Purpose: The study explores the effect of monetary and fiscal policies on stock price movements in the primary capital market of Zambia, Lusaka Securities Exchange (LuSE), focusing on how interest rates, inflation, government expenditures, and taxation decisions influence the behavior of investors and stock valuation in a developing market that suffers from economic volatility and limited market depth.
Methodology: To achieve this, the study embraced a mixed methodology of time-series quantitative analysis of macroeconomic and market data captured between 2010 and 2024, coupled with qualitative insights from semi-structured interviews. Ten participants, including financial analysts, stockbrokers, central bank officials, and economists were purposively selected for their respective expertise and direct engagement in Zambia's financial system. Quantitative data for analysis were obtained from the Bank of Zambia, the Ministry of Finance, and LuSE to determine long-term relationships between policy variables and market performance. Thematic analysis of the transcripts illuminated investor perceptions concerning policy communication and transparency, as well as issues affecting confidence.
Findings: The findings confirm the typical trend that an aggressive monetary policy, leading to an increase in interest rates, generally causes a fall in stock prices as it discourages investments and raises the price of borrowing. The same holds true for inflationary and expansive fiscal policies, especially if those policies are not accompanied by commensurate revenue generation. These factors generate uncertainties in the market and lower investor confidence. Participants held the view that abrupt policy changes coupled with poor communication and unpredictability act as catalysts that injure trust and result in reactive selling. It was concluded from this study that the coordination of economic policy and its transparency is a prerequisite for the maintenance of market stability and for bolstering investor confidence.
Unique Contribution: The study added a unique contribution in emphasizing the need for improvement of communication mechanisms between policy makers and market players, along with improving forecasting mechanisms of policy and upgrading the education of the wider community concerning the effects of macroeconomic policy on capital markets. Without those, the development of an inclusive and resilient financial environment in Zambia will be hampered.