2009 Index of Economic Freedom

Quick Facts

Population:

• 21.0 million

GDP (PPP):

• $15.5 billion
• 8.0% growth
• 8.0% 5-year compound annual growth
• $739 per capita

Unemployment:

Inflation (CPI):

• 7.9%

FDI Inflow:

• $153.7 million

Mozambique's economic freedom score is 55.7, making its economy the 113th freest in the 2009 Index. Its score has remained nearly unchanged from last year, reflecting a worsened government size score that offset an improved labor freedom score. Mozambique is ranked 16th out of 46 countries in the Sub-Saharan Africa region, and its overall score is below the world average.

Mozambique has moderate levels of fiscal freedom, monetary freedom, investment freedom, and trade freedom and a government size score that is about on par with the world average. Private-sector involvement in the economy is substantial, although privatization of state-owned enterprises has slowed. Foreign capital and domestic capital are treated similarly in most cases, and overall trade liberalization has progressed despite lingering non-tariff barriers.

Challenges include weak property rights, widespread corruption, and a poor business climate. Judicial enforcement is subject to corruption and the political whims of the executive. The inefficient regulatory environment is a burden on business formation, and many aspects of the labor market remain rigid.

Background Back to the top

After Mozambique gained its independence in 1975, the Front for the Liberation of Mozambique established a one-party socialist state. One million people are believed to have died in the 16-year civil war that followed. In 1983, President Samora Machel conceded the failure of socialism and began a reform process that continued under his successors. Mozambique held its first democratic elections in 1994 and since then has been a model for development and post-war recovery through economic liberalization, privatization, and stability. Economic growth has been strong, except for a slowdown in 2000 as a result of extensive flooding, but the country remains very poor. Over three-quarters of the population is engaged in small-scale agriculture. Major exports include aluminum, cashews, and shrimp. HIV/AIDS is a serious problem. Reform is continuing under President Armando Guebuza, who took office in 2005.

Business Freedom 54.2 Back to the top

The overall freedom to start, operate, and close a business is restricted by Mozambique's regulatory environment. Starting a business takes an average of 26 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 225 days, and fees are costly. Closing a business is a burdensome process.

Trade Freedom 73.4 Back to the top

Mozambique's weighted average tariff rate was 8.3 percent in 2006. Liberalization has progressed, but import restrictions, import taxes, import permits required for some goods, time-consuming and bureaucratic customs clearance, and corruption still add to the cost of trade. Ten points were deducted from Mozambique's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 77.7 Back to the top

Mozambique has relatively high tax rates. The top income tax rate is 32 percent. The corporate tax rate is 32 percent except for income from agricultural or cattle breeding activities, both of which are subject to a 10 percent corporate tax. Other taxes include a value-added tax (VAT) and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 13.4 percent.

Government Size 76.5 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 28.0 percent of GDP. Roughly 20 enterprises remain under state ownership. The national telecommunications and electricity companies are slated for the next round of privatizations.

Monetary Freedom75.9 Back to the top

Inflation is relatively high, averaging 9.1 percent between 2005 and 2007. The government influences prices through state-owned utilities, including electricity, telecommunications, ports, and transportation, and subsidizes passenger rail services. Five points were deducted from Mozambique's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign and domestic capital are treated equally in most cases. Much of the economy is open to foreign investment, although certain sectors are subject to specific performance requirements. All foreign and domestic investment must be screened and approved. Bureaucracy can be burdensome, especially for smaller investors. Additionally, regulations can be inconsistently applied, and the system is prone to corruption. Mozambique allows repatriation of profits and retention of earned foreign exchange. Residents and non-residents may hold foreign exchange accounts. Payments and transfers are subject to maximum amounts, above which they must be approved by the central bank. All land is owned by the state.

Financial Freedom50.0 Back to the top

Mozambique’s financial system has undergone a decade of restructuring. Dominated by banking, the small financial sec-tor has been growing, and overall financial intermediation has deepened as banks’ branch networks have expanded be-yond the capital area. Non-performing loans led to a crisis in 2000–2001 but have been significantly reduced since then. Foreign presence in the banking sector is substantial. The 12 commercial banks operating in Mozambique are all majority foreign-owned, with Banco Internacional de Moçambique controlling over 40 percent of assets. The state retains shares in two large banks, but further privatization is under consideration. The small insurance sector is dominated by a state-owned insurance firm. Capital markets are very small, and the stock market mostly trades government debt.

Property Rights30.0 Back to the top

Property rights are weakly protected, and the judiciary is corrupt. There is a severe shortage of qualified legal personnel, and the backlog of cases is substantial. Enforcement of contracts and legal redress through the courts cannot be assured. Most commercial disputes are settled privately. Pirated and counterfeit copies of audio and videotapes, CDs, DVDs, software, and other goods are sold in Mozambique.

Freedom From Corruption28.0 Back to the top

Corruption is perceived as widespread. Mozambique ranks 111th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Bribe-seeking by officials is endemic at every level. Conflicts of interest between senior officials' public roles and their private business interests are frequent and seldom investigated.

Labor Freedom41.1 Back to the top

Mozambique's restrictive labor regulations hinder employment opportunities and productivity growth. The non-salary cost of employing a worker can be low, but the high cost of laying off a worker creates a disincentive for additional hiring. Regulations on the number of work hours are rigid.