The Government of Iraq (GOI) continues to face the dual challenges of reconstruction from the fight against ISIS and the financial impact of a constrained budget due to lower world oil prices compared to 2014. Export increases have helped Iraq respond to lower prices; however, oil revenue in 2017 was only 70.7percent of 2014 revenues, despite a 26.4percent increase in exports for the same period. The GOI is also confronting a humanitarian crisis. Although the Iraqi government announced its defeat of ISIS in late 2017, 2.27 million Iraqis remained displaced as of April 2018. As a response to its fiscal challenges, in August 2015, Prime Minister Haider al-Abadi publicly committed to an economic plan that included reforming Iraq’s failing state-owned enterprises (SOEs), fighting corruption, reducing bureaucratic bottlenecks, and investing in necessary infrastructure. To date, however, the reforms have been only partially implemented as major political parties have challenged Abadi’s reform agenda.
ISIS’s previous control of large swaths of territory in Mosul and parts of northern and western Iraq, beginning in June 2014, cut key domestic and international trade routes and slowed economic growth. In the fall of 2016, the Iraqi Security Forces and the International Coalition to Defeat ISIS, led by the United States, launched a campaign to retake Mosul. On December 9, 2017, Prime Minister Abadi declared that the Iraqi Security and Coalition Forces had successfully liberated all of Iraq. Though major military operations against ISIS have concluded, security challenges and the threat of resurgent extremist groups remain an impediment to investment in many parts of the country. However, the security situation varies throughout the country and is generally less problematic in Iraq’s southern provinces and the Iraqi Kurdistan Region (IKR).
Despite the current fiscal and security challenges, Iraq has long-term potential for U.S. investment. Iraq has the fifth largest proven oil reserves in the world and needs tremendous investment in reconstruction and infrastructure development. Iraq also has the twelfth largest natural gas reserves in the world, but due to underdevelopment of its natural gas sector, and the increased need for natural gas to produce electricity, Iraq has recently been forced to import natural gas and is actively soliciting foreign investment to develop this vitally important sector. U.S. companies have opportunities to invest in the security, energy, environment, construction, healthcare, tourism, agriculture, and infrastructure sectors. Iraq imports large volumes of agricultural commodities, machinery, consumer goods, and defense articles.
Government contracts and tenders – the source of most commercial opportunities in Iraq – historically have been almost entirely financed by oil revenues. Increasingly, the GOI has asked investors and sellers to provide financing options and allow for deferred payments. Increases in oil production and exports in 2017, along with the stabilization and increase in oil prices, resulted in a 37percent increase in oil revenues from 2016 levels. The 2018 budget passed by Parliament in April 2018 projects a deficit of $10.6 billion based on a cautious expectation that the price of oil exports will average USD $46 per barrel. Iraq issued $1 billion in bonds guaranteed by the U.S. government in January 2017 and another $1 billion in bonds without a guarantee in July. Iraq receives financial aid lending through an IMF Stand-By Arrangement. With the completion of the second review in August 2017, Iraq was allowed to draw the equivalent of about $824.8 million, bringing total disbursements to $2.11 billion.
Investors in Iraq continue to face challenges resolving commercial disputes, receiving timely payments, and winning public tenders. Potential investors should prepare to face significant costs to ensure security, cumbersome and confusing procedures, and long payment delays on some GOI contracts. Concerns about corruption, customs regulations, dysfunctional visa and residency permit procedures, unreliable dispute resolution mechanisms, electricity shortages, and lack of access to financing remain common complaints from companies operating in Iraq. Shifting and unevenly enforced regulations create additional burdens for investors. The GOI currently operates 192 SOEs, a legacy from decades of statist economic policy.
Investors in the IKR face many of the same challenges as investors elsewhere in Iraq, but a pro-business visa regime, and a traditionally more stable security situation make the region more attractive to foreign businesses. However, the 2014 ISIS offensive, the drop in oil prices, and the aftermath of the 2017 Kurdish independence referendum, which led to the central government’s physical seizure of the Kirkuk oil fields and the temporary closure of IKR’s airports to international flights, dampened foreign investment and the region’s economy has struggled to recover.
The U.S. government and the GOI are seeking to address impediments to trade and investment through bilateral economic dialogue mechanisms provided under the U.S.-Iraq Strategic Framework Agreement and the Trade and Investment Framework Agreement. The American Chamber of Commerce in Iraq (AmCham Iraq), re-launched in October 2015, provides a platform for commercial advocacy for the U.S. business community. Efforts to start an American Chamber of Commerce in the IKR continue. Several regional chambers, such as the Erbil Chamber of Commerce, also provide support to U.S. businesses in the IKR.