Unveiling the Ties Between Corruption and Capital Flight: Pakistan’s Economic Challenge

Abstract

Capital flight poses a severe threat to Pakistan’s economic stability by draining essential financial resources needed for investment, widening the trade deficit, and exacerbating the debt burden. Between 1990 and 2023, capital flight in Pakistan reached alarming levels, with estimates showing it at times exceeding 12% of GDP. This study investigates the intricate relationship between corruption and capital flight in Pakistan. It aims to provide empirical insights into how corruption, as measured by the Corruption Perceptions Index (CPI), influences the outflow of capital from the country. Utilizing data from 1990 to 2017, the study employs econometric models to analyze the effects of key economic variables, including inflation, GDP, exchange rates, and interest rate differentials, on capital flight. The findings reveal a significant positive correlation between corruption and capital flight, suggesting that corruption exacerbates the capital outflow problem. The study emphasizes the urgent need for policy reforms targeting corruption control, financial regulation, and investment climate improvement to curb illicit financial flows and stabilize the economy.