Investing in Iraq: Prospects and Challenges

The dormant Iraqi economy has received a new thrust in recent years. As the country looks forward to overcome a prolonged period of conflict and stagnation, economic opportunities have opened up. A combination of several factors makes Iraq a favorable business and investment destination. The need to build new and modern infrastructures, develop housing, healthcare systems and other public services, enhance human resource through training in market-usable skills, foster expansion of export base, offer a wide range of opportunities to international companies ready to take on the challenge of post-war reconstruction. Some believe that rebuilding of Iraq offers one of the biggest global investment opportunities in decades, even though continued political turmoil makes for a risky business environment.

Nonetheless, a relative improvement in security situation of the country in the last two years with decline in insurgency is helping spur growth. The Iraqi government’s Five-Year National Development Plan (2010–2014), sets as targets a 9.4% annual rate of economic growth and US$186 billion worth of investments. Iraq’s largely state-run economy is dominated by the oil sector, which traditionally provides more than 90% of foreign exchange earnings.

Prospects of Doing Business in Iraq

Some positive indicators of business opportunities are:

High growth rate and high revenue from oil: The World Bank and IMF project a high GDP growth rate of 10% in 2013, primarily driven by steadily increasing oil production and high prices for energy. Currently, Iraq’s oil production is up to 3 billion barrels per day (bpd), of which around 2.3 million bpd is exported. With oil prices at about $90 per barrel, Iraq’s production rate translates into roughly $100 billion a year in revenue. Iraq has the world’s fourth-largest oil reserves and aims to export 6 million bpd by 2017. According to the IEA World Energy Outlook (2012) special report, Iraq could become the world’s second-largest oil exporter within two decades and double its output by 2020.[1]

Increased government spending: High revenues will keep government spending on the higher side amidst mounting pressure to provide basic services. This will buttress economic growth. Oil revenue will provide the necessary funding for development of infrastructure and other sectors of the economy, which along with ongoing economic and legislative reforms are creating an environment conducive to investment. The need for investment is high if jobs are to be created to bring down the current employment rate of 15% by half.

Laws in place for foreign Investment: Some laws on foreign investment are already in place. The foreign investment law passed shortly after the 2003 invasion now permits 100% foreign ownership of businesses in all sectors except oil and mineral extraction. Largely, the law tries to establish equality between foreigners and Iraqis on all terms of commercial interaction. As a result of the legislative reforms, foreign investment has grown from $3.87 billion in 2003 to $55.67 billion in 2011, an estimated 40.3% increase in total deal value over the previous year, according to Dunia Frontier Consultants.[2]

Diversification of economy: Iraq has lacked capital, technology, and skills for more than two decades due to prolonged sanctions and war. These vital inputs are needed in one and all sectors of economy as the country rebuilds, and the government recognizes the fact that foreign investors can bring them all. The Iraqi government is keen on diversifying the economy away from oil and has steadily opened the market to attract external investment and joint ventures in housing, infrastructure, industry, manufacturing, agriculture, food processing, transportation, financial services and tourism. To facilitate investment, the National Investment Law 13 (2006) has been amended to allow non-Iraqis to own land for housing projects, as well as investment partnerships with state-owned enterprises. The same Law exempts foreign companies from tax for up to ten years and import fees for a period of three years.

Economic reforms: Iraq is making some progress in building the institutions needed for an open economic environment. In February 2010, Iraq concluded a Stand-By Arrangement (SBA) with the IMF that details further economic reforms. This legislation includes a hydrocarbon law with two basic aims: a) establishment of a modern legal framework to allow Iraq to develop its resources and b) enactment of a revenue sharing law to equitably divide oil revenues within the nation. Although both are still under contentious political negotiation, foreign oil companies have signed contracts throughout Iraq, giving them a “strategic entry” at this time that would ensure better/larger market share in the future.

Opportunities in retail sector: Iraq’s heavy import-reliance implies that there is great potential for investment in the retail sector.

Challenges for Businesses in Iraq

However, challenges of doing business in Iraq abound. As it stands, Iraq rates as one of the worst places in the world to do business, languishing at 166 out of 183 countries, according to a World Bank report. For starting a business Iraq ranks even lower, at 174. Yet, this has not deterred foreign businesses from coming in. Some of the specific problems are:

Security: The first and foremost problem is security. While the security environment has steadily improved since 2010, attacks on people and institutions occur on a more or less regular basis, perpetrated by al Qaeda’s Iraq wing and allied Sunni insurgent groups. A shaky federal government, rife with bitter sectarian and political fights, together with weak security services, have allowed militia and insurgent groups to assert themselves time and again, although the incidence of violence has dramatically decreased since the height of sectarian fighting of 2006–2007. Iraq still remains a high-risk place to invest with possibility of renewed violence and political instability. The security situation in the Iraqi Kurdistan Region (IKR), which includes the provinces of Sulaymaniyah, Irbil, and Dahuk, has been more stable relative to the rest of Iraq in recent years, though threats remain.

Corruption: As is the case with most developing economies, corruption in Iraq remains high. According to Transparency International’s Corruption Perception Index (2012), Iraq is ranked as the seventh most corrupt country in the world. Problems in Iraq include a lack of transparency in government regulations, government involvement in bribery and preferential tenders, embezzlement of public funds, a weak judicial system, feeble role for public opinion and the media in confronting corruption, and the ineffectiveness of public sector anti-corruption efforts. The National Endowment for Democracy in its Iraqi Business Survey Report (2011)[3], names corruption as the topmost factor hindering the growth of the Iraqi business sector.

Lack of Transparency: In order to improve the business environment in Iraq, there is also a pressing need for improving transparency within government procurement/contracting procedure in Iraq. Government contracting is one area where businesses perceive a high level of illegal activity, especially when it comes to contract grants, raising question of crony capitalism rather than free and open competition. TheIraqi government’s ability to tender projects is fundamentally weak, says the Department of Commerce Guide for US Companies (2012). Across the board, there are institutional capacity issues with regard to due diligence, project award, approvals, implementation, financing, and payment.[4]

Unequipped banking system: If Iraq is to attract substantially greater foreign investments, banking sector reforms are imperative. Althoughthe banking sector assets have grown rapidly over the last five years owing to massive oil revenues, banking infrastructures and operations have not kept pace with economic expansion. There are currently 51 banks in Iraq, seven of which are state-owned and hold 89% of the country’s bank deposits. State-owned banks are inefficient and ridden with bad debts and old losses. Despite being awash with liquidity, they have remarkably low lending rates as compared to the plethora of small, privately owned banks that are undercapitalized and therefore do limited lending. This highlights an urgent need for a level-playing field for competition from the private sector. As state-owned banks are favored vehicles for the Iraqi government’s expenditure policies, restructuring may force more transparency on its own fiscal activity, a move that may not yet find favor across board. 

Intellectual Property Rights (IPR) issue: Enforcement and protection of intellectual property rights is another area of concern for business in Iraq. The IPR function is spread over several ministries, which thwarts a coherent policy. Although in July 2011, the Iraqi Government implemented a new pre-certification requirement for most imported product categories, counterfeit products in consumer goods and electronics are widely available.

Undeveloped arbitration law: Arbitration law for settlement of commercial disputes is undeveloped. In addition commercial arbitration courts are needed in different provinces to settle trade disputes involving non-Iraqi business partners. The Iraqi government is currently drafting an arbitration law based on UN International Commission on International Trade Law relating to international commercial arbitration.

Internal dispute over oil rights: A critical issue that could impact Iraq’s sustained inflow of high revenue is the dispute over oil rights. The country’s government must overcome internal the dispute over oil rights with the autonomous Kurdistan Regional Government (KRG) based in Irbil in the north. If the government finalizes the hydrocarbon law and resolve its dispute with KRG, it would offer greater clarity to foreign oil investors, who are key to financing Iraq’s growth. Many warn that Iraq needs sustained investment of $25 billion a year on average for a decade to increase its level of output.

Current Scenario

Nonetheless, the immense potential of Iraqi economy is steadily attracting foreign investors. The above-mentioned study by Dunia found over 45 countries active in Iraq in 2011, in the fields of investments, service contracts and other commercial activities into the country. Foreign investments have gone into top sectors such as residential real estate, oil and gas, electricity, water and sanitation, defense, medicine, commercial real estate and telecommunications, despite shaky security situation and political uncertainties.

In 2011, Asian countries were number one investors, constituting 42% of the total investment in Iraq, followed by Europe at 25.1% and the US at 12.4%. Among the Asians, South Korea topped the list, cornering 25.5% of the total investments. Turkey from the West Asian region stood a distant second at 6.6% followed by China, UAE and Iran.

Fig: Top 10 Investors in Iraq, 2011.

Source: Joel Wing, “2011 Sees Another Large Increase In Foreign Investment In Iraq,” AK News (December 23, 2012), http://www.aknews.com/en/aknews/8/297360/.

Some indicative investments by Asian countries are as follows:

South Korean investment went primarily into construction of housing units, water and sanitation, and electricity infrastructure. The country is also building power plants, most notably a 1500-megawatt power plant in Basra. Turkey is heavily into the housing sector, building large units in Karbala, Ninewa and international zone near Baghdad. It is also building a 750-megawatt power plant in Ninewa. China has invested heavily in the oil sector and electricity and power plant. Shanghai Electric is involved in expansion of Zubaidiyya power plant in Wasit and China National Machinery and Equipment Corporation is involved in the construction of 630-megawatt power plant, Salahuddin. UAE’s large investments have gone into building malls and shopping centers in Kurdistan. National Iranian Gas Company is engaged in constructing of natural gas export pipeline. A 4,125-megawatt power plant in Wasit is another striking investment by Iran. India’s modest investment includes a 550-megawatt power plant, Wasit, by India’s Bharat Heavy Electricals Limited.[5] Saudi Arabian companies have shown interest in the agricultural sector but nothing has materialized yet, probably owing to frosty diplomatic relations between the two countries.

Companies from Asia are beating their European and American rivals in investments in Iraq. Being more prone to risk-taking, they are cashing in on the opportunity to establish businesses that would be profitable in the long-term. The fact that foreign companies from all over the world are willing to invest means that they are looking past the perception of Iraq as a dangerous place for sustained business. The profitable developments in oil sector and improvements in security are boosting investor confidence.

[1] Joel Wing, “2011 Sees Another Large Increase In Foreign Investment In Iraq,” AK News, available at http://www.aknews.com/en/aknews/8/297360/ (23/12/2012).

[2]OECD/IEA, “Iraq Energy Outlook (World Energy Outlook Special Report),” 2012.

[3] Dunia Frontier Consultants, “Foreign Commercial Activity in Iraq,” 2011.

[4] Centre for International Private Enterprise, National Endowment for Democracy, “Iraqi Business Attitudes on the Economy, Government, and Business Organizations: 2011 Iraqi Business Survey, Final Report.”

[5]US Commercial Service, Department of Commerce, “Doing Business in Iraq: 2012 Country Commercial Guide for US Companies.”