Zimbabwe’s economy is synonymous with hyper inflationary pressures witnessed from 1998 to 2008. As of July 2008, inflation rate stood at 500 billion % and the currency had to be re-evaluated by directly removing 10 zeros. Before that, 3 zeros were dropped in 2006, and lastly 12 zeros were dropped in 2009. These events points at the rapid loss in value of the Zimbabwean dollar.
There was a cocktail of factors driving this inflationary environment. Chief among was government’s adoption of quasi-fiscal financing in an ailing economy. Because of such an economic financing model, the period 1998 to 2008 was characterised by a gradual transitioning into a standstill. Resultantly, ordinary investment tools had volatile interest earnings yet the ZSE remained active and viable. Investors found a safe investing heaven on the stock market. This article therefore briefly explores how viable it was to invest on the stock market during this hyper-inflationary period.
The General Investment Picture Between 1998 and 2009
The Zimbabwe stock exchange had a remarkable growth in activities starting in 1998. The number of listed companies gradually increased from the 1998 total of 67 companies to 82 listed firms in 2007. However, by end of the year 2007, economic growth rate stood at -17.7% and the GDP hovered around US$4.8 billion. In the same year, the total value of stocks traded on the ZSE accounted for 15% of the country’s GDP. This shows how active the market had become.
High performing stocks belonged to companies that managed to tap into foreign markets. Such companies enjoyed receipts which were relatively immune to Zimbabwe’s inflationary pressures. On the other hand, trading companies in the manufacturing sector whose products were sold to the domestic market suffered immense loses ensuing from a hyper inflationary environment. Stocks of these latter companies performed dismally.
Factors Driving Profit Returns On The Stoc Market Between 1998 – 2008
In the 1998-2008 hyper inflationary era stock market activities were directly influenced by the growth in money supply and real income. On the backdrop of shrinking investment options and incessant government quasi fiscal activities the stock market was attractive to excess funds. This economic anomaly created a value preservation frenzy leading to a stampede for the ZSE`s investment assets. Owing to this pressure, stock share prices continuously rose to record highs.
The high performance of the equity market at this period was not indicative of actual economic growth. It did not even represent the actual performance of listed companies. This growth was largely speculative, indicative of the illegal foreign exchange parallel market as well as excessive money growth. In light of these anomalies, the Reserve Bank of Zimbabwe took corrective measures and halted ZSE trading activities on the 20th of November 2008.
Tracing The Origin Of Inflation In Zimbabwe
Our best shot at tracing Zimbabwe’s economic past points us to 3 major acts of heroism which failed to pay off. In 1997, government resolved to pay independence war veterans an unbudgeted bonus package. Popularly known as the ‘50kg Package’ it chewed up 3% of the country’s GDP on the backdrop of a widening budget deficit.
Secondly, in 1998 government decided to participate in the DRC war, a move which led to foreign exchange shortages. This also widened further the long standing budget deficit gap.
Lastly, in 2000 government rolled out a populist land reclamation policy, the Fast Track Land Reform. This directly led to the halving of the country’s farm productivity. It also resulted in a knock-on effect to the country’s foreign exchange earnings.
Zimbabwe being an agro-based economy, the manufacturing sector subsequently declined. In reaction to the land reform policy, the IMF seized extending lines of credit to Zimbabwe. This meant government was left with a weak production and revenue base. The only workable alternative for the country was to exploit monetary tools available at its disposal. As result, in 2005 upto May 2007 government adopted a quasi fiscal financing model. This model resulted in an unprecedented increase in supply of the Zimbabwean dollar and its subsequent rapid lose in value.
Public Reactions During The Hyper Inflationar Period
While government was on a money printing spree, the economy was shrinking. This period was also characterised by mass labour migration thus posing a threat to tax collection. The tax based revenue challenge was solvable only through printing more money. The resultant effect was a currency which no one wanted to hold to the effect that the Zimbabwean dollar exchanged hands at an accelerating rate. The norm was, if you have cash spend it today otherwise tomorrow 5% of its value would have been shredded off. The only safe heaven for large sums of money was a carefully selected stock on the ZSE. Those that opted for this investment tool ripped the rewards as the stock market resumed with shares priced in US$.
