**5. Conclusions**

To the best of the authors' knowledge, this study is the first contribution to the literature that evaluates the impact of exchange rate misalignment on capital flight from Botswana. The principal aim of this study was to determine the impact of exchange rate misalignment on capital flight from Botswana over the period 1980–2015. The examination contributes to the literature in two important ways. First, previous studies posit that the pula is overvalued but there is no study that evaluates the impact of exchange rate misalignment on capital flight from Botswana. The present study filled this gap. The results of this study are important for implementing macroeconomic policies that support capital inflows for economic diversification in Botswana. Further, the World Bank (2019) indicates that Botswana's diamond mines will be depleted by 2030. In the absence of diamonds, Botswana's economic growth will decline drastically. Correcting exchange rate misalignment is necessary for early economic diversification and sustainable economic growth without diamonds. The results show that on average, Botswana experienced inward capital flight during 1980–2015. The most important determinant of capital flight from Botswana is trade openness, which indicates that exportable commodities are falsely invoiced, leading to net capital outflows. Overvaluation of the currency increased capital flight in the long-run since it increases expectations of devaluation. The Toda and Yamamoto (1995) causality test support the ARDL estimates that overvaluation and declining foreign reserves cause outward capital flight. There was no causality between undervaluation and capital flight, which suggests that undervaluation is a minor determinant of capital flight from Botswana. In summary, the results posit that in the long-run, when the currency is overvalued, the volume of capital flight through trade misinvoicing declines and increasing foreign reserves does not reduce capital flight. However, when the currency is undervalued, the volume of capital flight through trade misinvoicing increases and foreign reserves reduce outward capital flight.

The findings of this study would be vital for the implementation of macroeconomic policies in Botswana. The results of this study indicate that the major conduit of capital flight from Botswana is misinvoicing of exports. The governmen<sup>t</sup> has to formulate trade regulations and monitor imported and exported commodities. This process will involve trading partner economies by promoting transparency in international trade. The SACU and SADC units should be involved in the process since they promote free trade and economic cooperation. Ajayi and Ndikumana (2015) sugges<sup>t</sup> that trading partners should share invoice data, because this will help identify disparities in prices and quantities of goods between both sides of the trade transaction. Botswana should implement capital controls to limit capital smuggling and maintain monetary autonomy. Botswana has no capital controls to promote business efficiency and FDI inflows. However, the country experienced 14–21% of total trade as illicit financial outflows during 2005–2014 (Global Financial Integrity 2017). Capital controls can be implemented by increasing transaction costs and promoting regulation of the financial sector (Ajayi and Ndikumana 2015). In addition, the lack of capital controls interferes with macroeconomic policies implemented. The country should maintain stable reserves to support the currency in the case of a financial crisis. This study has some limitations. First, the lack of data for the Botswana economy restricted the choice of estimators. The nonlinear smooth transition model (STR) is a viable alternative to ARDL but it required quarterly data, which for Botswana is not available. Capital flight and REER misalignment are a concern in developing countries like Botswana. However, developing countries often lack sufficient data for meaningful results. In future, developing countries can be grouped together in a panel framework to obtain sufficient observations.

**Supplementary Materials:** The following are available online at http://www.mdpi.com/1911-8074/12/2/101/s1, Figure S1. Plots of CUSUM and CUSUM of squares (LNREER and fundamentals). Figure S2. Plots of CUSUM and CUSUM of squares (KF, LNOPENNESS, RESERVES). Figure S3. Plots of CUSUM and CUSUM of squares (KF, OVER, LNOPENNESS, RESERVES). Figure S4. Plots of CUSUM and CUSUM of squares (KF, UNDER, LNOPENNESS, RESERVES). Table S1. List of variables and data sources.

**Author Contributions:** Supervision, J.D. and A.N.; Writing—original draft, M.B.; Writing—review & editing, M.B. and J.D.

**Funding:** This research received no external funding.

**Acknowledgments:** We thank the anonymous reviewers and the managing editor.

**Conflicts of Interest:** The authors declare no conflict of interest.

**Appendix A**

**Figure A1.** Botswana's outward capital flight (KF). Positive values indicate resources leaving Botswana to other economies and less preference for domestic assets (outward capital flight). Negative values signal inward capital flight and less preference for foreign assets.
