*Article* **Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds**

### **Mpho Bosupeng \*, Janet Dzator and Andrew Nadolny**

Newcastle Business School, The University of Newcastle, Callaghan, NSW 2308, Australia; janet.dzator@newcastle.edu.au (J.D.); andrew.nadolny@newcastle.edu.au (A.N.) **\*** Correspondence: bosupengmpho@hotmail.com; Tel.: +61-2-043-216-2486

Received: 30 May 2019; Accepted: 15 June 2019; Published: 17 June 2019

**Abstract:** This study investigates the impact of exchange rate misalignment on outward capital flight in Botswana over the period 1980–2015. The study uses the autoregressive distributed lag (ARDL) approach to cointegration and the Toda and Yamamoto (1995) approach to Granger causality. Botswana's currency misalignment was caused by current account imbalances. The most important determinant of capital flight from Botswana is trade openness, which indicates that exportable commodities are misinvoiced leading to net capital outflows. Our main findings show 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 outward capital flight. However, when the currency is undervalued, the volume of capital flight through trade misinvoicing increases and foreign reserves reduce outward capital flight. Investors respond more to prospects of devaluation than to inflation. Botswana should tolerate overvaluation of the pula of only up to 5%. When the pula is overvalued beyond 5%, capital flight increases substantially. The governmen<sup>t</sup> has to formulate trade regulations and monitor imported and exported commodities. Botswana should also implement capital controls to limit capital smuggling and maintain monetary autonomy.

**Keywords:** real exchange rate; exchange rate misalignment; overvaluation; undervaluation; capital flight
