Capital flight
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Capital flight is a large, fast outflow of money from a country. It happens when people and investors fear for the economy or for political stability. Residents and foreigners rush to move their savings into safer foreign assets. This drains foreign exchange reserves, pushes the currency down and can turn a slowdown into a full crisis.
Example
In 2022, Sri Lanka's economic and political crisis led to heavy capital flight. Reserves ran dry and the country defaulted on its debt that year.
Don't confuse with
- Sudden stop: here foreign capital inflows halt or reverse abruptly, often because of a global shock such as the 2013 taper tantrum. Capital flight is driven by fear about the home country, and residents often take part in it.
- Hot money: this is short-term speculative capital that can move quickly in either direction. Capital flight is a panic outflow, and it can include long-held savings.
Related concepts
- Foreign exchange reserves
- Gold reserves
- Import cover
- Hot money
- Sudden stop
- Currency swap arrangement