2009 Index of Economic Freedom

Quick Facts

Population:

• 13.6 million

GDP (PPP):

• $9.5 billion
• 7.9% growth
• 4.2% 5-year compound annual growth
• $700 per capita

Unemployment:

Inflation (CPI):

• 8.1%

FDI Inflow:

• $29.7 million

Malawi's economic freedom score is 53.7, making its economy the 129th freest in the 2009 Index. Its score increased 1.1 points from last year, primarily reflecting improvements in property rights, government size, and trade freedom. Malawi is ranked 25th out of 46 countries in the Sub-Saharan Africa region, and its overall score is only a few points below the world average.

Malawi scores slightly above average in investment freedom and financial freedom. Despite some lingering barriers, foreign investment is generally welcome. The small financial sector is relatively stable compared to others in the region. Malawi has taken steps to improve its regulatory framework in order to enhance its business environment and develop a vibrant private sector, although overall progress has been slow.

Malawi ranks just below the world average in most other areas of economic freedom. Freedom from corruption and government size remain particularly weak. The weak rule of law jeopardizes the protection of property rights, and corruption is rampant. Monetary stability remains fragile, although government price distortions are not widespread.

Background Back to the top

Malawi is one of Africa's most densely populated countries. Over 85 percent of the population is engaged in subsistence agriculture, and the agricultural sector accounts for over 35 percent of GDP and over 80 percent of exports. Tobacco, tea, and sugar are the most important exports. After achieving its independence in 1964, Malawi became a one-party state that was ruled by Dr. Hastings Kamuzu Banda for over 30 years. President Bingu wa Mutharika was elected in 2004, but his subsequent formation of a new political party has thrown the political system into chaos.

Business Freedom 45.2 Back to the top

The overall freedom to start, operate, and close a business is restricted by Malawi's regulatory environment. The entry cost of starting a business is high, and obtaining a business license requires more than the world average of 18 procedures. Closing a business is relatively straightforward but very costly.

Trade Freedom 68.8 Back to the top

Malawi's weighted average tariff rate was 8.1 percent in 2006. Import restrictions, some services market access restrictions, import and export licensing requirements, import taxes, some discriminatory regulations, inadequate infrastructure, subsidies, and inefficient and corrupt customs administration add to the cost of trade. Fifteen points were deducted from Malawi's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 70.7 Back to the top

Malawi has high tax rates. The top income tax rate is 40 percent, and the top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 20.7 percent.

Government Size 48.6 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 41.4 percent of GDP. Because of minimal progress with privatization due to the unattractiveness of remaining state enterprises, authorities have turned their attention to public–private partnerships as a way to attract private finance for public projects.

Monetary Freedom69.8 Back to the top

Inflation is high, averaging 10.2 percent between 2005 and 2007. Although most prices are determined in the market, the government influences certain prices through state-owned enterprises and utilities, such as electricity, transportation, water, and telecommunications; controls the prices of petroleum products and sugar; and uses subsidies to stabilize maize and fertilizer prices. Ten points were deducted from Malawi's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign and domestic private investments are generally welcome in most sectors of the economy. There is no screening of foreign investment, although foreign and domestic investors are subject to licensing in certain sectors. Regulatory transparency has been improving, but procedural delays and red tape continue to impede the investment process. The legal system is slow, and contract enforcement can be uncertain. Non-residents may hold foreign exchange accounts, subject to restrictions and government approval. Because of shortages of foreign exchange, some payments and transfers face quantitative limits. Most capital transactions by residents require approval. Land ownership may be subject to some restrictions.

Financial Freedom50.0 Back to the top

Malawi's developing financial sector remains small and dominated by banking. Financial institutions offer a variety of services, generally allocating credit on market terms. However, high credit costs and scarce access to financing hinder more vibrant economic business activity. Much lending goes to the government or subsidiaries, though a decline in state borrowing has led to greater competition for private-sector lending. There were nine full-service commercial banks in 2007. The two largest banks are the domestic National Bank of Malawi, which is 50 percent government-owned, and Stanbic, a subsidiary of a South African bank. Small investment financing is dominated by the government and foreigners and is subject to regulatory problems. Capital markets are not fully developed, and activity on the Malawi Stock Exchange remains very limited.

Property Rights50.0 Back to the top

All rights to property, including real and intellectual property, are legally protected. There are reports of government intervention in some cases and frequent allegations of bribery in civil and criminal cases. Court administration is weak, and due process can be very slow. Malawi has laws protecting intellectual property rights and adheres to international IPR treaties and agreements.

Freedom From Corruption27.0 Back to the top

Corruption is perceived as widespread. Malawi ranks 118th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. There have been allegations of serious corruption in agencies handling customs, taxes, and procurement. Cases are still pending against several senior ruling party officials and three former cabinet ministers who were indicted on corruption offenses.

Labor Freedom57.2 Back to the top

Malawi's burdensome labor regulations discourage employment and productivity growth. The non-salary cost of employing a worker is moderate, but the cost of laying off a worker creates a disincentive for additional hiring.