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.
