following results:

R2 = 0.26; F(1, 22) = 7.53 (0.011); SEE = 0.55

D-W = 2.1

where ASEC is the adjusted stock of external claims and LTEXD is the stock of long-term foreign debt. The two equations reported above indicate that the rate of domestic inflation has a positive effect on capital flight. The inflation elasticity of the ratio of the stock of external claims to long-term foreign debt is on the order of 0.2; although this may not be very high, it is a clear indication of the macroeconomic instability of the motivation of capital flight.

Summary of Findings and Policy Implications

The interpretation of the results of this study as well as any policy implications that may be drawn from them must always be offered with a caveat. The most important reason for caution is the poor quality of the data on which the analyses are based. Having said that, the results of the analyses indicate that the Ugandan economy experienced capital flight of such magnitude relative to the size of its economy during the 1970s and 1980s that it should be a major focus of policy. The evidence on the stock of external claims by Ugandan residents clearly indicates that the potential exists for solving the country’s growth-cum-debt problem. Some indication of the role of the macroeconomic environment in providing incentives for the outflow of capital is also provided by the modest econometric exercise reported here. This is supported by the attempt to interpret the trend of capital outflows in light of the country’s economic and political experience.

The obvious policy implication of these results is that a precondition for the success of any effort by macroeconomic managers to attract and keep investment capital, both domestic and foreign, is a stable economic environment. Only then will investors develop confidence in the economy to the extent that they will risk keeping their assets within the country.

Appendix. Trends in Uganda’s External Debt and Capital Flight
Table A1.Database for Capital Flight Estimates, 1970–94(In millions of U.S. dollars)
Long-Term External DebtShort-Term and External DebtNet Foreign Direct InvestmentCurrent Account BalanceChange in ReservesBanks’ Net Foreign AssetsForeign Income InflowsNet Private Short-Term CapitalNet Errors and OmissionsCross-Border Deposits
1970138.00.04.220.3–1.67.72.9–15.2–26.1
1971172.40.0–1.2–85.834.43.13.10.66.9
1972177.50.2–11.916.44.40.62.4–2.3–40.0
1973176.70.2–1.443.0–8.62.24.1–11.4–41.1
1974202.50.51.7–24.1–12.22.84.31.2–22.5
1975208.11.52.1–56.111.59.54.0–6.129.5
1976241.52.91.243.212.410.32.8–11.921.8
1977299.938.80.868.10.520.23.4–7.5–21.9
1978421.630.41.1–137.42.125.95.9–44.075.8
1979540.544.91.639.5–36.514.52.026.4–171
1980632.763.8–166.4–83.2–26.114.31.40.064.6
1981697.831.90.07.734.610.70.8–18.0–38.2
1982852.041.00.0–69.934.518.80.00.0–24.780
1983984.429.80.0–72.228.619.80.00.0–36.6100
19841,037.242.30.0103.5–26.519.60.03.321.6100
19851,195.345.10.04.6–17.38.11.572.5–52.2120
19861,353.969.10.0–3.8–36.214.12.9117.6–40.1140
19871,868.770.00.0112.020.324.30.0–86.426.4170
19881,881.687.80.0195.22.49.10.0–29.9154.9170
19892,142.4112.90.0–259.5–1.89.10.0–41.4–38.0160
19902,513.2149.60.1–263.3–5.212.80.0–19.59.5180
19912,682.4184.21.0–169.812.729.82.8–21.40.6190
19922,840.0158.03.0–99.650.650.64.1–9.59.0160
19932,643.0128.73.37–135.7–57.46.4–41.35.14160
19942,999.396.64.49–27.7–167.714.0–102.02–33.56
Sources: World Bank (1993, 1994); International Monetary Fund (1994); and Research Department, Bank of Uganda.Note: Based on information in the introduction to International Financial Statistics Yearbook (IFS; IMF, 1994, pp. xvii–xviii), net foreign direct investment was estimated using the balance of payments table in the same publication. The formula used is given as net foreign direct investment = overall balance (IFS, line 78..d) less current account balance (IFS, line 77a.d) less other capital (n.i.e.) (IFS, line 77g.d) less errors and omissions (IFS, line 77e.d). This formula should give an estimate of net direct investment plus portfolio investment. Since for Uganda the balance of payments data indicate no portfolio investment, the formula provides an estimate of net foreign direct investment. The estimates were compared with reported net foreign direct investment (IFS, line 77 bad). The only observed discrepancies between the reported values and the author’s estimates are for 1973 and 1980. IFS reports a net inflow of $5.2 million and nothing for 1973 or 1980. The data reported for these two years are based on the author’s estimates.
Sources: World Bank (1993, 1994); International Monetary Fund (1994); and Research Department, Bank of Uganda.Note: Based on information in the introduction to International Financial Statistics Yearbook (IFS; IMF, 1994, pp. xvii–xviii), net foreign direct investment was estimated using the balance of payments table in the same publication. The formula used is given as net foreign direct investment = overall balance (IFS, line 78..d) less current account balance (IFS, line 77a.d) less other capital (n.i.e.) (IFS, line 77g.d) less errors and omissions (IFS, line 77e.d). This formula should give an estimate of net direct investment plus portfolio investment. Since for Uganda the balance of payments data indicate no portfolio investment, the formula provides an estimate of net foreign direct investment. The estimates were compared with reported net foreign direct investment (IFS, line 77 bad). The only observed discrepancies between the reported values and the author’s estimates are for 1973 and 1980. IFS reports a net inflow of $5.2 million and nothing for 1973 or 1980. The data reported for these two years are based on the author’s estimates.
Table A2.Alternative Estimates of Uganda’s Unadjusted Stock of External Claims, 1970–94
Reported Foreign Income BasisGross Private Capital Outflows (GPCX Residual Method)Hot Money Approach
GPCX IGPCX IIGPCX IIIGPCX IVIII
197041.341.341.341.341.341.34.3
197155.623.127.723.127.738.433.8
197243.528.335.428.535.683.276.1
197343.977.783.277.983.4134.1128.6
197437.893.398.293.898.7154.8149.9
197539.333.431.634.933.1124.7126.5
197625.298.896.2101.799.1157.6160.2
197744.3225.6213.1263.9251.4177.1189.6
197875.3208.9212.1239.3242.5129.6157.8
197915.4405.4420.0450.3464.9338.9355.7
19809.2274.1288.9337.9352.5403.7420.3
19816.1312.3330.7344.2362.4463.5476.5
19820.0362.1372.4403.1413.2480.1501.2
19830.0393.7403.0423.5432.6515.7537.8
19840.0576.5586.0618.8628.1491.0512.9
198513.0756.5777.5801.6822.4482.2492.6
198628.0947.5962.51,016.61,031.4388.7405.1
19870.01,330.01,334.81,400.01,404.6438.5465.1
19880.01,150.11,170.11,237.91,257.7328.5340.1
19890.01,153.21,173.21,266.11,285.9407.9419.5
19900.01,265.91,282.21,415.61,431.7414.2429.5
199125.51,252.61,251.91,437.91,437.0418.0450.3
199245.91,260.01,238.51,422.11,400.4398.0450.8
1993121.4873.3836.51,006.1969.1
1994139.31,038.71,139.4
Source: Author’s calculations.Note: The first data column is the implied external claims based on the level of interest income reported in the balance of payments accounts. It is equal to the inflow of interest income from abroad deflated by the U.K. treasury bill rate. The estimates correspond to the concept of normal capital flows in the literature (Khan and Ul Haque, 1987, p. 3). The other columns are cumulated private capital flows based, respectively, on the estimates reported in Table 3 in the text. These are initialized with the 1970 estimate of the implied stock of external claims in the first column, based on the value of interest income.
Source: Author’s calculations.Note: The first data column is the implied external claims based on the level of interest income reported in the balance of payments accounts. It is equal to the inflow of interest income from abroad deflated by the U.K. treasury bill rate. The estimates correspond to the concept of normal capital flows in the literature (Khan and Ul Haque, 1987, p. 3). The other columns are cumulated private capital flows based, respectively, on the estimates reported in Table 3 in the text. These are initialized with the 1970 estimate of the implied stock of external claims in the first column, based on the value of interest income.
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