2009 Index of Economic Freedom

Quick Facts

Population:

• 9.5 million

GDP (PPP):

• $7.0 billion
• 5.5% growth
• 5.8% 5-year compound annual growth
• $738 per capita

Unemployment:

Inflation (CPI):

• 9.4%

FDI Inflow:

• $15.0 million

Rwanda's economic freedom score is 54.2, making its economy the 124th freest in the 2009 Index. Its score remains essentially the same as last year. Rwanda is ranked 22nd out of 46 countries in the Sub-Saharan Africa region, and its overall score is below the world average.

Rwanda scores well in fiscal freedom and government size. Personal and corporate income tax rates are moderate, and the overall tax burden is not high. Rwanda has made considerable progress in privatization. Of the 104 enterprises slated for privatization over the past decade, only 14 remain state-owned.

Rwanda rates poorly in investment freedom, financial freedom, property rights, and freedom from corruption. Although foreign investment is welcome, political instability is still a major deterrent. The government remains extensively involved in the financial sector. The judicial system lacks both independence and capacity, and legal procedures are commonly subject to corruption. Monetary stability needs to be enhanced.

Background Back to the top

Decades of ethnic tension culminated in the 1994 genocide in which an estimated one million Tutsis and moderate Hutus were slaughtered. The unity government of President Paul Kagame has focused on political reconciliation and rebuilding Rwanda's shattered economy. Despite strong growth based on tourism and exports of coffee and tea, poverty remains widespread, and over 80 percent of Rwandans are engaged in subsistence agriculture that is supplemented by cash crops. Economic recovery has been gradually reducing the importance of foreign aid, but aid flows continue to account for over 20 percent of national income.

Business Freedom 58.9 Back to the top

The overall freedom to conduct a business is restricted by Rwanda's regulatory environment. Starting a business takes an average of 14 days, compared to the world average of 38 days, but the entry cost of launching a business is high. Obtaining a business license takes about the world average of 225 days.

Trade Freedom 61.2 Back to the top

Rwanda's weighted average tariff rate was 14.4 percent in 2006. Liberalization of the trade regime has progressed, but some prohibitive tariffs, import taxes, complex and inefficient customs procedures, corruption, and lack of transparency in government procurement add to the cost of trade. Ten points were deducted from Rwanda's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 76.8 Back to the top

Rwanda has moderately high tax rates. The top income tax rate is 35 percent, and the top corporate tax rate is 30 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 14.1 percent.

Government Size 76.8 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 27.8 percent of GDP. Recent privatizations include cement and rice factories, banks, tea plantations, and a mining company. Donor aid focuses on public infrastructure improvements.

Monetary Freedom70.8 Back to the top

Inflation is high, averaging 9.2 percent between 2005 and 2007. The government controls the prices of cement, electricity, water, telecommunications, petroleum, beer, and soft drinks and also influences prices through regulation and state-owned enterprises and utilities. Ten points were deducted from Rwanda's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom40.0 Back to the top

Foreign investment is not subject to discriminatory treatment, and there are no restrictions on investment in any sector. Investment projects are subject to screening if investors are seeking government incentives. Commercial courts were created by law in December 2006, but none are in operation yet. Until commercial courts begin to operate, there is no effective means for enforcing contracts. Bureaucracy can be cumbersome and prone to corruption. Residents and non-residents may hold foreign exchange accounts if they provide supporting documentation. Payments and transfers are subject to some authorizations, maximum allowances, and limits. Nearly all capital transactions require central bank approval. Land is owned by the state but may be leased by both foreign and local investors.

Financial Freedom40.0 Back to the top

The small but growing financial sector is burdened by serious shortcomings in supervision, regulation, and oversight. The government reduced its involvement in banking in 2004 when it sold off two majority bank holdings, but it remains extensively involved and controls a significant portion of total assets. The high costs of financing and limited access to credit remain serious challenges for entrepreneurs. There are eight commercial banks, the largest of which has a 50 percent stake controlled by the government. The state owns the largest insurer, Sonarwa, and controls another insurance parastatal, and these two companies together account for a majority of the insurance market. There are no capital markets in Rwanda.

Property Rights30.0 Back to the top

Rwanda's judiciary is government-influenced and suffers from inefficiency, a lack of resources, and corruption. A land law passed in 2005 stipulates procedures for property registration, but no registries have been established. Despite adherence to key international agreements on intellectual property rights, sales of counterfeit goods and violations of pharmaceutical patents continue.

Freedom From Corruption28.0 Back to the top

Corruption is perceived as widespread. Rwanda ranks 111th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007. Experts regard corruption among public officials as “rampant.” The authorities reportedly harass journalists who report on corruption in government.

Labor Freedom59.5 Back to the top

Rwanda's restrictive labor regulations hinder overall productivity and employment growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be difficult. Regulations relating to the number of work hours are rigid.