2009 Index of Economic Freedom

Quick Facts

Population:

• 11.7 million

GDP (PPP):

• $14.7 billion
• 6.2% growth
• 5.0% 5-year compound annual growth
• $1259 per capita

Unemployment:

• 50.0%

Inflation (CPI):

• 10.7%

FDI Inflow:

• $350.4 million

Zambia's economic freedom score is 56.6, making its economy the 108th freest in the 2009 Index. Its score increased by 0.4 point, reflecting improvements in five of the 10 economic freedoms. Zambia is ranked 13th out of 46 countries in the Sub-Saharan Africa region, and its overall score is below the world average.

Zambia's political and macroeconomic stability has facilitated steady economic growth over the past five years. Poverty levels have declined in urban areas but have increased in rural areas. Better governance, development of a more robust private sector, and diversification of the economy are needed to create more opportunity and continue economic development.

Institutional challenges include an inefficient legal and regulatory environment, state influence, weak protection of property rights, and corruption. Foreign investors are treated similarly to domestic investors but still face extensive red tape, especially in profitable industries. Inflation is high, and the government influences prices through state-owned enterprises. Corruption is widespread, especially in the issuance of land titles. The judicial process is slow, and many courts cannot arbitrate commercial suits effectively. The regulatory environment hinders business activity, and labor regulations remain rigid.

Background Back to the top

Zambia was a middle-income country as the world's third-largest producer of copper in the 1960s, but falling copper prices and mismanagement of state-owned mines led to steadily declining income from 1974 to 1990. Today, copper remains the biggest export, but mining contributes only about 10 percent to GDP. Zambia is landlocked and sparsely populated. Subsistence agriculture is the main employer, and HIV/AIDS is a significant problem. The British protectorate of Northern Rhodesia became the Republic of Zambia in 1964, but it was not until 1991 that multi-party elections were held. President Levy Mwanawasa, elected in 2001 and re-elected in 2006, has made the fight against corruption the centerpiece of his presidency, encouraging investigations into corruption by his predecessor.

Business Freedom 68.8 Back to the top

The overall freedom to conduct a business is restricted by Zambia's regulatory environment. Starting a business takes an average of 18 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 225 days, and costs are high. Closing a business is relatively straightforward.

Trade Freedom 71.2 Back to the top

Zambia's weighted average tariff rate was 9.4 percent in 2005. Import restrictions, some services market access barriers, some import taxes, some non-transparent and burdensome import certification requirements, some export licensing requirements, inefficient and cumbersome customs implementation and corruption add to the cost of trade. Ten points were deducted from Zambia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 72.9 Back to the top

Zambia has burdensome tax rates. The top income tax rate and the top corporate tax rate are both 35 percent. Other taxes include a value-added tax (VAT) and a property transfer tax. In the most recent year, overall tax revenue as a percentage of GDP was 16.1 percent. Tax collection has improved.

Government Size 82.1 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 24.4 percent of GDP. Despite ambitious reform schemes, progress in improving spending management and restructuring the public sector has been slow.

Monetary Freedom64.1 Back to the top

Inflation is high, averaging 10.9 percent between 2005 and 2007. The government subsidizes agricultural input products and influences prices through state-owned enterprises and utilities. Fifteen points were deducted from Zambia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign investors are granted national treatment. An investment board screens all investments for which incentives are requested. Investments in communications, banking, tourism, transport, mining, health, education, and aviation are subject to additional regulations and approvals. The retail sector is closed to foreigners. Bureaucratic red tape is extensive, contract enforcement can be weak, and the dispute resolution process is burdensome. Corruption remains an important deterrent to investment. Residents and non-residents may hold foreign exchange accounts. There are no controls on payments, transfers, capital transactions, or repatriation of profits.

Financial Freedom50.0 Back to the top

Zambia has a relatively liberal and advanced banking regime. The financial sector is small and dominated by banking, and the country's three largest banks account for about three-quarters of the total banking market. Banking supervision and regulation have improved due in part to the government's financial sector development plan. However, financial intermediation and credit to the private sector remain low, growing marginally. The poor loan repayment records of many borrowers and difficulty in seizing loan collateral have led banks to invest in government debt and to remain highly risk-averse. The legal climate does not easily support creditor claims on collateral, and lengthy trials are common. The insurance market is open to competition. Privatization of the state-owned Zambia State Insurance Corporation has stalled with little investor interest. Though participation is increasing, capital markets remain very small. There are no restrictions on foreign investment in the stock exchange.

Property Rights30.0 Back to the top

Zambia's judicial system suffers from inefficiency, government influence, and a lack of resources. Contracts are weakly enforced, and courts are relatively inexperienced in commercial litigation. Despite constitutional and legal protections, customary law and practice place women in a subordinate status with respect to property, inheritance, and marriage. Trademark protection is adequate, but copyright protection is limited and does not cover computer applications. It takes at least four months to patent an item or process.

Freedom From Corruption26.0 Back to the top

Corruption is perceived as widespread. Zambia ranks 123rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Controls over government funds and property are often weak, investigative units lack authority and personnel, and officials dealing with the public frequently demand illicit payments with impunity. The issuance of land titles has been singled out as particularly susceptible to corruption. The government has no clear policy for the disposal of confiscated assets, and a lack of transparency surrounds the liquidation of seized assets.

Labor Freedom51.0 Back to the top

Zambia's rigid labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is low, but the difficulty of firing workers is a disincentive for employment expansion.