Friday, 11 October 2019

Curbing The Zambian Economic Leakage

By Kasuluba Mashonga

What is leakage?

Borrowing from the Keynesian economic theory, it refers to capital or income that exits a system(economy) as opposed to remaining within it. Wikipedia asserts that leakages are the non-consumption uses of income, including saving, taxes, and imports, yet other scholars simply postulate that leakage occurs when money leaves an economy. In other words, when funds are not used for their initial intended purposes or money is pushed out of a closed cash flow cycle, leakages are created.

If a pipe were to describe the Zambian economy and water being money, then a hole in that pipe causing water to ooze out would be a practical representation of leakage in that, a lot of water would constantly be lost if the pipe were not mended.

Effects of leakage

It is imperative to note that leakage is very common in almost all economies globally not only Zambia and does not necessarily hinge on bad governance. A leakage causes the exiting of money from an economy and results in a gap between the supply and demand chain. In the retail sector for instance, this would mean consumers spending money outside the local market, forcing businesses within such an economy to find other ways of drumming up revenue just so that they may avoid incurring losses and this may prove difficult.

Causes of leakage

There are several reasons that lead to leakage but only a few are going to be discussed. Firstly, capital that leaves an economy or system as opposed to remaining within results into leakage. This happens when proceeds from a Zambian or local investment venture are removed from the economy by investing in say real estate, supermarkets or other foreign projects.

In addition, money spent outside an economy for purposes of tourism, export funds that are not used within the area of their initial production or money spent out of the local market are all deemed to be leaked. This topic is broad, and it is vital to make mention that even funds that are saved for too long result into leakage. This is because if that money has no velocity within the economic system (no movement), there will be a shortage of funds in the country.

Compensation for leakage

In dealing with the problem that is detrimental to many systems such as the Zambian economy, a few suggestions will be provided by this literature based on research. As a depiction from the circular flow model of economic activity, the Zambian government might stimulate its economy through injecting cash into the financial system when leakage affects the flow or circulation of money.

However, injection does not entail borrowing from foreign financial institutions or other countries in the wake of austerity measures(reduction of money spent in the country by the government). That being the case we still cannot completely do away with borrowing. Hence, local financial institutions would be the best sources of extra funds because that money is still going to be kept within the Zambian economic system.

As narrated by one of the Oversees Development Institutes’ articles, they argue to say about 75% of tourism proceeds are taken out of the host nation. This is because international tour operators are paid huge sums of money which they spend in their native countries. For this reason, they propose that tourist destinations should invest in home grown tour operators, thereby keeping money locally.

The other solution to dealing with leakage lies in what USA and the UK do which is paying attention to little denominations of currency. These and other big economies have come up with ways to ensure that Cents and Pennies, respectively are in constant circulation and it has proven to be very beneficial.

These forms of currency are used when people visit rooms of convenience (Toilets), purchasing of refreshments and other foods via vending machines, including the other advantages being that they keep prices low and are depended upon by charity organisations. Zambia should also ensure that smaller denominations of currency such as 5 and 10 Ngwees are ploughed back into circulation. By so doing, this activates the multiplier effect leading to increased money by the central bank, which would then be injected back into the economy in the long run.

CONCLUSION

In a nutshell, it is quite impracticable to eliminate leakage completely but measures can still be taken to reduce it to the lowest possible level, if the measures discussed or even more are taken into consideration.

10 comments:

  1. Well articulated, leakages indeed cannot be totally avoided but with the measures you have suggested and many more, our economic leakages can be reduced and the economy can move forward with a few hiccups.

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