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Executive Summary

The Government of Iraq (GOI) continues to face reconstruction challenges after the defeat of the ISIS physical caliphate, an uneven security environment, an economy primarily dependent on oil revenues, and deep institutional corruption. Widespread street protests that began October 2019 led to the resignation of then Prime Minister Adil Abd al-Mahdi, amid calls for greater government accountability, improved government services, and more jobs. After two other PM-designates were unsuccessful, the Iraqi Council of Representatives approved Mustafa al-Kadhimi, his political platform, and some proposed cabinet ministers on May 7, 2020.

An uneven security environment, including the threat of resurgent extremist groups, remains an impediment to investment in many parts of the country. Other lingering effects of the fight against ISIS include major disruptions of key domestic and international trade routes and the destruction of economic infrastructure, especially in the ISIS-controlled territory in Mosul and parts of northern and western Iraq. Some militia groups that participated in the fight against ISIS remained deployed even after the completion of combat operations. Some militia also appear to be under only marginal government control and have been implicated in a range of criminal and extralegal activities, including extortion. However, the security situation varies throughout the country and is generally less problematic in the Iraqi Kurdistan Region (IKR).

Despite these challenges, the Iraqi market offers some potential for U.S. exporters. Iraq imports large volumes of agricultural commodities, machinery, consumer goods, and defense articles. While non-oil bilateral trade with the United States was just over USD1 billion in 2019, Iraq’s economy had an estimated GDP of USD200 billion.  Government contracts and tenders are the source of most commercial opportunities in Iraq in all sectors, including the significant oil and gas sectors, and have been financed almost entirely by oil revenues. Increasingly, the GOI has asked investors and sellers to provide financing options and allow for deferred payments. Although there has been slow progress in negotiating flare-gas-capture projects on associated gas-to-oil production and licensing the exploration of free gas fields, Iraq announced the release of a national gas plan in early 2020, which identified several long-term investment projects to modernize and increase the capacity of the country’s gas industry.

Investors in Iraq continue to face extreme challenges resolving issues with GOI entities, including procurement disputes, receiving timely payments, and winning public tenders. Difficulties with corruption, customs regulations, irregular and high tax liabilities, unclear visa and residency permit procedures, arbitrary application of e-regulations, lack of alternative 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 state-owned enterprises (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 have a pro-business, visa-on-arrival option and traditionally more stable security situation. However, the region’s economy has struggled to recover from the 2014 ISIS offensive, the drop in oil prices, and the aftermath of the 2017 Kurdish independence referendum. Key factors in the IKR’s ability to attract business and investment interests include: stable oil prices, budget support to the Kurdistan Regional Government (KRG) from the central government, and agreements between the GOI and KRG on a unified customs system and the shipment of Kirkuk oil through the IKR pipeline to Turkey.

Numerous efforts to facilitate business climate improvements saw positive movement in the past year. Since November 2018, the U.S. Embassy Baghdad Trade and Investment Team has operated as a partner post of the U.S. Commercial Service, supported by its office at the U.S. Embassy Amman. As a result, the U.S. Embassy in Baghdad now offers eight fee-based services, including market reports, local partner matching, and trade missions.

The U.S. government and the GOI have revived the 2005 U.S.-Iraq Strategic Framework Agreement and the Trade and Investment Framework Agreement (TIFA), and held the second TIFA meeting in June 2019 with good success. The American Chamber of Commerce in Iraq, having relaunched in October 2015, provides a platform for commercial advocacy for the U.S. business community. Local businesses also are re-energizing an American Chamber of Commerce presence in the IKR.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 162 of 180
World Bank’s Doing Business Report 2019 172 of 190
Global Innovation Index 2019 Not Ranked
U.S. FDI in partner country ($M USD, stock positions) 2018 2,216
World Bank GNI per capita 2019 5,740

6. Financial Sector

Capital Markets and Portfolio Investment

Iraq remains one of the most under-banked countries in the Middle East.  The Iraqi banking system includes 68 private banks and seven state-owned banks.  As of early 2020, 20 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks.  The three largest banks in Iraq are Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), which account for roughly 85 percent of Iraq’s banking sector assets.  Iraq’s economy remains primarily cash based, with many banks acting as little more than ATMs.  Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.

Credit is difficult to obtain and expensive.  Iraq ranks 186 out of 190 in terms of ease of getting credit in the World Bank’s 2020 Doing Business Report.  Although the volume of lending by privately-owned banks is growing, most privately-owned banks do more wire transfers and other fee-based exchange services than lending.  Businesses are largely self-financed or between individuals in private transactions.  State-owned banks mainly make financial transfers from the government to provincial authorities or individuals, rather than business loans.

The CBI introduced a small and medium enterprise lending program in 2015, in which 35 of the 48 private banks have participated.  In early 2020, it launched a real estate lending initiative, and an Islamic finance consolidation program.

The main purpose of TBI is to provide financial and related services to facilitate trade, particularly through letters of credit.  Although CBI granted private banks permission to issue letters of credit below USD50 million, TBI continues to process nearly all government letters of credit.

Money and Banking System

Although banking sector reform was a priority of Iraq’s IMF Stand-By Arrangement, the GOI has had only incremental success reforming its two largest state-owned banks, Rafidain and Rasheed.  Private banks are mostly active in currency exchanges and wire transfers.  CBI is Iraq’s central bank, headquartered in Baghdad, with branches in Basrah and Erbil.  CBI’s Erbil branch, and the IKR’s state-owned banking system, are now electronically linked to the CBI system.   The CBI now has full supervisory authority over the financial sector in the IKR, including the banks and non-bank financial institutions.

Foreign Exchange and Remittances

Foreign Exchange

The currency of Iraq is the dinar (IQD).  Iraqi authorities confirm that in practice, there are no restrictions on current and capital transactions involving currency exchange as long as valid documentation supports underlying transactions.  The Investment Law allows investors to repatriate capital brought into Iraq, along with proceeds.  Funds can be associated with any form of investment and freely converted into any world currency.  The Investment Law also allows investors to maintain accounts at banks licensed to operate in Iraq and transfer capital inside or outside of the country.

The GOI’s monetary policy since 2003 has focused on ensuring price stability primarily by maintaining a de facto peg between the IQD and the USD, while seeking exchange rate predictability by supplying U.S. dollars to the Iraqi market.  Banks may engage in spot transactions in any currency; however, they are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes through auction but can do so through wire transfer.  There are no taxes or subsidies on purchases or sales of foreign exchange.

Remittance Policies

There are no recent changes to Iraq’s remittance policies.  Foreign nationals are allowed to remit their earnings, including U.S. dollars, in compliance with Iraqi law.  Iraq does not engage in currency manipulation.  Iraq is listed as a jurisdiction with strategic deficiencies according to the Financial Action Task Force.

Sovereign Wealth Funds

Iraq does not have a sovereign wealth fund.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

The U.S. International Development Finance Corporation (DFC) provides debt and equity financing, political risk insurance, and technical development to mobilize private sector investment to advance development in emerging economies. DFC currently has eight active projects in Iraq with a total commitment level of over USD280 million. These include projects in the energy, housing, and finance sectors as well as insurance for humanitarian and other assistance.

Iraq is a signatory to the Riyadh Convention; however, it is not a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”), which is typically a requirement for DFC political risk insurance.

Investment Climate Statements
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U.S. Department of State

The Lessons of 1989: Freedom and Our Future