2009 Index of Economic Freedom

Quick Facts

Population:

• 0.1 million

GDP (PPP):

• $0.4 billion
• 2.4% growth
• 1.8% 5-year compound annual growth
• $3688 per capita

Unemployment:

• 6.1%

Inflation (CPI):

• 0.2%

FDI Inflow:

• $12.0 million

The 2009 Index is the first to assess Kiribati's level of economic freedom. Kiribati's economic freedom score is 45.7, making its economy the 164th freest in the world. With an overall score below the world average, it ranks 38th out of 41 countries in the Asia–Pacific region

Kiribati is one of the world's poorest economies. The public sector remains large and is a major source of employment. However, only 10 percent of the population is employed on wages or salaries; the rest work in subsistence farming or fishing. The economy relies heavily on foreign assistance and remittances. Kiribati scores above the world average in only two areas: monetary freedom and labor freedom.

Challenges to overall economic freedom remain daunting, and geographical remoteness increases the costs of interaction with the world economy. The government has made efforts to decentralize economic activity from the main islands, but progress has been very limited. The financial sector remains underdeveloped, leaving a large portion of the population without formal access to banking services. Corruption also poses considerable impediments to entrepreneurial activity.

Background Back to the top

An archipelago spread across the equator in the Pacific, Kiribati gained its independence from Britain in 1979 and enjoys democratic government under a national constitution. President Anote Tong was elected to a second term in 2007. Kiribati was once rich in phosphates and highly dependent on mining, but deposits were exhausted in 1979. Today, the country depends on a $500 million Revenue Equalization Reserve Fund created with the profits from phosphates earnings, foreign assistance, remittances from overseas, sale of fishing licenses, and exports of fish and coconuts.

Business Freedom 62.5 Back to the top

The overall freedom to start, operate, and close a business is constrained by Kiribati's regulatory environment. Starting a business takes an average of 21 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 days, but the entry cost of launching a business is quite high.

Trade Freedom 55.0 Back to the top

Kiribati's simple average tariff rate was 17.5 percent in 2008. Weak regulatory capacity, some export licensing, limited infrastructure, and significant geographic isolation delay trade and increase costs. Ten points were deducted from Kiribati's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 42.2 Back to the top

Kiribati has high taxes. Both the top income tax rate and the top corporate tax rate are 35 percent. In the most recent year, overall tax revenue, including revenue from fishing licenses, was equivalent to 91.6 percent of GDP.

Government Size 0.0 Back to the top

Total government expenditures, including consumption and transfer payments, are exceedingly high. In the most recent year, government spending equaled 192.6 percent of GDP. Budget management is poor.

Monetary Freedom88.7 Back to the top

Inflation is minimal, averaging zero percent between 2005 and 2007, although there was increasing inflationary pressure during the first half of 2008. Ten points were deducted from Kiribati's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom30.0 Back to the top

Foreign investment is generally granted national treatment. All foreign investment is screened and subject to various levels of official approval, depending on the size of the proposal. Certain sectors are reserved exclusively for domestic activity. On average, it takes two to three months for a project to receive approval. Once approved, the government establishes criteria that the investor must fulfill with regard to employment, technology transfer, local content, and other requirements. Regulatory administration is ad hoc, limited, and non-transparent. There are no controls on foreign exchange or capital transactions. Foreign investors may lease but not own land.

Financial Freedom30.0 Back to the top

Kiribati's small financial sector remains underdeveloped and dominated by banking. High credit costs and scarce access to financing severely impede dynamic entrepreneurial activity and development of the private sector. A large proportion of the population remains outside the formal banking system. The economy is burdened by a public sector that accounts for close to half of GDP, and state-directed lending to public enterprises remains considerable. There are two banks operating in Kiribati. The Bank of Kiribati, in which the government has 25 percent ownership, is the only commercial bank and has only four branches. The Development Bank of Kiribati generally lends to small businesses. Capital markets are underdeveloped and inefficient, offering a very limited range of financing options for the private sector.

Property Rights30.0 Back to the top

The protection of movable property is secured by law and the courts. Land rights in cases of real property that is not owned by the government can be particularly complex and are subject to traditional land rights constraints. Non-citizens may not own land. The magistrates' courts have original jurisdiction in all cases involving land. Appeals of land cases are heard by the High Court.

Freedom From Corruption33.0 Back to the top

Corruption is perceived as significant. Kiribati ranks 84th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Laws providing criminal penalties for official corruption have not been implemented effectively, and government officials sometimes engage in corrupt practices with impunity. Nepotism based on tribal, church, and family ties is prevalent.

Labor Freedom85.6 Back to the top

Kiribati's labor market operates under flexible employment regulations that enhance employment and productivity growth. The non-salary cost of employing a worker is low, and the cost of dismissing a redundant employee is moderate. The formal labor market is not fully developed.