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Afghanistan

Executive Summary

Afghanistan has a poor, agrarian economy with a small manufacturing base, few value-added industries, and a partially dollarized economy.  More than 55 percent of the population lives below the poverty line. International financial and security support has been instrumental in growing the Afghan economy from a USD 2.4 billion GDP in 2001 to USD 20.1 billion in 2018.  In addition, various estimates place the value of the informal economy to be about USD 4.1 billion, based in part on illicit activities. Government expenses will continue to far exceed revenues, resulting in continued dependency on international donors for the foreseeable future, although the Government of National Unity (GNU) has been able to increase tax revenue by implementing reforms and improved tax collection procedures.

The drawdown of international forces from 2012-2014 significantly slowed economic growth as demand for transport, construction, telecommunications and other services fell.  Economic growth averaged only 2.3 percent annually from 2014-2017, with the same rate of growth estimated for 2018. Much higher growth rates are required to support a three percent annual population growth and roughly 400,000 new entrants into the labor market each year.  The IMF notes that a return to growth is conditioned on improvements in the security sector, strong reform, and investments in key economic sectors, such as mining and agriculture.

Agriculture remains Afghanistan’s most important source of employment:  60-80 percent of Afghanistan’s population works in this sector, although it accounts for less than a third of GDP due to insufficient irrigation, drought, lack of market access, and other structural impediments.  Most Afghan farmers are primarily subsistence farmers.

The World Bank’s Ease of Doing Business rating for Afghanistan increased in 2019 to #167 from #183 in 2018, driven by reforms in the ease of starting a business, getting credit, protecting minority investors, revenue collection, and a new insolvency law. The government has undertaken several important reforms to attract Afghan private-sector and foreign investment, including promotion of public-private partnerships and streamlining the business license registration process.  In 2017, the government consolidated business licensing procedures under the Afghanistan Central Business Registry (ACBR). The ACBR extended the validity of business licenses for three years and reduced the licensing fee. Afghanistan continues to have a small formal financial services sector and domestic credit remains tight.

Significant challenges to business in Afghanistan remain, due to the country’s still-developing legal environment, varying interpretations of tax law, inconsistent application of customs duties, persistent insecurity, and the impact of corruption on administration.  Afghanistan’s legal and regulatory frameworks and enforcement mechanisms remain irregularly implemented. The existence of three overlapping legal systems – Sharia (Islamic Law), Shura (traditional law and practice), and the formal system under the 2004 Constitution – can be confusing to investors and legal professionals.

While Afghanistan’s security challenges remain headline news, other challenges also significantly impact the business environment.  For example, corruption often hampers fair application of laws, regulatory bodies lack capacity, and financial data systems are limited.  Furthermore, although government officials express strong commitment to a market economy and foreign investment, Afghan and foreign business leaders report this attitude is not always reflected in practice.  Private sector leaders routinely note that some government officials levy unofficial taxes and inflict bureaucratic delays to extract rents.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 172 of 180 https://www.transparency.org/country/AFG 
World Bank’s Doing Business Report “Ease of Doing Business” 2019 167 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2018 N/A https://www.globalinnovationindex.org/gii-2018-report 
U.S. FDI ($M USD, stock positions) 2017 $19M https://ustr.gov/countries-regions/south-central-asia/afghanistan 
World Bank GNI per capita 2017 $550 https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=AF 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

Under the Private Investment Law of 2005 (PIL), qualified domestic or foreign entities may invest in all sectors of the economy.  Article 16 of the PIL states that approved domestic and foreign companies with similar objectives are subject to the same rights under Afghan law and the same protections against discriminatory governmental actions.

The Ministry of Commerce and Industries (MOCI) has taken on the role of promoting business growth, investment, and trade.  The High Commission on Investment (HCI) is responsible for investment policy making. The HCI includes the Ministers of Agriculture, Finance, Foreign Affairs, Mines and Petroleum, and the Governor of the Central Bank (Da Afghanistan Bank). The Minister of Commerce and Industries chairs the HCI.  The High Economic Council (HEC), which is chaired by the President and includes both the HCI members and representatives from academia and the private sector, also plays a role in investment policy development.

The HEC, HCI, MOCI, and the Afghan Chamber of Commerce and Industries are tasked with maintaining a dialogue and resolving business disputes with the government.

On July 29, 2016, Afghanistan was formally admitted to the WTO, which could bring about a number of benefits for Afghanistan after full implementation, including improving prospects for foreign direct investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under the PIL, foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity, and freely acquire and dispose of interests in business enterprises.

While there is no requirement for foreigners to secure Afghan partners, the Afghan Constitution and the PIL prohibit foreign ownership of land.  In practice most foreign firms find it necessary to work with an Afghan partner. Foreign land ownership is not permitted, however, foreigners may lease land for up to 50 years.

Although the HCI has authority to limit the share of foreign investment in some industries, specific economic sectors, and specific companies, that authority has never been exercised.  In practice, investments may be 100 percent foreign owned.

Article 5 of the PIL prohibits investment in nuclear energy and gambling establishments.

Investment in certain sectors, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources, and infrastructure (defined as power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the HCI, in consultation with relevant government ministries.  The HCI may choose to apply specific requirements for investments in restricted sectors. Direct investment exceeding USD 3,000,000 requires HCI approval of the investment application.

Other Investment Policy Reviews

There have been no third-party investment policy reviews by the OECD, WTO, or UNCTAD in the past six years.

Afghanistan’s last major investment policy review was the Afghanistan National Development Strategy (ANDS), which was developed with the assistance of the United Nations Development Program (UNDP) and covered the period 2008-2013.  That strategy attempted to guide development investments in the focus areas of (1) agriculture and rural rehabilitation, (2) human capacity development, and (3) economic development and infrastructure, through high-priority programs chosen for contributions to job creation, broad geographic impact, and likelihood of attracting additional investment.

Business Facilitation

The Ministry of Commerce and Industry (MoCI) is responsible for business facilitation.  The HCI and HEC are responsible for investment and economic policy making.

Foreign or domestic companies investing in Afghanistan must obtain a corporate registration from the Afghanistan Central Business Registry (ACBR) and a Tax Identification Number issued by the Department of Revenue.

The websites for registration are:

Companies operating in the security, telecommunications, agriculture, and health sectors require additional licenses from relevant ministries.  Companies seeking licenses to provide consultancy, legal, or audit services must meet requirements for education or related experience for top officers.

To begin the process for initial issuance of licenses, renewals, and material changes to the license, foreign firms must submit a letter of interest to the Afghan Center of Business Registers.  From there, the Ministry of Commerce and Industry (MoCI) will process the request, and notify the foreign firm how to proceed in obtaining the license.

While registering a business can take as little as two days, it often takes longer and may require a local attorney’s help.

Ease of doing business reforms in 2016 led MOCI to begin issuing licenses for three years, as opposed to one year, to attract investment.  Obtaining a business license is relatively simple, however, applications for renewal are contingent upon certification from the Ministry of Finance (MOF) that all tax obligations have been met.  Some companies have seen MOCI license renewals delayed while the MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede license renewal.

Outward Investment

The government does not promote or incentivize outward investment.  Due to the security situation capital flight is a concern.

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service.  There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market-clearing rate.

The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.  The MOF has in some instances frozen the domestic bank accounts of companies over tax disputes, which has effectively served to prohibit transfers of capital.

2. Bilateral Investment Agreements and Taxation Treaties

In 2004, Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States.  Afghanistan does not have a bilateral investment treaty (BIT) with the United States. Afghanistan has BITs with Germany, Iran, and Turkey.

Afghanistan has signed multiple trade, economic, and investment agreements/memoranda of understanding with other countries.  The most significant is the Afghanistan Pakistan Transit Trade Agreement (APTTA), signed in 2010.

The United States, European Union, Canada, India, and Japan have granted Afghan exports preferential import tariffs under their Generalized Systems of Preference.  Afghanistan is a member of the Economic Cooperation Organization (ECO), the South Asia Free Trade Area (SAFTA), the South Asian Association for Regional Cooperation (SAARC), and of Central Asian Regional Economic Cooperation (CAREC).  The Afghan government has stated its intent to formally join the Transport Corridor Europe Caucasus Asia organization (TRACECA).

Afghanistan does not have a bilateral taxation treaty with the United States.

The Embassy believes many U.S. firms and U.S.-related entities are working with the Afghan government to resolve persistent differences over dividend taxes, vendor withholding tax obligations, taxation of U.S. government assistance, and other tax and contract disputes.

3. Legal Regime

Transparency of the Regulatory System

Afghanistan’s Law on Publication and Enforcement of Legislation requires that official declarations, laws, decrees, and other legislative documents be published in the Official Gazette.  There is no legal requirement or practice for publication and comment for domestic laws, regulations, or other measures of application that will become legally enforceable.

In general, the Afghan government shares draft legislation with interested parties for comment and some ministries publish draft legislation in national newspapers for public comment.  Foreign firms in Afghanistan follow accounting procedures consistent with international norms. The government uses ministerial orders to enforce regulatory compliance. For example, ministries have in the past taken action to freeze accounts or limit travel for companies until they comply with regulations.

International Regulatory Considerations

Afghanistan became a WTO member in 2016.  The government is working to build its capacity to meet the notification requirements of the WTO.

Legal System and Judicial Independence

The legal system of Afghanistan consists of Islamic, statutory, and customary (Shura) rules.  The supreme law of the land is the Constitution. The judiciary system is composed of the Supreme Court, the Courts of Appeal, and the Primary Courts.  There are trial and appellate courts that specialize on commercial disputes. Since 2002, NGOs have been working to strengthen the rule of law in Afghanistan by identifying peaceful means for dispute resolutions and developing partnerships between state and community actors in the hopes of improving access to justice.

Despite these efforts, many legal disputes are still resolved outside the formal justice system by community based tribal leaders.  Contract law in Afghanistan is set out in the Afghanistan Commercial Code 1955 and the Afghanistan Civil Code 1977. Under these codes, parties are generally free to:  a) enter into and perform a contract on any commercial subject matter provided that subject matter or performance is not contrary to law, public policy, or sharia; and b) agree to have the law of a foreign state govern their contract.

According to credible contacts, civil cases in the commercial court system can sometimes take more than 18 months for parties to obtain resolutions.  Cases are frequently resolved more quickly through an informal system or, in some cases, pursuant to negotiations facilitated by formal justice system actors or private lawyers.

Because access to the formal legal system is limited in rural areas, local elders and shuras (consultative gatherings, usually of men selected by the community) are often the primary means of settling both criminal matters and civil disputes, and they are known to levy unsanctioned punishments.  According to the 2018 Asia Foundation Survey of the Afghan People, shuras were used to resolve 45 percent of all disputes and represent the predominant form of dispute resolution employed by Afghans (up from 43 percent in 2017).

Investors should be aware that the 2018 Human Rights Report noted that arbitrary arrests occur in most provinces, and that authorities frequently detain citizens without respecting essential procedural protections.  Local law enforcement officials reportedly detain persons illegally on charges not specified under local criminal law. While the law gives defendants the right to object to his or her pretrial detention and receive a court hearing on the matter, authorities generally do not observe this requirement.

Laws and Regulations on Foreign Direct Investment

Under the PIL, investment is defined as currency and contributions in kind, including, without limitation, licenses, leases, machinery, equipment, and industrial and intellectual-property rights provided for the purpose of acquiring shares of stock or other ownership interests in a registered enterprise.  The PIL permits investments in nearly all sectors except nuclear power, gambling, and production of narcotics and intoxicants. There are also limitations on the total value of service transactions or assets with respect to motion pictures, road transport (passenger and freight), and on the total number of people that can be employed in security companies.

Foreign investors have complained of irregularities in the court system, arbitration, and tax disputes.  As a result of the various legal and regulatory challenges, companies operating in Afghanistan may want to seek local legal counsel to help navigate licensing and permitting requirements and conforming to tax regulations.

Competition and Anti-Trust Laws

Afghanistan does not have anti-trust laws.  The Afghan government enacted a law to protect sound competition in markets and prevent unfair competition in 2010.

Expropriation and Compensation

The PIL allows for expropriation of investments or assets by the government on a non-discriminatory basis for the purposes of public interest.  The law stipulates that the government shall provide prompt, adequate, and effective compensation in conformity with the principles of international law.

In cases of investment in a foreign currency, the law requires compensation to be made in that currency.  The government may also confiscate private property to settle debts. According to the PIL, investors with an ownership share of more than 25 percent may challenge the expropriation.  There have been no reports of government expropriation of foreign assets.

The Ministry of Finance may freeze assets to collect taxes.

Dispute Settlement

ICSID Convention and New York Convention

In 2005, Afghanistan became a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).  Under the New York Convention, Afghanistan has agreed to (a) recognize and enforce awards made in another contracted state, and (b) apply the convention to commercial disputes.

Under the PIL and the Commercial Arbitration Law of 2007, (a) parties can agree to have foreign law govern their contract and agree to have their disputes resolved through arbitration or other mechanisms inside or outside of Afghanistan, and (b) Afghan courts must enforce any resulting award or agreement.

Afghanistan has been a member state to the International Centre for Settlement of Investment Disputes (ICSID convention) since 1966.

Investor-State Dispute Settlement

Afghanistan does not have a Bilateral Investment Treaty or Free Trade Agreement with the United States.  There are several disputes between the government and investors, typically about tax assessments and license requirements.

International Commercial Arbitration and Foreign Courts

Since 2005, Afghan law has expressly recognized alternative dispute resolution provisions.  In 2014, the Afghanistan Centre for Dispute Resolution (ACDR), whose decisions are non-binding, was established with support from USAID and the Department of Commerce Commercial Law Development Program (CLDP).  The ACDR offers mediation, expert witness services, and award calculation services in a limited number of cases referred by the commercial courts and plans to expand its services to include arbitration.

Bankruptcy Regulations

Provisions in the Banking Law provide special procedures for bank insolvency.  The Afghan government enacted a new insolvency law in 2018 to provide a uniform and fair procedure for the payment of debts to creditors.  The text of the law can be found at https://www.ahg.af/wp-content/uploads/2015/04/Draft-Insolvency-Law-English.pdf .

4. Industrial Policies

Investment Incentives

The Public Procurement Law, revised in 2016, retains the preference for national sources and domestic products that was codified in the Public Procurement Law of 2005.  In public statements since ratification, President Ghani has continued to emphasize the importance of giving preference to domestic products in order to create jobs. Foreign firms can receive the benefit of a domestic firm by partnering with a domestic firm.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Afghan Airfield Economic Development Commission (AAEDC), established in 2015, has taken the lead on drafting a new Special Economic Zone (SEZ) law, which was released for public comment in early 2019.  If passed, the law will provide the legal foundation for all types of export processing zones.

Performance and Data Localization Requirements

The Afghan government does not require the use of domestic content in goods or technology related to data storage.  There are no requirements for foreign IT providers to turn over source code and/or provide access for surveillance purposes.

5. Protection of Property Rights

Real Property

Property rights protection is weak due to a lack of cadasters or a comprehensive land titling system, disputed land titles, incapacity of commercial courts, and widespread corruption.  Land laws in Afghanistan are inconsistent, overlapping, incomplete, or silent with regard to details of effective land management. Judges and attorneys are often without expertise in land matters.  According to the World Bank, less than 20 percent of land in Afghanistan is formally titled. An estimated 80 percent of land is held and transferred informally, without legally recognized deeds, titles, or a simple means to prove ownership.

The acquisition of a clear land title to purchase real estate or a registered leasehold interest is complicated and cumbersome.  The World Bank estimated in its 2018 “Doing Business Report” that it takes an average of 155 days to register property, and entails extensive legal fees.  Investment disputes are common in the areas of land titling and contracts. Many documents evidencing land ownership are not archived in any official registry.

Frequently, multiple “owners” claim the same piece of land, each asserting rights from a different source.  These disputes hinder the development of commercial and agricultural enterprises. Real estate agents are not reliable.  Instances of parties falsely claiming title to land that they do not own undermines investor confidence. Mortgages and liens are at an early stage of development.  Foreign investors seeking to work with Afghan citizens to purchase property should conduct thorough due diligence to identify reliable partners.

Intellectual Property Rights

Prior to 2012, Afghanistan did not have fully operational intellectual property rights (IPR) offices at the Ministry of Information and Culture (MOIC), which focuses on copyrights, or at the Ministry of Industry and Commerce (MOCI), which focuses on all other intellectual property areas.  Since 2012, laws on copyrights, patents, trademarks, and geographical indications have been adopted.

To fully comply with the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), laws related to other IPR substantive areas (e.g., industrial designs, trade secrets, and layout designs) are in the process of adoption.  Afghanistan’s IPR regime provides investors with access to the judicial system and, in certain areas such as copyrights, to administrative appeals.

Afghanistan has limited experience regarding IPR and needs significant capacity building to effectively enforce and administer IPR laws.  Afghanistan is not included in the United States Trade Representative’s (USTR) Special 301 Report or the Notorious Markets List. Afghanistan has been a member of the World Intellectual Property Organization (WIPO) since 2005.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at https://www.wipo.int/portal/en/index.html  .

Resources for Rights Holders

Contact at U.S. Embassy Kabul:

Economic Section, Embassy of the United States of America
Kabul, Afghanistan
+93 (0) 700-108-001
Email KabulEcon@State.gov

American Chamber of Commerce in Afghanistan: www.amcham.af  
Email: info@amcham.af

A list of local lawyers is at https://af.usembassy.gov/u-s-citizen-services/attorneys/

6. Financial Sector

Capital Markets and Portfolio Investment

Afghanistan is in principle welcoming toward foreign portfolio investment, but financial institutions and markets are at an early stage of development.  Afghanistan does not have a stock market. There are no limitations of foreign investors obtaining credit. The banking sector generally only provides short term loans.

Afghanistan joined the IMF on July 14, 1955.  As confirmed in the May 2018 IMF Country Report, Afghanistan maintains an exchange system that is free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions.

Money and Banking System

The penetration of banking services is described in the below tables based on Q3 2018 data from the Afghan Central Bank (Da Afghanistan Bank, DAB):

Provided Banking Facilities  No.
Full Service Branches 414
Limited Service Branches 212
Automated Teller Machines 332
Others   92
Point of Sale    182
  Total 1,232

 

Debit and Credit Cards No.
Debit Card                                                                                                              455,376
Credit Card 2,016
  Total 457,392

Most Afghans remain outside the formal banking sector.  Afghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system, and limited access to banks in rural areas.  Three of the four major mobile network operators – Etisalat, AWCC, and Roshan – offer mobile money services. The Afghan government will launch a mobile money salary payment system for 5,000 employees in the Ministry of Labor in mid-2019.

Finance is Afghanistan’s second-largest service industry behind telecommunications and is potentially an important driver of private investment and economic growth.  There are 14 commercial banks operating in Afghanistan.

There are three state banks: Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank, and New Kabul Bank (formerly the privately owned Kabul Bank).  There are also branch offices of foreign banks, including Alfalah Bank (Pakistan), Habib Bank of Pakistan, and National Bank of Pakistan.

As of September 2018, the total assets of the banking sector was USD 4.16 billion.  Banking remains highly centralized, with a considerable majority of total loans made in Kabul.  Bank lending is undermined by the legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral.

As of December 2018, the banking sector gross Non-Performing Loans (NPL) ratio was 11.3 percent, while the net ratio stands at 5.9 percent.

Formal credit to the private sector stands at less than 10 percent of GDP, significantly lower than other countries in the region.  Afghanistan ranks 105 out of 190 economies for ease of obtaining credit in the World Bank’s Doing Business 2019. Afghan entrepreneurs complain interest rates for commercial loans from local banks are high, averaging around 15.5 percent.  In response to this situation, investment funds, leasing, micro-financing, and SME-financing companies have entered the market. USAID is working with the Afghan banking sector to promote improved access to finance and the expansion of financial inclusion.

Afghanistan has lost many correspondent banking relationships in the past few years due to risk aversion and lack of profitability.  The full extent of impact has yet to be quantified, but the unmeasured effects have been a loss in the ease of basic international transactions.

The Afghan Central Bank (Da Afghanistan Bank, DAB) has made improvements in monitoring and supervising the banking sector, following the 2010 Kabul Bank crisis.  President Ghani also took steps to hold those responsible accountable. The Afghan Government has a plan to recover assets from perpetrators of the large-scale bank fraud, though progress on its implementation remains slow.

Foreigners can open bank accounts with Afghanistan banks if they have valid visas, work permits, and in the case of a legal entity, a valid business license.  Afghan banks do not open bank accounts for non-resident customers.

Foreign Exchange and Remittances

Foreign Exchange Policies

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service.  There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate.  The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.

Major transactions in Afghanistan, such as the sale of autos or property, are frequently conducted in dollars or in the currency of neighboring countries.  Afghanistan does not maintain a dual-exchange-rate policy, currency controls, capital controls, or any other restrictions on the free flow of funds abroad. Afghanistan uses a managed floating exchange rate regime under which the rate is determined by market forces.  It is illegal to transport more than USD 20,000 or its equivalent in other currencies out of Afghanistan via land or air. Amounts over USD 10,000 but less than USD 20,000 must be declared. Enforcement is reported to be inconsistent.

Remittance Policies

Access to foreign exchange for investment is not restricted by any law or regulation.  There are large, yet informal, foreign exchange markets in major cities and provinces where U.S. dollars, British pounds, and euros are readily available.  Entities wishing to buy and sell foreign exchange in Afghanistan must register with the Afghan Central Bank (Da Afghanistan Bank, DAB), and thousands of licensed, as well as unlicensed, Hawalas continue to practice their trade.  Non-official money service providers often cite the lack of enforcement in the currency exchange sector, and the resulting competitive disadvantage to licensed exchangers, as a disincentive to becoming licensed.

Over the past several years, Afghanistan has made significant progress in improving Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) controls and is no longer subject to Financial Action Task Force (FATF) monitoring.  The FATF report can be found at http://www.fatf-gafi.org/countries/a-c/afghanistan/documents/fatf-compliance-june-2017.html  .

Sovereign Wealth Funds

Afghanistan does not have a sovereign wealth fund.

7. State-Owned Enterprises

The Government of Afghanistan operates over 30 active state-owned enterprises (SOEs), almost all of which are wholly-owned.  About 11,000 people are employed in sectors including public security, construction, transport, telecommunications, agriculture, and extractives.  Net income for all the SOEs is around USD 13 million; few are profitable. All SOEs are overseen and regulated by the Ministry of Finance and directly operated by specific ministries depending on the nature of the operations.  The Law on State Owned Enterprises includes specific targets for research and development investment, social development measures, and employee profit sharing, but compliance is negligible.

The Afghan government is also a stakeholder in 13 state-owned corporations (SOCs), entities that have independent boards and are not operated or directly supervised by the government.  SOEs and SOCs make up a small share of overall economic activity, although a few SOCs have significant market share in their sectors, including Afghan Telecom (Aftel), Ariana Afghan Airlines, and the electrical utility DABS (Da Afghanistan Breshna Sherkat).

Afghanistan does not have a centralized ownership entity for SOEs; the Ministry of Finance is responsible for all SOE oversight.

8. Responsible Business Conduct

Afghan awareness of the term “Responsible Business Conduct” is nascent, but the government has encouraged large companies and foreign investors to invest in corporate social responsibility (CSR).  Large mining contracts include stipulations for environmental protection and community inclusion. A new Minerals Law enacted by decree in October 2018, and published in the Official Gazette in December 2018, requires mining contract holders to consult with communities that will be affected by mining projects and to implement a community development agreement that includes details of the firm’s environmental and social impact assessment.  The law also requires extractive sector companies to safeguard and maintain any archeological and cultural relics they come across during the extraction operations until the Afghan government removes them.

Afghanistan is an Extractive Industries Transparency Initiative (EITI) candidate country.  The 2018 Minerals Law requires the Ministry of Mines and Petroleum to comply with the financial reporting requirements and standards of EITI.

A number of the competing mobile network operators have well-developed CSR outreach programs that include health, education, job creation, environmental protection, and outreach to refugees.  For example, the largest telecom operator in Afghanistan, Roshan, whose majority owner is the Aga Khan Fund for Economic Development, has received recognition for its social responsibility mission.  In addition, some Afghan entrepreneurs, such as Ihsanullah Bayat, the Barakat Group, the Ghazanfar Group, Hotak Azizi, and the Alokozay Group, have foundations that provide assistance in the fields of health, education, and the eradication of poverty.

OECD Guidelines for Multinational Enterprises

Afghanistan is not a subscriber to the OECD Declaration and Decisions on International Investment and Multinational Enterprises.

9. Corruption

Afghan and foreign firms routinely cite corruption as an obstacle to doing business, whether in permitting and licensing, government procurement, meeting regulatory requirements, or taxation.  Various corruption watchdog reports regularly indicate corruption is endemic throughout society. For example, systemic corruption at border crossings hampers development of the licit market economy.  Afghan officials collect bribes in exchange for undervaluing, under-weighing, or not scanning shipments, which facilitates smuggling of illegal goods and the illicit trade of legal goods, while also weakening Afghan revenue collection and regulatory institutions.

The practice of criminalizing commercial complaints is commonly used to settle business disputes or to extort money from wealthy international investors.  The government does not implement criminal penalties for official corruption effectively, and officials are reported to frequently engage in corrupt practices with impunity.  There are reports of low-profile corruption cases successfully tried and of lower-level officials removed for corruption.

President Ghani has made anti-corruption efforts a high priority, and the government has seen some success in reform of procurements and customs.  In 2016, the government opened the Anti-Corruption Justice Center (ACJC) to investigate and try corruption cases. The ACJC has successfully convicted some government officials for corruption.  These high-level initiatives are positive steps though corruption remains a major issue. Disputes over land and land grabbing have risen over the last decade. Press reports indicate that government officials take land without compensation in exchange for contracts or political favors.  Occasionally, provincial governments confiscate land without due process or compensation to build public facilities.

UN Anticorruption Convention, OECD Convention on Combating Bribery

Afghanistan has signed and ratified the UN Anticorruption Convention. Afghanistan is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

The Afghan Government body responsible for combating corruption is the High Office of Oversight & Anti-Corruption. Prosecutorial authority resides with the Attorney General’s Office.

Afghan Government Point of Contact:

Dr. Yama Torabi
Head of Secretariat of High Council on Rule of Law and Anti-Corruption: (HCRoLAC)
+93 799 271 624)
Email: yama.torabi@gmail.com

Watchdog Organization Contact:

Sayed Ikram Afzali, Executive Director
Integrity Watch Afghanistan
Emal: ikram.afzali@iwaweb.org

10. Political and Security Environment

The U.S. Department of State continues to warn Americans against travel to Afghanistan.  U.S. citizens should review the Consular Information Sheet and Travel Warning for Afghanistan for the most up-to-date information on the security situation and possible threats.

Anti-government and political violence are common and public concerns regarding security constrain economic activity.  Security is a primary concern for investors. Foreign firms operating in country report spending a significant percentage of revenues on security infrastructure and operating expenses.

11. Labor Policies and Practices

Afghanistan suffers a critical shortage of skilled labor.  Only 31 percent of the population over the age of 15 can read and write.  Decades of war, emigration, low education levels, and a lack of training facilities have resulted in a scarcity of skilled labor, qualified managers, and educated professionals.  The Central Statistical Organization reports the 2018 unemployment rate was 8.8 percent, although the youth unemployment rate is estimated to be as high as 40 percent.

A 2005 labor regulation allows for the employment of foreign workers but requires priority be given to equally qualified Afghan workers.  Under the law on Foreigners Employment in Afghanistan, foreigners can be employed on the basis of a work permit issued by the Ministry of Labor and Social Affairs.  Work permits are issued for one year and are renewable. Foreign citizens traveling to Afghanistan for employment are required to obtain business visas and work permits.

The formal sector labor law contains some restrictions on termination of employment.  The law provides for the right of workers to join and form independent unions and to conduct legal strikes and bargain collectively, and the government generally respects these rights.  Broadly, labor-management relations are undeveloped. Freedom of association and the right to bargain collectively are generally respected, but most workers and employers are not aware of these rights.  This was particularly true of workers in rural areas or agriculture. In urban areas, the majority of workers participate in the informal sector as day laborers in construction, where there are neither unions nor collective bargaining.  The 2007 Labor Law guarantees basic workers’ rights, such as wages, overtime, leave, and other benefits, and bans forced labor and child labor. The 2017 Trafficking in Persons law punishes forced and child labor with a maximum 12-year sentence.

Comprehensive data on workplace accidents are unavailable, though there have been several reports of poor and dangerous working conditions.  Although the law prohibits children under 14 from working, UNESCO reported 7.5 percent of children under 14 work, primarily in agriculture, domestic work, carpet-making, and brick kilns.

12. OPIC and Other Investment Insurance Programs

Since 2003, OPIC has committed more than USD 295 million in financing and political risk insurance to support 38 projects in Afghanistan.  OPIC operates its programs in Afghanistan under the Investment Incentive Agreement, which the Afghan government signed in 2004.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 1: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $20.82 B 2017 $19,540 https://data.worldbank.org/country/afghanistan   
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 N/A 2017 $19 https://ustr.gov/countries-regions/south-central-asia/afghanistan   
Host country’s FDI in the United States ($M USD, stock positions) 2017 $0 2017 $2 https://ustr.gov/countries-regions/south-central-asia/afghanistan    
Total inbound stock of FDI as % host GDP N/A N/A 2017 7.0% unctad.org/sections/dite_dir/docs/wir2018/wir18_fs_af_en.pdf  


Table 3: Sources and Destination of FDI

Data not available.


Table 4: Sources of Portfolio Investment

Data not available.

14. Contact for More Information

Economic Section
Embassy of the United States of America
Kabul, Afghanistan
+93 (0) 700-108-001

Egypt

Executive Summary

Progress on Egyptian economic reforms over the past two years has been noteworthy.  Though many challenges remain, Egypt’s investment climate is improving. The country has undertaken a number of structural reforms since the flotation of the Egyptian Pound (EGP) in November 2016 and implemtation of a three-year, USD 12 billion International Monetary Fund (IMF)-backed economic reform program.  Increased investor confidence and the reactivation of Egypt’s interbank foreign exchange (FX) market have attracted foreign portfolio investment and grown foreign reserves. As yields on government debt fall, investors may shift towards direct investments, which would be a positive market signal that the Egyptian economy is beginning to trend  towards higher growth. The Government of Egypt (GoE) understands that attracting foreign direct investment (FDI) is key to addressing many of the economic challenges it faces, including low economic growth, high unemployment, current account imbalances, and hard currency shortages. Though FDI inflows grew 13 percent year-on-year in 2017, they declined slightly in 2018 from USD 7.9 to 7.7 billion, according to the Central Bank of Egypt.

Egypt implemented a number of regulatory reforms in 2017 and 2018.  Key among these are the new Investment Law and the Companies Law – which aim to improve Egypt’s ranking in international reports of doing business and to help the economy realize its full potential.  These reforms have increased investor confidence.

The Investment Law (Law 72 of 2017) aims to attract new investment and provides a framework for the government to offer investors more investment-related incentives and guarantees.  Additionally, the law aims to attract new investments, consolidate many investment-related rules, and streamlines procedures.

The government also hopes to attract  international investment in several “mega projects,” including a large-scale industrial and logistics zone around the Suez Canal, the construction of a new national administrative capital, a 1.5 million-hectare agricultural land reclamation and development project, and to promote mineral extraction opportunities in the Golden Trianlge economic zone between the Red Sea and the Nile River.

Egypt is a party to more than 100 bilateral investment treaties, including with the United States.  It is a member of the World Trade Organization (WTO), the Common Market for Eastern and Southern Africa (COMESA), and the Greater Arab Free Trade Area (GAFTA).  In many sectors, there is no legal difference between foreign and domestic investors. Special requirements exist for foreign investment in certain sectors, such as upstream oil and gas as well as real estate, where joint ventures are required.

Several challenges persist for investors.  Dispute resolution is slow, with the time to adjudicate a case to completion averaging three to five years.  Other obstacles to investment include excessive bureaucracy, regulatory complexity, a mismatch between job skills and labor market demand, slow and cumbersome customs procedures, and various non-tariff trade barriers.  Inadequate protection of intellectual property rights (IPR) remains a significant hurdle in certain sectors and Egypt remains on the U.S. Trade Representative’s Special 301 Watch List. Nevertheless, Egypt’s reform story is noteworthy, and if the steady pace of implementation for structural reforms continues, and excessive bureaucracy reduces over time, then the investment climate should continue to look more favorable to U.S. investors.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 105 of 175 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 120 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 95 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country (M USD, stock positions) 2017 $9,352.0  http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 $3,010 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies toward Foreign Direct Investment

The flotation of the EGP in November 2016 and the restart of Egypt’s interbank foreign exchange FX market as part of the IMF program was a first step in restoring investor confidence that immediately attracted increased portfolio investment and should lead to increased FDI over the long term.  The stable macro-economic outlook has allowed Egypt to focus on structural reforms to support strong economic growth. The next phase of reform has included a new investment law, an industrial licensing law, a bankruptcy law and other reforms to reduce regulatory overhang and improve the ease of doing business.  Successful implementation of these reforms could give greater confidence to foreign investors. Egypt’s government has announced plans to further improve its business climate through investment promotion, facilitation, efficient business services, and advocacy of more investor friendly policies.

With a few exceptions, Egypt does not legally discriminate between Egyptian nationals and foreigners in the formation and operation of private companies.  The 1997 Investment Incentives Law was designed to encourage domestic and foreign investment in targeted economic sectors and to promote decentralization of industry away from the Nile Valley.  The law allows 100 percent foreign ownership of investment projects and guarantees the right to remit income earned in Egypt and to repatriate capital.

The new Tenders Law No. 182 of 2018 requires the government to consider both price and best value in awarding contracts and to issue an explanation following refusal of a bid.  Nevertheless, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent. Additionally the new law includes a wide range of reforms, such as establishing new rules in the contracting process on good governance, sustainable development goals, transparency, competition, equal opportunity, and an improved business environment.  Egyptian small- and medium-sized enterprises (SMEs) have the right under the new law to obtain up to 20 percent annually of the Government’s contracts. This aims to achieve a positive return on investment of public expenditures, along with controls to combat corruption.

The Capital Markets Law (Law 95 of 1992) and its amendments, including the most recent in February 2018, and related regulations govern Egypt’s capital markets.  Foreign investors are permitted to buy shares on the Egyptian Stock Exchange on the same basis as local investors.

The General Authority for Investment and Free Zones (GAFI) is an affiliate of the Ministry of Investment and International Cooperation (MIIC) and the principal government body regulating and facilitating investment in Egypt. ”The Investor Service Center (ISC)” is an administrative unit established within GAFI that provides ”one-stop-shop” services, easing the way for global investors looking for opportunities presented by Egypt’s domestic economy and the nation’s competitive advantages as an export hub for Europe, the Arab world, and Africa.

ISC provides a full start-to-end service to investors, including assistance related to company incorporation, establishment of company branches, approval of minutes of Board of Directors and General Assemblies, increase of capital, change of activity, liquidation procedures, and other corporate-related matters.  The Center also aims to issue licenses, approvals, and permits required for investment activities, within 60 days from the date of request submissions. Other services GAFI provides include:

  • Advice and support to help in the evaluation of Egypt as a potential investment location;
  • Identification of suitable locations and site selection options within Egypt;
  • Assistance in identifying suitable Egyptian partners;
  • Aftercare and dispute settlement services.​

ISC Branches are expected to be established in all Egyptian governorates.  Egypt maintains ongoing communication with investors through formal business roundtables, investment promotion events (conferences and seminars), and one-on-one investment meetings

Limits on Foreign Control and Right to Private Ownership and Establishment

The Egyptian Companies Law does not set any limitation on the number of foreigners, neither as shareholders nor as managers or board members, except for Limited Liability Companies where the only restriction is that one of the managers should be an Egyptian national.  In addition, companies are required to obtain a commercial and tax license, and pass a security clearance process. Companies are able to operate while undergoing the often lengthy security screening process. Nevertheless, if the firm is rejected, it must cease operations and undergo a lengthy appeals process.  Businesses have cited instances where Egyptian clients were hesitant to conclude long term business contracts with foreign firms that have yet to receive a security clearance. They have also expressed concern about seemingly arbitrary refusals, a lack of explanation when a security clearance is not issued, and the lengthy appeals process.  Although the GoE has made progress in streamlining the business registration process at GAFI, its apparent overall lack of familiarity or experience of Egyptians working closely with foreign nationals has sometimes led to inconsistent and questionable treatment by banks and government officials, thus, delaying registration.

Sector-specific limitations to investment include restrictions on foreign shareholding of companies owning lands in the Sinai Peninsula.  Likewise, the Import-Export Law requires companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians.  In 2016, the Ministry of Trade prepared an amendment to the law allowing the registration of importing companies owned by foreign shareholders, but, as of April 2019, the law had not yet been submitted to Parliament.  Nevertheless, the new Investment Law does allow wholly foreign companies, which invest in Egypt to import goods and materials.

Land/Real Estate Law 15 of 1963 explicitly prohibits foreign individual or corporation ownership of agricultural land (defined as traditional agricultural land in the Nile Valley, Delta and Oases).  The ownership of land by foreigners is governed by three laws: Law No. 15 of 1963, Law No. 143 of 1981, and Law No. 230 of 1996.  Law No. 15 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land.  Law No. 143 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is equal to approximately one hectare) that may be owned by individuals, families, cooperatives, partnerships and corporations.  Partnerships are permitted to own 10,000 feddans. Joint stock companies are permitted to own 50,000 feddans.

Under Law No. 230 non-Egyptians are allowed to own real estate (vacant or built) only under the following conditions:

  • Ownership is limited to two real estate properties in Egypt that serve as accommodation for the owner and his family (spouses and minors), in addition to the right to own real estate needed for activities licensed by the Egyptian Government.
  • The area of each real estate property does not exceed 4,000 m².
  • The real estate is not considered a historical site.

Exemption from the first and second conditions is subject to the approval of the Prime Minister. Ownership in tourist areas and new communities is subject to conditions established by the Cabinet of Ministers.  Non-Egyptians owning vacant real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public. Non-Egyptians cannot sell their real estate for five years after registration of ownership, unless the consent of the Prime Minister for an exemption is obtained.  http://www.gafi.gov.eg/English/StartaBusiness/Laws-and-  Regulations/Pages/BusinessLaws.aspx  

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) signed a declaration with Egypt on International Investment and Multinational Enterprises on July 11, 2007, at which time Egypt became the first Arab and African country to sign the OECD Declaration, marking a new stage in Egypt’s drive to attract more FDI.

The United Nations Conference of Trade Development (UNCTAD) signed in an Investment Policy Review with Egypt in June 1999 that recognized the efforts that the GoE had made to establish an adequate investment regulatory framework and improve the business environment.

The UNCTAD Review pointed out that overcoming the limited involvement of multinational companies in manufacturing sectors with export potential such as food, garments, and electronics, would require policy emphasis on infrastructure investments, promotion of  clusters of related enterprises, and self-sustaining development. Since the publication of its policy review on Egypt, UNCTAD has assisted the government with training diplomats on investment trends, policies, and promotion, and staff on FDI statistics.

Business Facilitation

GAFI’s new ISC was launched in February 2018 at a ceremony attended by President Sisi. The ISC provides a full start-to-end service to the investor as described above.  The new Investment Law also introduces ”Ratification Offices” to facilitate the obtaining of necessary approvals, permits, and licenses within 10 days of issuing a Ratification Certificate.

Investors may fulfill the technical requirements of obtaining the required licenses through these Ratification Offices, directly through the concerned authority, or through its representatives at the Investment Window at GAFI.  The Investor Service Center is required to issue licenses within 60 days from submission. Companies can also register online. MIIC and GAFI have also launched e-establishment, e-signature, and e-payment services to facilitate establishing companies.

Outward Investment

Egypt promotes and incentivizes outward investment.  According to the Egyptian government’s FDI Markets database for the period from January 2003 to February 2019, outward investment indicated that Egyptian companies implemented 241 Egyptian FDI projects.  The estimated total value of these projects, which employed about 48,204 workers, was USD 23.86 billion.

The following countries received the largest amount of Egyptian outward investment in terms of total project value:  United Arab Emirates (UAE), Saudi Arabia, Algeria, Jordan, Germany, Kenya, Libya, Morocco, Sudan, and Ethiopia. The UAE, Saudi Arabia and Algeria accounted for about 28.6 percent of the total amount.

Elsewedy Electric (Elsewedy Cables) was the largest Egyptian company investing abroad, implementing 19 projects with a total investment estimated to be USD 2.1 billion.

Egypt does not restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Egypt has signed 115 Bilateral Investment Treaties (BITs), out of which 74 BITs have entered into force.  The full list can be found at http://investmentpolicyhub.unctad.org/IIA.

The U.S.-Egypt Bilateral Investment Treaty provides for fair, equitable, and nondiscriminatory treatment for investors of both nations. The treaty includes provisions for international legal standards on expropriation and compensation; free financial transfers; and procedures for the settlement of investment disputes, including international arbitration.

In addition to BITs, Egypt is also a signatory to a wide variety of other agreements covering trade issues. Egypt joined the Common Market for Eastern and Southern Africa (COMESA) in June 1998.  In June 2001, Egypt signed an Association Agreement (AA) with the European Union (EU), which entered into force on June 1, 2004. The agreement provided immediate duty free access of Egyptian products into EU markets, while duty free access for EU products into the Egyptian market was phased in over a 12-year period ending in 2016.  In 2010, Egypt and the EU completed an agricultural annex to their agreement, liberalizing trade in over 90 percent of agricultural goods.

In July 1999, Egypt and the United States signed a Trade and Investment Framework Agreement (TIFA). The TIFA forum has been an effective forum to discuss tariff and non-tariff barriers and address issues affecting U.S. commercial interests.

Egypt is also a member of the Greater Arab Free Trade Agreement (GAFTA), and a member of the Agadir Agreement with Jordan, Morocco, and Tunisia, which relaxes rules of origin requirements on products jointly manufactured by the countries for export to Europe.  Egypt also has an FTA with Turkey, in force since March 2007, and an FTA with the Mercosur bloc of Latin American nations.

In 2004, Egypt and Israel signed an agreement to take advantage of the U.S. Government’s Qualifying Industrial Zone (QIZ) program.  The purpose of the QIZ program is to promote stronger ties between the region’s peace partners, as well as to generate employment and higher incomes, by granting duty-free access to goods produced in QIZs in Egypt using a specified percentage of Israeli and local input.  Under Egypt’s QIZ agreement, Egypt’s exports to the United States produced in certain industrial areas are eligible for duty-free treatment if they contain a minimum 10.5 percent Israeli content.

The industrial areas currently included in the QIZ program are Alexandria, areas in Greater Cairo such as Sixth of October, Tenth of Ramadan, Fifteenth of May, South of Giza, Shobra El-Khema, Nasr City, and Obour, areas in the Delta governorates such as Dakahleya, Damietta, Monofeya and Gharbeya, and areas in the Suez Canal such as Suez, Ismailia, Port Said, and other specified areas in Upper Egypt.  Egyptian exports to the United States through the QIZ program have mostly been ready-made garments and processed foods. The value of the Egyptian QIZ exports to the United States was approximately USD 877 million in 2018, up 16 percent from 2017.

Egypt has a bilateral tax treaty with the United States. Egypt also has tax agreements with 59 other countries, including UAE, Kuwait, Saudi Arabia, Mauritius, Bahrain, and Morocco.

The Egyptian Parliament passed and the government implemented a value added tax (VAT) in late 2016, which took the place of the General Sales Tax, as part of the IMF loan and economic reform program. Yet, the government decided to postpone the “Stock Market Capital Gains Tax” for three years as of early 2017. In 2016, there were a number of tax disputes between foreign investors and the government, but most of them were resolved through the Tax Department and the Economic Court.

3. Legal Regime

Transparency of the Regulatory System

The Egyptian government has made efforts to improve the transparency of government policy and to support a fair, competitive marketplace.  Nevertheless, improving government transparency and consistency has proven difficult and reformers have faced strong resistance from entrenched bureaucratic and private interests.  Significant obstacles continue to hinder private investment, including the reportedly arbitrary imposition of bureaucratic impediments and the length of time needed to resolve them.  Nevertheless, the impetus for positive change driven by the government reform agenda augurs well for improvement in policy implementation and transparency.

Enactment of laws is the purview of the Parliament, while executive regulations are the domain of line ministries.  Under the Constitution, draft legislation can be presented by the president, the cabinet, and any member of parliament.  After submission, parliamentary committees review and approve, including any amendments.  Upon parliamentary approval, a judicial body reviews the constitutionality of any legislation before referring it to the president for his approval.  Although notice and full drafts of legislation are typically printed in the Official Gazette (similar to the Federal Register in the United States), in practice consultation with the public is limited.  In recent years, the Ministry of Trade and other government bodies have circulated draft legislation among concerned parties, including business associations and labor unions. This has been a welcome change from previous practice, but is not yet institutionalized across the government.

While Egyptian parliaments have historically held “social dialogue” sessions with concerned parties and private or civic organizations to discuss proposed legislation, it is unclear to what degree the current Parliament, seated in January 2016, will adopt a more inclusive approach to social dialogue.  Many aspects of the 2016 IMF program and related economic reforms stimulated parliament to engage more broadly with the public, marking some progress in this respect.

Accounting, legal, and regulatory procedures are transparent and consistent with international norms.  The Financial Regulatory Authority (FRA) supervises and regulates all non-banking financial markets and instruments, including capital markets, futures exchanges, insurance activities, mortgage finance, financial leasing, factoring, securitization, and microfinance.  It issues rules that facilitate market efficiency and transparency. FRA has issued legislation and regulatory decisions on non-banking financial laws which govern FRA’s work and the entities under its supervision. (http://www.fra.gov.eg/jtags/efsa_en/index_en.jsp  )

The criteria for awarding government contracts and licenses are made available when bid rounds are announced.  The process actually used to award contracts is broadly consistent with the procedural requirements set forth by law.  Further, set-aside requirements for small- and medium-sized enterprise (SME) participation in GoE procurement are increasingly highlighted. FRA maintains a centralized website where key regulations and laws are published: http://www.fra.gov.eg/content/efsa_en/efsa_pages_en/laws_efsa_en.htm  

The Parliament, seated in early 2016, and the independent “Administrative Control Authority” both ensure the government’s commitment to follow administrative processes at all levels of government.  Egypt does not have an online equivalent of the U.S. Federal Register and there is no centralized online location for key regulatory actions or their summaries.

The cabinet develops and submits proposed regulations to the president following discussion and consultation with the relevant ministry and informal consultation with other interest groups. Based on the recommendations provided in the proposal, including recommendations by the presidential advisors, the president issues “Presidential Decrees” that function as implementing regulations.  Presidential decrees are published in the “Official Gazette” for enforcement.

The specific government agency or entity responsible for enforcing the regulation works with other departments for implementation across the government.  Not all issued regulations are announced online. Theoretically, the enforcement process is legally reviewable.

Before a government regulation is implemented, there is an attempt to properly analyze and thoroughly debate proposed legislation and rules using appropriate available data.  But there are no laws requiring scientific studies or quantitative analysis of impacts of regulations. Not all public comments received by regulators are made public.

International Regulatory Considerations

In general, international standards are the main reference for Egyptian standards.  According to the Egyptian Organization for Standardization and Quality Control, approximately 7,000 national standards are aligned with international standards in various sectors.  In the absence of international standards, Egypt uses other references which are referred to in Ministerial decrees No. 180//1996 and No. 291//2003, which stipulate that in the absence of Egyptian standards, the producers and importers may use the following:

  • European standards (EN)
  • U.S. standards (ANSI)
  • Japanese standards (JIS)

Egypt is a member of the WTO and participates actively in various committees.  Though Egypt ratified the Trade Facilitation Agreement (TFA) on June 22, 2017 by a vote of Parliament and issuance of presidential decree No. 149/2017, it has still not deposited its formal notification to the WTO. As of April 2019, the Ministry of Foreign Affairs was in the process of notifying the WTO.  Customs officials are reviewing Categories B and C. In March 2019, the Egyptian Customs Authority published an updated draft of the Customs Law on its website in Arabic for public comment. The law includes language for key TFA reforms, including advance rulings, separation of release, Single Window, authorized economic operators, post-clearance audits, e-payments, and more.

Legal System and Judicial Independence

Egypt’s legal system is a civil codified law system based on the French model.  If contractual disputes arise, claimants can sue for remedies through the court system or seek resolution through arbitration.  Egypt has written commercial and contractual laws. The country has a system of economic courts, specializing in private sector disputes, which have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes.  The judiciary is set up as an independent branch of the government.

Regulations and enforcement actions can be appealed through Egypt’s courts, though appellants often complain about the very lengthy judicial process, which can often take years.  To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur (a legal document issued by governments allowing judgements to be enforced).  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt must be satisfied. Moreover, several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts, and verifying the competence of the court rendering the judgment.

Judges in Egypt are said to enjoy a high degree of public trust and are the designated monitors for general elections.  The Judiciary is proud of its independence and can point to a number of cases where a judge has made surprising decisions that run counter to the desires of the regime.  The judge’s ability to loosely interpret the law can sometimes lead to an uneven application of justice.  The system’s slowness and dependence on paper processes hurts its overall competence and reliability.  The executive branch claims to have no influence over the judiciary, but in practice political pressures seem to influence the courts on a case by case basis.  In the experience of the Embassy, judicial decisions are highly appealable at the national level and this appeal process is regularly used by litigants.

Laws and Regulations on Foreign Direct Investment

No specialized court exists for foreign investments. In 2016, the Import-Export Law was revised to allow companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians; formerly the law required 100 percent Egyptian ownership and management.  In November 2016, the Supreme Investment Council also announced seventeen presidential decrees designed to spur investment or resolve longstanding issues. These include:

  • Forming a “National Payments Council” that will work to restrict the handling of FX outside the banking sector;
  • A decision to postpone for three years the capital gains tax on stock market transactions;
  • Producers of agricultural crops that Egypt imports or exports will get tax exemptions;
  • Five-year tax exemptions for manufacturers of “strategic” goods that Egypt imports or exports;
  • Five-year tax exemptions for agriculture and industrial investments in Upper Egypt;
  • Begin tendering land with utilities for industry in Upper Egypt for free as outlined by the Industrial Development Authority.

The Ministry of Investment and International Cooperation issued a new Investment Law that was discussed extensively with all stakeholders prior to its mid-2017 release.  New laws regarding Bankruptcy and Companies’ Law were also released in late 2017 and early 2018.

Competition and Anti-Trust Laws

The Egyptian Competition Authority (ECA) is the body tasked with ensuring free competition in the market and preventing anticompetitive practices.  The Authority operates under the Egyptian Competition Law, which covers three categories of violations: (1) cartels; (2) abuse of dominance; and (3) vertical restraints.  The ECA monitors the market, detects anti-competitive practices that are considered violations to the law, and takes measures to stop such violations. The Anti-Trust and Competition Protection Council (ACPC) monitors business practices of companies to ensure they comply with the standards of the free market.  The main challenges to competition in Egypt include a regulatory system that protects established companies and large companies, a significant informal sector, and the lack of availability of reliable information.

Expropriation and Compensation

The Investment Incentives Law provides guarantees against nationalization or confiscation of investment projects under the law’s domain.  The law also provides guarantees against seizure, requisition, blocking, and placing of assets under custody or sequestration. It offers guarantees against full or partial expropriation of real estate and investment project property.  The U.S.-Egypt Bilateral Investment Treaty also provides protection against expropriation. Private firms are able to take cases of alleged expropriation to court, but the judicial system can take several years to resolve a case.

Dispute Settlement

ICSID Convention and New York Convention

Egypt acceded to the International Convention for the Settlement of Investment Disputes (ICSID) in 1971 and is a member of the International Center for the Settlement of Investment Disputes, which provides a framework for the arbitration of investment disputes between the government and foreign investors from another member state, provided the parties agree to such arbitration.  Without prejudice to Egyptian courts, the Investment Incentives Law recognizes the right of investors to settle disputes within the framework of bilateral agreements, the ICSID or through arbitration before the Regional Center for International Commercial Arbitration in Cairo, which applies the rules of the United Nations (UN) Commissions on International Trade Law.

Egypt adheres to the 1958 New York Convention on the Enforcement of Arbitral Awards; the 1965 Washington Convention on the Settlement of Investment Disputes between States and the Nationals of Other States; and the 1974 Convention on the Settlement of Investment Disputes between the Arab States and Nationals of Other States.  An award issued pursuant to arbitration that took place outside Egypt may be enforced in Egypt if it is either covered by one of the international conventions to which Egypt is party or it satisfies the conditions set out in Egypt’s Dispute Settlement Law 27 of 1994, which provides for the arbitration of domestic and international commercial disputes and limited challenges of arbitration awards in the Egyptian judicial system.  The Dispute Settlement Law was amended in 1997 to include disputes between public enterprises and the private sector.

To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur.  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt, and several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts and verifying the competence of the court rendering the judgment.

Egypt has a system of economic courts specializing in private sector disputes that have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes.  Despite these provisions, business and investors in Egypt’s renewable energy projects have reported significant problems resolving disputes with the Government of Egypt.

Investor-State Dispute Settlement

The U.S.-Egypt Bilateral Investment Treaty allows an investor to take a dispute directly to binding third-party arbitration.  The Egyptian courts generally endorse international arbitration clauses in commercial contracts. For example, the Court of Cassation, on a number of occasions, has confirmed the validity of arbitration clauses included in contracts between Egyptian and foreign parties.

A new mechanism for simplified settlement of investment disputes aimed at avoiding the court system altogether has been established.  In particular, the law established a Ministerial Committee on Investment Contract Disputes, responsible for the settlement of disputes arising from investment contracts to which the state, or an affiliated public or private body, is a party.  This is in addition to establishing a Complaint Committee to consider challenges connected to the implementation of Egypt’s Investment Law.  Finally, the decree established a Committee for Resolution of Investment Disputes, which will review complaints or disputes between investors and the government related to the implementation of the Investment Law.  In practice, Egypt’s dispute resolution mechanisms are time-consuming, but broadly effective.  Businesses have, however, reported difficulty collecting payment from the government when awarded a monetary settlement.

Over the past 10 years, there have been several investment disputes involving both U.S. persons and foreign investors.  Most of the cases have been settled, though no definitive number is available. Local courts in Egypt recognize and enforce foreign arbitral awards issued against the government.  There are no known extrajudicial actions against foreign investors in Egypt during the period of this report.

International Commercial Arbitration and Foreign Courts

Egypt allows mediation as a mechanism for alternative dispute resolution (ADR), a structured negotiation process in which an independent person known as a mediator assists the parties to identify and assess options, and negotiate an agreement to resolve their dispute.  GAFI has an Investment Disputes Settlement Center, which uses mediation as an ADR.

The Economic Court recognizes and enforces arbitral awards.  Judgments of foreign courts may be recognized and enforceable under local courts under limited conditions.

In most cases, domestic courts have found in favor of state-owned enterprises (SOEs) involved in investment disputes.  In such disputes, non-government parties have often complained about the delays and discrimination in court processes.

It is recommended that U.S. companies employ contractual clauses that specify binding international (not local) arbitration of disputes in their commercial agreements.

Bankruptcy Regulations

Egypt passed a new bankruptcy law in January 2018, which should speed up the restructuring and settlement of troubled companies.  It also replaces the threat of imprisonment with fines in cases of bankruptcy.

In practice, the paperwork involved in liquidating a business remains convoluted and extremely protracted; starting a business is much easier than shutting one down.  Bankruptcy is frowned upon in Egyptian culture and many businesspeople believe they may be found criminally liable if they declare bankruptcy.

4. Industrial Policies

Investment Incentives

The Investment Law 72//2017 provides incentives to investors, including:

General Incentives:

  • All investment projects subject to the provisions of the new law enjoy the general incentives provided by it.
  • Investors are exempted from the stamp tax, fees of the notarization, registration of the memorandum of incorporation of the companies, credit facilities, and mortgage contracts associated with their business for five years from the date of registration in the Commercial Registry, in addition to the registration contracts of the lands required for a company’s establishment.
  • If the establishment is under the provisions of the new investment law, it will benefit from a 2 percent unified custom tax over all imported machinery, equipment, and devices required for the establishment of such a company.

Special Incentive Programs:

  • Investment projects established within three years of the date of the issuance of the Investment Law will enjoy a deduction from their net profit, subject to the income tax:
    • 50 percent of the investment costs for geographical region (A) (the regions the most in need of development as well as designated projects in Suez Canal Special Economic Zone and the “Golden Triangle” along the Red Sea between the cities of Safaga, Qena and El Quseer);
    • 30 percent of the investment costs to geographical region (B) (which represents the rest of the republic).
  • Provided that such deduction shall not exceed 80 percent of the paid-up capital of the company, the incentive could be utilized over a maximum of seven years.

Additional Incentive Program:

The Cabinet of Ministers may decide to grant additional incentives for investment projects in accordance with specific rules and regulations as follows:

  • The establishment of special customs ports for exports and imports of the investment projects.
  • The state may incur part of the costs of the technical training for workers.
  • Free allocation of land for a few strategic activities may apply.
  • The government may bear in full or in part the costs incurred by the investor to invest in utility connections for the investment project.
  • The government may refund half the price of the land allocated to industrial projects in the event of starting production within two years from receiving the land.

Other Incentives related to Free Zones according to Investment Law 72/2017:

  • Exemption from all taxes and customs duties.
  • Exemption from all import/export regulations.
  • The option to sell a certain percentage of production domestically if customs duties are paid.
  • Limited exemptions from labor provisions.
  • All equipment, machinery, and essential means of transport (excluding sedan cars) necessary for business operations are exempted from all customs, import duties, and sales taxes.
  • All licensing procedures are handled by GAFI. To remain eligible for benefits, investors operating inside the free zones must export more than 50 percent of their total production.
  • Manufacturing or assembly projects pay an annual charge of 1 percent of the total value of their products.
  • Excluding all raw materials, storage facilities are to pay 1 percent of the value of goods entering the free zones while service projects pay 1 percent of total annual revenue.
  • Goods in transit to specific destinations are exempt from any charges.

Other Incentives related to the Suez Canal Economic Zone (SCZone):

  • 100 percent foreign ownership of companies.
  • 100 percent foreign control of import/​export activities.
  • Imports are exempted from customs duties and sales tax.
  • Customs duties on exports to Egypt imposed on imported components only, not the final product.
  • Fast-track visa services.
  • A full service one-stop shop for registration and licensing.
  • Allowing enterprises access to the domestic market; duties on sales to domestic market will be assessed on the value of imported inputs only.

The Ministry of Industry & Foreign Trade and the Ministry of Finance’s Decree No. 719//2007 provides incentives for industrial projects in the governorates of Upper Egypt (Upper Egypt refers to governorates in southern Egypt).  The decree provides an incentive of EGP 15,000 (approximately USD 850) for each job opportunity created by the project, on the condition that the investment costs of the project exceed EGP 15 million (approximately USD 850,000).  The decree can be implemented on both new and ongoing projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Public and private free trade zones are authorized under GAFI’s Investment Incentive Law.  Free zones are located within the national territory, but are considered to be outside Egypt’s customs boundaries, granting firms doing business within them more freedom on transactions and exchanges.  Companies producing largely for export (normally 80 percent or more of total production) may be established in free trade zones and operate using foreign currency. Free trade zones are open to investment by foreign or domestic investors.  Companies operating in free trade zones are exempted from sales taxes or taxes, and fees on capital assets and intermediate goods. The Legislative Package for the Stimulation of Investment, issued in 2015, stipulated a 1 percent duty paid on the value of commodities upon entry for storage projects and a 1 percent duty upon exit for manufacturing and assembly projects.

There are currently 11 public free trade zones in operation in the following locations: Alexandria, Damietta, East Port Said Port Zone, Ismailia, Qeft, Media Production City, Nasr City, Port Said, Shebin el Kom, and Suez.  Private free trade zones may also be established with a decree by GAFI, but are usually limited to a single project. Export-oriented industrial projects are given priority. There is no restriction on foreign ownership of capital in private free zones.

The Special Economic Zones (SEZ) Law 83//2002 allows establishment of special zones for industrial, agricultural, or service activities designed specifically with the export market in mind.  The law allows firms operating in these zones to import capital equipment, raw materials, and intermediate goods duty free. Companies established in the SEZs are also exempt from sales and indirect taxes, and can operate under more flexible labor regulations.  The first SEZ was established in the northwest Gulf of Suez.

Law 19//2007 authorized creation of investment zones, which require Prime Ministerial approval for establishment.  The government regulates these zones through a board of directors, but the zones are established, built, and operated by the private sector.  The government does not provide any infrastructure or utilities in these zones. Investment zones enjoy the same benefits as free zones in terms of facilitation of license-issuance, ease of dealing with other agencies, etc., but are not granted the incentives and tax/custom exemptions enjoyed in free zones.  Projects in investment zones pay the same tax/customs duties applied throughout Egypt. The aim of the law is to assist the private sector in diversifying its economic activities.

The Suez Canal Economic Zone, a major industrial and logistics services hub announced in 2014, is expected to include upgrades and renovations to ports located along the Suez Canal corridor, including West and East Port Said, Ismailia, Suez, Adabiya, and Ain Sokhna.  The Egyptian government has invited foreign investors to take part in the projects, which are expected to be built in several stages, the first of which is scheduled to be completed by 2020. Reported areas for investment include maritime services like ship repair services, bunkering, vessel scrapping and recycling; industrial projects, including pharmaceuticals, food processing, automotive production, consumer electronics, textiles, and petrochemicals; IT services such as research and development and software development; renewable energy; and mixed use, residential, logistics, and commercial developments.  Website for the Suez Canal Development Project: http://www.sczone.com.eg/English/Pages/default.aspx  

Performance and Data Localization Requirements

Egypt has rules on national percentages of employment and difficult visa and work permit procdeures.  The application of these provisions that restrict access to foreign worker visas has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. The application of these regulations is inconsistent. The Labor Law allows Ministers to set the maximum percentage of foreign workers that may work in companies in a given sector.  There are no such sector-wide maximums for the oil and gas industry, but individual concession agreements may contain language establishing limits or procedures regarding the proportion of foreign and local employees.

No performance requirements are specified in the Investment Incentives Law, and the ability to fulfill local content requirements is not a prerequisite for approval to set up assembly projects.  In many cases, however, assembly industries still must meet a minimum local content requirement in order to benefit from customs tariff reductions on imported industrial inputs.

Decree 184//2013 allows for the reduction of customs tariffs on intermediate goods if the final product has a certain percentage of input from local manufacturers, beginning at 30 percent local content.  As the percentage of local content rises, so does the tariff reduction, reaching up to 90 percent if the amount of local input is 60 percent or above. In certain cases, a minister can grant tariff reductions of up to 40 percent in advance to certain companies without waiting to reach a corresponding percentage of local content.  In 2010, Egypt revised its export rebate system to provide exporters with additional subsidies if they used a greater portion of local raw materials.

Manufacturers wishing to export under trade agreements between Egypt and other countries must complete certificates of origin and local content requirements contained therein.  Oil and gas exploration concessions, which do not fall under the Investment Incentives Law, do have performance standards, which are specified in each individual agreement and which generally include the drilling of a specific number of wells in each phase of the exploration period stipulated in the agreement.

Egypt does not impose localization barriers on IT firms.  Egypt does not make local production a requirement for market access, does not have local content requirements, and does not impose forced technology or intellectual property transfers as a condition of market access.  But there are exceptions where the government has attempted to impose controls by requesting access to a company’s servers located offshore, or request servers to be located in Egypt and thus under the government’s control.

5. Protection of Property Rights

Real Property

The Egyptian legal system provides protection for real and personal property.  Laws on real estate ownership are complex and titles to real property may be difficult to establish and trace.  According to the World Bank’s 2019 Doing Business Report, Egypt ranks 125 of 190 for ease of registering property.

The National Title Registration Program introduced by the Ministry of State for Administrative Development has been implemented in nine areas within Cairo.  This program is intended to simplify property registration and facilitate easier mortgage financing. Real estate registration fees, long considered a major impediment to development of the real estate sector, are capped at no more than EGP 2000 (USD 110), irrespective of the property value.  In November 2012, the government postponed implementation of an enacted overhaul to the real estate tax and as of April 2017 no action has been taken.

Foreigners are limited to ownership of two residences in Egypt and specific procedures are required for purchasing real estate in certain geographical areas.

The mortgage market is still undeveloped in Egypt, and in practice most purchases are still conducted in cash.  Real Estate Finance Law 148//2001 authorized both banks and non-bank mortgage companies to issue mortgages. The law provides procedures for foreclosure on property of defaulting debtors, and amendments passed in 2004 allow for the issuance of mortgage-backed securities.  According to the regulations, banks can offer financing in foreign currency of up to 80 percent of the value of a property.

Presidential Decree 17//2015 permitted the government to provide land free of charge, in certain regions only, to investors meeting certain technical and financial requirements.  This provision expires on April 1, 2020 and the company must provide cash collateral for five years following commencement of either production (for industrial projects) or operation (for all other projects).

The ownership of land by foreigners is governed by three laws: Law 15//1963, Law 143//1981, and Law 230//1996.  Law 15//1963 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land.  Law 143//1981 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is equal to approximately one hectare) that may be owned by individuals, families, cooperatives, partnerships and corporations.  Partnerships are permitted to own up to 10,000 feddans. Joint stock companies are permitted to own up to 50,000 feddans.

Partnerships and joint stock companies may own desert land within these limits, even if foreign partners or shareholders are involved, provided that at least 51 percent of the capital is owned by Egyptians.  Upon liquidation of the company, however, the land must revert to Egyptian ownership. Law 143 defines desert land as the land lying two kilometers outside city borders. Furthermore, non-Egyptians owning non-improved real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public.  Non-Egyptians may only sell their real estate five years after registration of ownership, unless the consent of the Prime Minister for an exemption is obtained.

Intellectual Property Rights

Egypt remains on the Special 301 Watch List in 2019.  Egypt’s IPR legislation generally meets international standards, but is weakly enforced.  Shortcomings in the IPR environment include infringements to copyrights and patents, particularly in the pharmaceuticals sector.

Book, music, and entertainment software piracy is prevalent in Egypt, and a significant portion of the piracy takes place online.  American film studios represented by the Motion Pictures Association of America are concerned about the illegal distribution of American movies on regional satellite channels.

Multinational pharmaceutical companies complain that local generic drug-producing companies infringe on their patents.  Delays and inefficiencies in processing patent applications by the Egyptian Patent Office compound the difficulties pharmaceutical companies face in introducing new drugs to the local market.  The government views patent linkage as “a legal violation” against the concept of separation of authorities between the Ministry of Health and the Egyptian Patent Office. As a result, the Ministry of Health has the authority to issue permits for the sale of drugs, but generally issues these permits without cross-checking patent filings.

Eight GoE ministries have the responsibility to oversee IPR concerns: Supply and Internal Trade for trademarks, Higher Education and Research for patents, Culture for copyrights, Agriculture for plants, Communications and Information Technology for copyright of computer programs, Interior for combatting IPR violations, Customs for border enforcement, and Trade and Industry for standards and technical regulations.  Article 69 of Egypt’s 2014 constitution mandates the establishment of a “specialized agency to uphold [IPR] rights and their legal protection.” A National Committee on IPR was temporary established to address IPR matters until a permanent body is established. All IPR stakeholders are represented in the committee, and members meet every two months to discuss issues. The National Committee on IPR is chaired by the Ministry of Foreign Affairs and reports directly to the Prime Minister. As of April 2019, Parliament was drafting a revision of the 2002 IPR law, and was receptive to U.S. government advice and input.

The Egyptian Customs Authority (ECA) handles IPR enforcement at the national border and the Ministry of Interior’s Department of Investigation handles domestic cases of illegal production. The ECA cannot act unless the trademark owner files a complaint.  Moreover, Egypt’s Economic Courts often take years to reach a decision on IPR infringement cases.

ECA’s customs enforcement also tends to focus on protecting Egyptian goods and trademarks. The ECA is taking steps to adopt the World Customs Organization’s (WCO) Interface Public-Members platform, which allows customs officers to detect counterfeit goods by scanning a product’s barcode and checking the WCO trademark database system.

For additional information about treaty obligations and points of contact at local offices, please see WIPO’s country profiles at http://wipo.int/directory/en/

6. Financial Sector

Capital Markets and Portfolio Investment

To date, high returns on GoE debt have crowded out Egyptian investment in productive capacity.  The large foreign inflows Egypt witnessed in 2018 have been mostly portfolio capital, which is highly volatile.  Returns on GoE debt have begun to decrease, which could presage investment by Egyptian capital in the real economy

The Egyptian Stock Exchange (EGX) is Egypt’s registered securities exchange.  There are more than 500,000 investors registered to trade on the exchange. Stock ownership is open to foreign and domestic individuals and entities.  The GoE issues dollar-denominated and Egyptian pound-denominated debt instruments. The GoE has developed a positive outlook toward foreign portfolio investment, recognizing the need to attract foreign capital to help develop the Egyptian economy.

The Capital Market Law 95//1992, along with the Banking Law 88//2003, constitutes the primary regulatory frameworks for the financial sector.  The law grants foreigners full access to capital markets, and authorizes establishment of Egyptian and foreign companies to provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities.  The law specifies mechanisms for arbitration and legal dispute resolution and prohibits unfair market practices. Law 10//2009 created the Egyptian Financial Supervisory Authority (EFSA) and brought the regulation of all non-banking financial services under its authority. In 2017, EFSA became the Financial Regulatory Authority (FRA).

Settlement of transactions takes one day for treasury bonds and two days for stocks.  Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, virtually no listed stocks have such restrictions.  While a significant number of the companies listed on the exchange have been family-owned or dominated conglomerates, the exchange has gone through a period of major delisting of many companies that do not have sufficient shares or do not meet the management, fiscal, and transparency standards. Free trading of the remaining shares in many of these ventures is increasing, with a 110 percent increase in trade value and a 53 percent increase in trading volume from 2016 to 2017.  Companies are delisted from the exchange if not traded for six months.

The Higher Investment Council extended the suspension of capital gains tax for three years, until 2020 as part of efforts to draw investors back.   In 2017, the government implemented a stamp duty on all stock transactions with a duty of 0.125 percent on all buyers and sellers. Egypt’s stamp duty on stock exchange transactions includes for the first time a 0.3 percent levy for investors acquiring more than a third of a company’s stocks.

Foreign investors can access Egypt’s banking system by opening accounts with local banks, and buying and selling all marketable securities with brokerages.  The government has repeatedly emphasized its commitment to maintaining the profit repatriation system to encourage foreign investment in Egypt, especially since the pound floatation and implementation of the IMF loan program in November 2016.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates.  The system is designed to allow for settlement of transactions in fewer than two days.

The Egyptian credit market, open to foreigners, is vibrant and active. Repatriation of investment profits has become much easier, as there is enough available hard currency to execute FX trades. Since the floatation of the EGP in November 2016, FX trading is considered straightforward, given the reestablishment of the interbank foreign currency trading system.

Money and Banking System

Benefitting from the nation’s increasing economic stability over the past two years, Egypt’s banks have enjoyed both ratings upgrades and continued profitability.  Thanks to economic reforms, a new floating exchange system, and an Investment Law passed in 2017, the project finance pipeline is increasing after a period of lower activity.  Banking competition is improving to serve a largely untapped retail segment and the nation’s challenging, but potentially rewarding, the SME segment. The Central Bank of Egypt (CBE) has mandated that 20 percent of bank loans go to SMEs within the next two years).  Also, with only about a quarter to a third of Egypt’s adult population owning or sharing an account at a formal financial institution (according to press and comments from contacts), the banking sector has potential for growth and higher inclusion, which the government and banks discuss frequently.  A low median income plays a part in modest banking penetration. But the CBE has taken steps to work with banks and technology companies to expand financial inclusion.

Egypt’s banking sector is generally regarded as healthy and well-capitalized due in part to its deposit-based funding structure and ample liquidity—especially since the floatation and restoration of the interbank market.  The CBE estimates that approximately 4.3 percent of the banking sector’s loans are non-performing in 2018. Still, since 2011, a high level of exposure to government debt, accounting for over 40 percent of banking system assets, at the expense of private sector lending, has reduced the diversity of bank balance sheets and crowded out domestic investment.  Given the floatation of the Egyptian Pound and restart of the interbank trading system, Moody’s and S&P have upgraded the outlook of Egypt’s banking system to positive from stable to reflect improving macroeconomic conditions and ongoing commitment to reform.

38 banks operate in Egypt, including several foreign banks. The CBE has not issued a new commercial banking license since 1979.  The only way for a new commercial bank, whether foreign or domestic, to enter the market (except as a representative office) is to purchase an existing bank.  To this end, in 2013, QNB Group acquired National Société Générale Bank Egypt (NSGB). That same year, Emirates NBD, Dubai’s largest bank, bought the Egypt unit of BNP Paribas.  In 2015, Citibank sold its retail banking division to CIB Bank. In 2016 and 2017, Egypt indicated a desire to partially (less than 35 percent) privatize at least one (potentially two) state-owned banks and a total of 23 firms through either expanded or new listings on the Egypt Stock Exchange, though no action has been taken as of early 2018. In March 2019, Egypt began its program to privatize 23 State-Owned Enterprises with a successful minority stake in the Eastern Tobacco Company.

According to the CBE, banks operating in Egypt held EGP 4.216 trillion in total assets at the end of first quarter of 2018, of which approximately 45 percent were held by the largest five banks (the National Bank of Egypt, Banque Misr, the Commercial International Bank, Qatar National Bank Al-Ahli, and the Banque Du Caire). Egypt’s three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt) control nearly 40 percent of banking sector assets.

The chairman of the EGX recently stated that Egypt is allowing, even encouraging, exploration of the use of blockchain technologies across the banking community.  The FRA will review the development and most likely regulate how the banking system adopts the fast-developing blockchain systems into banks’ back-end and customer-facing processing and transactions. Seminars and discussions are beginning around Cairo, including visitors from Silicon Valley, in which leaders and experts are still forming a path forward.  While not outright banning cryptocurrencies, which is distinguished from blockchain technologies, authorities caution against speculation in unknown asset classes.

Alternative financial services in Egypt are extensive, given the large informal economy, estimated to be from 30 to 50 percent of the GDP. Informal lending is prevalent, but the total capitalization, number of loans, and types of terms in private finance is less well known.

Foreign Exchange and Remittances

Foreign Exchange

There has been significant progress in accessing hard currency since the floatation of the EGP and reestablishment of the interbank currency trading system in November 2016.  While the immediate aftermath saw some lingering difficulty of accessing currency, by 2017 most firms operating in Egypt reported having little difficulty obtaining hard currency for business purposes, such as importing inputs and repatriating profits.  In 2016 the Central Bank lifted dollar deposit limits on households and firms importing priority goods which had been in place since early 2015. With net foreign reserves at an all-time high of over USD 44 billion (March 2019), accessing foreign currency is no longer an issue.

Funds associated with investment can be freely converted into any world currency, depending on the availability of that currency in the local market.  Some firms and individuals report that the process takes time. But the interbank trading system works in general and currency is available as the foreign exchange markets continue to react positively to the government’s commitment to macro and structural reform.

The floating exchange rate operates on the principle of market supply and demand: the exchange rate is dictated by availability of currency and demand by firms and individuals.  While there is some reported informal Central Bank window guidance, the rate generally fluctuates depending on market conditions, without direct market intervention by authorities.  In general, the EGP has stabilized within an acceptable exchange rate range, which has increased the foreign exchange market’s liquidity. Since the early days following the floatation, there has been very low exchange rate volatility.

Remittance Policies

The 1992 U.S.-Egypt Bilateral Investment Treaty provides for free transfer of dividends, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payments, and proceeds from sales.

The Investment Incentives Law stipulates that non-Egyptian employees hired by projects established under the law are entitled to transfer their earnings abroad.  Conversion and transfer of royalty payments are permitted when a patent, trademark, or other licensing agreement has been approved under the Investment Incentives Law.

Banking Law 88//2003 regulates the repatriation of profits and capital.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions.  The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in fewer than two days, though in practice some firms have reported short delays in repatriating profits, no longer due to availability but more due to processing steps.

Sovereign Wealth Funds

The Cabinet has approved  the establishment of a sovereign wealth fund, which will be charged with investing state funds locally and abroad across asset classes and will be tapped to manage underutilized assets.  The framework of the EGP200 billion sovereign wealth fund was issued in March of 2018. The government is collaborating with regional and European institutions to take part in forming the fund’s sector-specific units.

7. State-Owned Enterprises

State and military-owned companies compete directly with private companies in many sectors of the Egyptian economy.  According to Public Sector Law 203//1991, SOEs should not receive preferential treatment from the government, nor should they be accorded any exemption from legal requirements applicable to private companies.  In addition to the SOEs groups, 40 percent of the banking sector’s assets are controlled by three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt). In March 2014, the government announced that nine public holding companies will be placed under an independent sovereign fund.

In an attempt to encourage growth of the private sector, privatization of SOEs and state-owned banks accelerated under an economic reform program that took place from 1991 to 2008. Following the 2011 revolution, third parties have brought cases in court to reverse privatization deals, and in a number of these cases, Egyptian courts have ruled to reverse the privatization of several former public companies.  Most of these cases are still under appeal.

The state-owned telephone company, Telecom Egypt, lost its legal monopoly on the local, long-distance, and international telecommunication sectors in 2005.  Nevertheless, Telecom Egypt held a de facto monopoly until late 2016 because the National Telecommunications Regulatory Authority (NTRA) had not issued additional licenses to compete in these sectors.  In October 2016, NTRA, however, implemented a unified license regime that allows companies to offer both fixed line and mobile networks. The agreement allows Telecom Egypt to enter the mobile market and the three existing mobile companies to enter the fixed line market.  The introduction of Telecom Egypt as a new mobile operator in the Egyptian market will increase competition among operators, which will benefit users by raising the bar on the quality of services as well as improving prices. Egypt is not a party to the WTO’s Government Procurement Agreement.

SOEs in Egypt are structured as individual companies controlled by boards of directors and grouped under government holding companies that are arranged by industry, including Petroleum Products & Gas, Spinning & Weaving; Metallurgical Industries; Chemical Industries; Pharmaceuticals; Food Industries; Building & Construction; Tourism, Hotels & Cinema; Maritime & Inland Transport; Aviation; and Insurance. The holding companies are headed by boards of directors appointed by the Prime Minister with input from the relevant Minister.

Privatization Program

Egypt has made some progress on its program to privatize 23 State-Owned Enterprises (SOEs). The process formally began in March 2019 with a successful public offering of a minority stake in the Eastern Tobacco Company. The long-awaited program had been delayed repotedly due to market conditions.  The government plans to sell 20-30 percent of Banque du Caire’s shares in an initial public offering on the EGX by the end of 2019, according to the Central Bank. Efforts to privatize before had stalled in an environment where the public often associates privatization with poor quality and higher prices.

Egypt’s privatization program is based on Public Enterprise Law 203//1991, which permits the sale of SOEs to foreign entities.  In 1991, Egypt began a privatization program for the sale of several hundred wholly or partially SOEs and all public shares of at least 660 joint venture companies (joint venture is defined as mixed state and private ownership, whether foreign or domestic).  Bidding criteria for privatizations were generally clear and transparent.

8. Responsible Business Conduct

Responsible Business Conduct (RBC) programs have grown in popularity in Egypt over the last 10 years.  Most programs are limited to multinational and larger domestic companies as well as the banking sector and take the form of funding and sponsorship for initiatives supporting entrepreneurship and education and other social activities.  Environmental and technology programs are also garnering greater participation. The Ministry of Trade has engaged constructively with corporations promoting RBC programs, supporting corporate social responsibility (CSR) conferences and providing Cabinet-level representation as a sign of support to businesses promoting RBC programming.

A number of organizations and corporations work to foster the development of RBC in Egypt.  The American Chamber of Commerce has an active CSR committee. Several U.S. pharmaceutical companies are actively engaged in RBC programs related to Egypt’s hepatitis-C epidemic.  The Egyptian Corporate Responsibility Center, which is the UN Global Compact local network focal point in Egypt, aims to empower businesses to develop sustainable business models as well as improve the national capacity to design, apply, and monitor sustainable responsible business conduct policies.  In March 2010, Egypt launched an environmental, social, and governance (ESG) index, the second of its kind in the world after India’s, with training and technical assistance from Standard and Poor’s. Egypt does not participate in the Extractive Industries Transparency Initiative. Public information about Egypt’s extractive industry remains limited to the government’s annual budget.

9. Corruption

Egypt has a set of laws to combat corruption by public officials, including an Anti-Bribery Law (which is contained within the Penal Code), an Illicit Gains Law, and a Governmental Accounting Law, among others.  Countering corruption remains a long-term focus. There have been cases involving public figures and entities, including the arrests of Alexandria’s deputy governor and the secretary general of Suez on several corruption charges and the investigation into five members of parliament alleged to have sold Hajj visas.  Nevertheless, according to some businesses, corruption laws have not been consistently enforced. Transparency International’s Corruption Perceptions Index ranked Egypt 105 out of 180 in its 2018 survey, an improvement of 12 places from its rank of 117 in 2017. Transparency International also found that approximately 50 percent of Egyptians reported paying a bribe in order to obtain a public service.

Some private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. There is no government requirement for private companies to establish internal codes of conduct to prohibit bribery.

Egypt ratified the UN Convention against Corruption in February 2005. It has not acceded to the OECD Convention on Combating Bribery or any other regional anti-corruption conventions.

While NGOs are active in encouraging anti-corruption activities, dialogue between the government and civil society on this issue is almost non-existent, the OECD found in 2009 and a trend that continues today.  While government officials publicly asserted they shared civil society organizations’ goals, they rarely cooperated with NGOs, and applied relevant laws in a highly restrictive manner against NGOs critical of government practices.  Media was also limited in its ability to report on corruption, with Article 188 of the Penal Code mandating heavy fines and penalties for unsubstantiated corruption allegations.

U.S. firms have sometimes identified corruption as an obstacle to FDI in Egypt.  Companies might encounter corruption in the public sector in the form of requests for bribes, using bribes to facilitate required government approvals or licenses, embezzlement, and tampering with official documents.  Corruption and bribery are reported in dealing with public services, customs (import license and import duties), public utilities (water and electrical connection), construction permits, and procurement, as well as in the private sector.  Businesses have described a dual system of payment for services, with one formal payment and a secondary, unofficial payment required for services to be rendered.

Resources to Report Corruption

Several agencies within the GoE share responsibility for addressing corruption.  Egypt’s primary anticorruption body is the Administrative Control Authority (ACA), which has jurisdiction over state administrative bodies, SOEs, public associations and institutions, private companies undertaking public work, and organizations to which the state contributes in any form.  In October 2017, Parliament approved and passed amendments to the ACA law, which grants the organization full technical, financial, and administrative authority to investigate corruption within the public sector (with the exception of military personnel/entities).  The law is viewed as strengthening an institution, which was established in 1964.  The ACA appears well funded and well trained when compared with other Egyptian law enforcement organizations.  Strong funding and the current ACA leadership’s close relationship with President Sisi reflect the importance of this organization and its mission. It is too small for its mission (roughly 300 agents) and is routinely over-tasked with work that would not normally be conducted by a law enforcement agency.

The ACA periodically engages with civil society.  For example, it has met with the American Chamber of Commerce and other organizations to encourage them to seek it out when corruption issues arise.

In addition to the ACA, the Central Auditing Authority (CAA) acts as an anti-corruption body, stationing monitors at state-owned companies to report corrupt practices.  The Ministry of Justice’s Illicit Gains Authority is charged with referring cases in which public officials have used their office for private gain.  The Public Prosecution Office’s Public Funds Prosecution Department and the Ministry of Interior’s Public Funds Investigations Office likewise share responsibility for addressing corruption in public expenditures.

Contact information for the government agency responsible for combating corruption:

Minister of Interior
General Directorate of Investigation of Public Funds
Telephone: 02-2792-1395 / 02-2792 1396
Fax: 02-2792-2389

10. Political and Security Environment

Stability and economic development remain Egypt’s priorities. The GoE has taken measures to eliminate politically-motivated violence, while also limiting peaceful protests and political expression.  Egypt’s presidential elections proceeded without incident in March 2018. Late 2018 and early 2019 saw a relatively low number of small-scale terrorist attacks primarily against security targets in Cairo and elsewhere in the Nile Valley, with some against civilians. Militant groups committed several large-scale attacks in the Western Desert and Sinai in late 2017, and a car bombing in Alexandria in early 2018.  In the Sinai Peninsula, militants affiliated with ISIS have conducted terrorist attacks against military installations and personnel, as well as a prominent religious site targeting civilians. In response, the government launched a comprehensive counterterrorism offensive beginning in early 2018, which is still ongoing. The United States designated three groups – Harakat Sawaad Misr (HASM), Liwaa el Thawra, and ISIS Egypt – as Specially Designated Global Terrorists in 2018, and designated ISIS-Sinai Province as an alias of Ansar Bayt al-Maqdis, which had been designated a Foreign Terrorist Organization in September 2015.

11. Labor Policies and Practices

Official statistics put Egypt’s labor force at approximately 29 million, with an official unemployment rate of 10.7 percent as of December 2018, a 0.6 percent decrease since the previous quarter and a continuation of a gradual downward trend since its peak of over 13 percent in 2014.  Women account for some 75 percent of those unemployed, according to a May 2017 statement by Abu Bakr el-Gendy, head of Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS). Accurate figures are difficult to determine and verify given Egypt’s large informal economy in which some 62 percent of the non-agricultural workforce is engaged, according to ILO estimates.

The government bureaucracy and public sector enterprises are substantially over-staffed compared to the private sector and other international norms.  According to the World Bank, Egypt has the highest number of government workers per capita in the world.  Businesses highlight a mismatch between labor skills and market demand, despite high numbers of university graduates in a variety of fields.  Foreign companies frequently pay internationally competitive salaries to attract workers with valuable skills.

The Unified Labor Law 12//2003 provides comprehensive guidelines on labor relations, including hiring, working hours, termination of employees, training, health, and safety.  The law grants a qualified right for employees to strike, as well as rules and guidelines governing mediation, arbitration, and collective bargaining between employees and employers.   Non-discrimination clauses are included, and the law complies with labor-related International Labor Organization (ILO) conventions regulating the employment and training of women and eligible children. Egypt ratified ILO Convention 182 on combating the Worst Forms of Child Labor in April 2002. On July 2018, Egypt launched the first National Action Plan on combating the Worst Forms of Child Labor. The law also created a national committee to formulate general labor policies and the National Council of Wages, whose mandate is to discuss wage-related issues and national minimum-wage policy, but it has rarely convened and a minimum wage has rarely been enforced in the private sector. .

Parliament adopted a new Trade Unions Law in late 2017, replacing a 1976 law, which experts said was out of compliance with Egypt’s commitments to ILO conventions.  After a March 2016 Ministry of Manpower and Migration (MOMM) directive not to recognize documentation from any trade union without a stamp from the government-affiliated Egyptian Trade Union Federation (ETUF), the new law established procedures for registering independent trade unions, but some of the unions noted that the directorates of the Ministry of Manpower didn’t implement the law and placed restrictions on freedoms of association and organizing for trade union elections.  Executive regulations for trade union elections stipulate a very tight deadline of three months for trade union organizations to legalize their status, and one month to hold elections, which, critics said, restricted the ability of unions to legalize their status or to campaign. On April 3, 2018, the government registered its first independent trade union in more than two years. Under the new law, a trade union or workers’ committee may be formed if 150 employees in an entity express a desire to organize.  Minimum membership thresholds for forming a general trade union are 20,000 and for a trade union federation, 200,000. The new law explicitly bans compulsory membership or the collection of union dues without written consent of the worker and allows members to quit unions. Each union, general union, or federation is registered as an independent legal entity, thereby enabling any such entity to exit any higher-level entity.

The 2014 Constitution stipulated in Article 76 that “establishing unions and federations is a right that is guaranteed by the law.”  Only courts are allowed to dissolve unions. The 2014 Constitution maintained past practice in stipulating that “one syndicate is allowed per profession.”  The Egyptian constitutional legislation differentiates between white-collar syndicates (e.g. doctors, lawyers, journalists) and blue-collar workers (e.g. transportation, food, mining workers). Workers in Egypt have the right to strike peacefully, but strikers are legally obliged to notify the employer and concerned administrative officials of the reasons and time frame of the strike 10 days in advance.  In addition, strike actions are not permitted to take place outside the property of businesses.  The law prohibits strikes in strategic or vital establishments in which the interruption of work could result in disturbing national security or basic services provided to citizens.  In practice, however, workers strike in all sectors, without following these procedures, but at risk of prosecution by the government.

Collective negotiation is allowed between trade union organizations and private sector employers or their organizations.  Agreements reached through negotiations are recorded in collective agreements regulated by the Unified Labor law and usually registered at MOMM.  Collective bargaining is technically not permitted in the public sector, though it exists in practice.  The government often intervenes to limit or manage collective bargaining negotiations in all sectors.

MOMM sets worker health and safety standards, which also apply in public and private free zones and the Special Economic Zones (see below).  Enforcement and inspection, however, are uneven.  The Unified Labor Law prohibits employers from maintaining hazardous working conditions, and workers have the right to remove themselves from hazardous conditions without risking loss of employment.

Egyptian labor laws allow employers to close or downsize operations for economic reasons.  The government, however, has taken steps to halt downsizing in specific cases.  The Unemployment Insurance Law, also known as the Emergency Subsidy Fund Law 156//2002, sets a fund to compensate employees whose wages are suspended due to partial or complete closure of their firm or due to its downsizing.  The Fund allocates financial resources that will come from a 1 percent deduction from the base salaries of public and private sector employees.  According to foreign investors, certain aspects of Egypt’s labor laws and policies are significant business impediments, particularly the difficulty of dismissing employees.  To overcome these difficulties, companies often hire workers on temporary contracts; some employees remain on a series of one-year contracts for more than 10 years. Employers sometimes also require applicants to sign a “Form 6,” an undated voluntary resignation form which the employer can use at any time, as a condition of their employment. Negotiations on drafting a new Labor Law, which has been under consideration in the Parliament for two years, have included discussion of requiring employers to offer permanent employee status after a certain number of years with the company and declaring Form 6 or any letter of resignation null and void if signed prior to the date of termination.

Egypt has a dispute resolution mechanism for workers.  If a dispute concerning work conditions, terms, or employment provisions arises, both the employer and the worker have the right to ask the competent administrative authorities to initiate informal negotiations to settle the dispute. This right can be exercised only within seven days of the beginning of the dispute. If a solution is not found within 10 days from the time administrative authorities were requested, both the employer and the worker can resort to a judicial committee within 45 days of the dispute.  This committee is comprised of two judges, a representative of MOMM and representatives from the trade union, and one of the employers’ associations. The decision of this committee is provided within 60 days. If the decision of the judicial committee concerns discharging a permanent employee, the sentence is delivered within 15 days. When the committee decides against an employer’s decision to fire, the employer must reintegrate the latter in his/her job and pay all due salaries. If the employer does not respect the sentence, the employee is entitled to receive compensation for unlawful dismissal.

Labor Law 12//2003 sought to make it easier to terminate an employment contract in the event of “difficult economic conditions.”  The Law allows an employer to close his establishment totally or partially or to reduce its size of activity for economic reasons, following approval from a committee designated by the Prime Minister.  In addition, the employer must pay former employees a sum equal to one month of the employee’s total salary for each of his first five years of service and one and a half months of salary for each year of service over and above the first five years.  Workers who have been dismissed have the right to appeal. Workers in the public sector enjoy lifelong job security as contracts cannot be terminated in this fashion; however, government salaries have eroded as inflation has outpaced increases.

Egypt has regulations restricting access for foreigners to Egyptian worker visas, though application of these provisions has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. Application of these regulations is inconsistent.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) is operating in Egypt to provide the capital and risk mitigation tools that investors need to overcome the barriers faced in this region. In 2012, OPIC launched the USD 250 million Egypt Loan Guaranty Facility (ELGF), in partnership with USAID, to support bank lending and stimulate job creation. The ELGF’s main objective is to help SMEs access finance for growth and development, by providing creditors the needed guarantees to help them mitigate loan risks.  This objective goes hand-in-hand with the Central Bank of Egypt’s initiative to support SMEs. The ELGF expands lending to SMEs by supporting local partner banks as they lend to the target segment and increase access to credit for SMEs. The result is the promotion of jobs and private sector development in Egypt. The ELGF and partner banks sign a Guarantee Facility Agreement (GFA) to outline main terms and conditions of credit guarantee. The two bank partners are Commercial International Bank (CIB) and the National Bank of Kuwait (NBK).  USAID has collaborated with OPIC/ELGF and the CIB to provide training to SME owners and managers on the basics of accounting and finance, banking and loan processes, business registration, and other topics that will help SMEs access financing for business growth.

OPIC is affiliated with several renewable energy, oil and gas, and water supply projects in Egypt, as well. Apache Corporation, the largest U.S. investor in Egypt, has supported its natural gas investment with OPIC risk insurance since 2004. In December 2018, the OPIC Board approved a project to provide USD 430 million in political risk insurance to Noble Energy, Inc. to support the restoration, operation, and maintenance of a natural gas pipeline in Egypt and the supply of natural gas through a pipeline from Israel.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (M USD ) 2017 $235,370    2018 $242,800 www.worldbank.org/en/country  
Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (M USD , stock positions) 2018 $2,244.4  2017 $9,352.0  BEA data available at https://tradingeconomics.com/egypt/foreign-direct-investment  
Host country’s FDI in the United States (M USD , stock positions) 2017  $2,960.0  2017  $2,950.5 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Total inbound stock of FDI as % host GDP N/A N/A 2017 55.63% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

Measurements of FDI in Egypt vary according to the source and the definitions employed to calculate the figure.  The Central Bank of Egypt records figures on quarterly and annual investment flows based on financial records for Egypt’s balance of payments statistics.  They are reported in the table below. The Ministry of Petroleum maintains statistics on investment in the oil and gas sector (which accounts for the bulk of FDI in Egypt), while GAFI has statistics on all other investments – including re-invested earnings and investment-in-kind.  Statistics are not always current. GAFI’s figures are calculated in EGP at the historical value and rate of exchange, with no allowance for depreciation, and are cumulative starting from 1971.

U.S. firms are active in a wide range of manufacturing industries, producing goods for the domestic and export markets.  U.S. investors include American Express, AIG, Ideal Standard, Apache Corporation, Bechtel, Bristol-Myers Squibb, Cargill, Citibank, Coca-Cola, Devon Energy, Dow Chemical, ExxonMobil, Eveready, General Motors, Guardian Industries, H.J.  Heinz, Johnson & Johnson, Kellogg’s, Mars, Mondelez, Microsoft, Proctor and Gamble, Pfizer, PepsiCo, Pioneer, and Xerox. Leading investors from other countries include BG, ENI-AGIP, BP, Vodaphone, and Shell (in the oil/gas sector), Unilever, Al-Futtaim, (UAE), the M.A. Kharafi Group (Kuwait), and the Kingdom Development Company (Saudi Arabia).


Table 3: Sources and Destination of FDI

Data not available.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars, 2016)
Total Equity Securities Total Debt Securities
All Countries $1,886 100% All Countries $888 100% All Countries $998 100%
Cayman Islands $416 22% Saudi Arabia $347 39% Cayman Islands $406 41%
Saudi Arabia $392 13% International Organizations $250 28% United States $190 19%
International Organizations $250 12% United Kingdom $45 5% Qatar $103 10%
United States $219 5% Italy $36 4% Germany $48 5%
Qatar $103 5% Switzerland $32 4% Saudi Arabia $46 5%

14. Contact for More Information

Mohamed El Husseiny, Economic Specialist, U.S. Embassy Cairo
02-2797-2323
Elhusseinyma@state.gov

Iraq

Executive Summary

The U.S. business community is increasingly interested in potential investment and export opportunities in Iraq.  Since the December 9, 2017, declaration by then-Prime Minister Haider al-Abadi that the Iraqi Security and Coalition Forces successfully liberated all of Iraq, foreign companies have gradually increased their activity in exploring non-oil trade with and investment in Iraq.  Prime Minister Adil Abd al-Mahdi (AAM) has committed to an economic plan that includes reforming Iraq’s failing state-owned enterprises (SOEs), fighting corruption, reducing bureaucratic bottlenecks, investing in necessary infrastructure, and stimulating the private sector.

The Government of Iraq (GOI) continues to face the challenges of reconstruction after the defeat of ISIS, assisting more than 1.7 million Iraqis who remain displaced, and an economy that is primarily dependent on oil revenues and burdened by institutional corruption.  Although the GOI announced the defeat of ISIS in late 2017 and more than 4.2 million Iraqis have returned to their homes, the rate of returns is slowing. Many of those still displaced are concerned about security in their areas of origin as well as the lack of livelihoods, appropriate housing, or other basic services.  After a peaceful transition of power to AAM’s technocratic coalition in October 2018, the failure of the GOI to pass a budget in a timely manner and complete the formation of a cabinet significantly slowed the momentum of this ambitious economic reform plan.

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.  Though major military operations against ISIS have concluded, lack of security and the threat of resurgent extremist groups remain an impediment to investment in many parts of the country. Some militia groups that participated in the fight against ISIS remained deployed even after the completion of combat operations.  In many instances, these militia appeared to be under only marginal government control and were 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).

With non-oil bilateral trade with the U.S. just over USD 1 billion and limited U.S. foreign direct investment (FDI) in an economy with an estimated gross domestic product (GDP) of USD 200 billion, the Iraqi market offers tremendous potential for U.S. exporters.  However, due to the statist approach of the central government and its aversion to foreign investors owning or having operational control of infrastructure, particularly in the energy sector, many of these opportunities are high risk but rewards can be limited. This structure may have a chilling effect on FDI from the U.S.  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. A December 2018 trade mission by 57 U.S. companies to Baghdad represented many of these sectors, but the obstacles to doing business in Iraq are substantial and few of these companies realized any significant progress since their visit to Iraq.

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 an increase and stabilization in oil prices, resulted in a 37 percent increase in oil revenues from 2016 levels.  The 2019 budget passed by Parliament in January projects a deficit of USD 23.3 billion based on an expectation that the price of oil exports will average USD 56 per barrel and Iraq will receive USD 79.3 billion in oil revenue.

Investors in Iraq continue to face extreme challenges resolving procurement disputes with GOI entities, 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 GOI contracts. Difficulties with corruption, customs regulations, dysfunctional visa and residency permit procedures, nonexistent 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.  Recent positive signs boosting confidence in the IKR economy include a stable oil price, the resumption of budget support to the Kurdistan Regional Government (KRG) from the central government, and initial agreements between the GOI and KRG on issues such as a unified customs system and the shipment of Kirkuk oil through the IKR pipeline to Turkey. According to the Kurdistan Board of Investment (BOI), the total capital of licensed projects in the IKR in 2018 increased by over 340 percent compared to 2017.

Numerous efforts to facilitate business climate improvements saw positive movement in the past year.  In November 2018, the U.S. Embassy Baghdad Trade and Investment team (T&I) was approved as a partner post of the U.S. Foreign Commercial Service (USFCS), supported by the USFCS office at U.S. Embassy Amman.  T&I can now offer eight of Commerce’s fee-based services supported by economic officers and the team’s three local staff.

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), which convened the first and only TIFA council meeting in 2014.  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, and recently hired a full-time executive director. Efforts to organize an American Chamber of Commerce in the IKR have stalled but regional chambers of commerce in Sulaimaniya, Duhok, and Erbil also provide support to U.S. businesses in the IKR.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 168 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2018 171 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 Not Ranked https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $2,527 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $4,630 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The GOI has publicly stated its commitment to attract foreign investment in the Prime Minister’s National Program to strengthen local industries and promote the “Made in Iraq” brand.  In February 2018, the GOI partnered with the World Bank and the Kuwaiti government to host the Kuwait International Conference for the Reconstruction of Iraq. The GOI has not yet followed through on commitments made at the conference to reform processes and regulations that hinder investment.

In December 2015, the GOI passed an amended National Investment Law (NIL) that improves investment terms for foreign investors, allows them to purchase land in Iraq for certain projects, and speeds up the investment license process.  However, purchasing land for commercial or residential development is extremely difficult. In 2015, Iraq also joined the International Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID).

Nevertheless, foreign investors continue to encounter bureaucratic challenges, corruption, and a weak banking sector, which make it difficult to successfully conclude investment deals.  State-owned banks in Iraq serve predominantly to settle the payroll of Iraq’s public sector and privately-owned banks, and until recently served almost entirely as currency exchange businesses.  Some of the privately-owned banks have begun commercial lending programs, but Iraq’s lack of a credit monitoring system, insufficient legal guarantees for lenders, and limited connections to international banks hinder commercial lending.  The financial sector in the IKR is still recovering from years of financial instability there, and the Central Bank of Iraq (CBI) levied sanctions against the IKR financial system immediately following the Kurdistan independence referendum in September 2017.

Recently, the GOI has been exploring financing options to pay for large-scale development projects rather than relying on its previous practice of funding investments entirely from current annual budget outlays.  According to the NIL, the GOI reserves the right to screen foreign direct investment. The U.S. Department of State is not aware of specific instances where this screening process has explicitly blocked foreign investments in Iraq, but the bureaucratic barriers to investment – including, for example, a requirement to place a significant portion of the capital investment in an Iraqi bank prior to receiving a license – remain significant.

The IKR has its own investment law (passed in 2006) and supporting regulations.  The KRG is working to put the business registration process and procedures online, and initial steps have been completed.  The KRG is generally open to public-private partnerships and is interested in modern, long-term financing, as demonstrated by the KRG’s oil and gas sector contracts that increase production.  Legislation to amend the investment law to broaden its reach to potential investors remains pending in the Iraqi Kurdistan Parliament (IKP).

According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited.  However, Iraq’s NIL limits foreign direct and indirect ownership of most natural resources, particularly the extraction and processing of any natural resources. It does allow foreign ownership of land to be used for residential projects and co-ownership of land to be used for industrial projects when an Iraqi partner is participating.

Iraq’s 2006 Investment Law Number 13 called for the establishment of a National Investment Commission (NIC) and a Provisional Investment Commission in each province.  The NIC, launched in 2007, is a cabinet-level organization which provides policy recommendations as well as support to current and potential investors in Iraq. The NIC’s “One Stop Shop” is intended to guide investors through the investment process, though investors have reported challenges using the NIC’s services.  The NIC can also grant investment licenses and facilitate visa and residency permit issuances for business travelers.

Limits on Foreign Control and Right to Private Ownership and Establishment

According to the National Investment Regulation No. 2 of 2009, if an investment license is granted to a project, at least 50 percent of the project’s workers must be Iraqi nationals.  The amended NIL also states that investors should give priority to Iraqi citizens before hiring non-Iraqi workers. As a result of popular protests in the summer of 2015, the GOI has applied pressure on foreign companies to hire more local employees.  In order to generate non-oil revenues, the GOI has also encouraged foreign companies to partner with local industries and purchase Iraqi-made products. The GOI generally favors SOEs and state-controlled banks in competitions for government tenders and investment.  This preference discriminates against both local and foreign investors.

Other Investment Policy Reviews

In the past three years, the GOI has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s Companies Registration Department.  The procedure costs and time to obtain a business license can be found at https://baghdad.eregulations.org/procedure/21?l=en  .  The process for doing so is too complicated to do from overseas, so companies must register using a local agent or consultant.  Investors who will do business only in the IKR can register with the KRG directly. Companies that will do business in both the IKR and greater Iraq must register with the Ministry of Trade.  The KRG has been negotiating with the GOI to gain Ministry of Trade recognition outside the IKR for KRG-issued business registrations.

Under the NIL, the NIC and the Provincial Investment Commissions (PICs) are intended to be one-stop shops that can provide information, sign contracts, and facilitate registration for new foreign and domestic investors.  The NIC offers investor facilitation services on transactions including work permit applications, visa approval letters, customs procedures, and business registration. Investors can request these services through the NIC website:  http://investpromo.gov.iq/  .  However, the National and Provincial Investment Commissions struggle to operate amid unclear lines of authority, budget constraints, and an absence of regulations and standard operating procedures.  The Investment Commissions still generally lack the authority to intercede when investors encounter bureaucratic obstacles with other Iraqi ministries.

In order to incorporate a company in Iraq, an investor must obtain a statement from an Iraqi bank showing a minimum capital deposit.  All investors must also apply for an investment license from the appropriate national, regional, or provincial investment commission. Companies are required to register with the General Commission for Taxation and register employees for social security (if applicable).  Companies automatically should receive their tax identification number as part of registering their business with the Ministry of Trade. Companies that provide security are also required to register with the Ministry of the Interior. It takes an average of 10 working days to start a business in Iraq, according to the 2018 World Bank Ease of Doing Business report; online procedures accounted for only 0.5 days of that time.

The National Investment Commission does not exclude businesses from taking advantage of its services based on the number of employees or the size of the investment project.  The commission can also connect investments by micro-, small-, and medium-sized enterprises (MSMEs) with the appropriate provincial investment council.

The Kurdistan Board of Investment (BOI) manages a streamlined investment licensing process in the IKR whose policy is to acknowledge receipt of the license request within 30 days of the initial license application; however, the licensing process can take from three to six months and may involve more than one KRG ministry or entity, depending on the sector of investment.  Despite bureaucratic hurdles, on the whole, the BOI investment framework seems to work well. Because of oversaturated commercial and residential real estate markets, the BOI has moved away from approving licenses in these sectors but still approves them on a case-by-case basis. Businesses reported some difficulties establishing local connections, obtaining qualified staff, and meeting import regulations.  Businesses also report that the KRG has not provided all promised support infrastructure such as water, electricity, or wastewater services under the investment law framework. However, the BOI receives generally high marks for being helpful in resolving problems. Additional information is available at the BOI’s website: http://www.kurdistaninvestment.org/  .

Outward Investment

Iraq does not restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Iraq does not have a bilateral investment treaty (BIT) or a bilateral taxation treaty with the United States.  The United States and Iraq signed an Agreement for Economic and Technical Cooperation on July 11, 2005, and it entered into force December 18, 2013.  The U.S.-Iraq Strategic Framework Agreement (SFA) (available at the following website: http://photos.state.gov/libraries/iraq/216651/US-IRAQ/us-iraq-sfa-en.pdf ) provides intergovernmental forums to address impediments to investment and trade.  There was a bilateral Higher Coordinating Committee (HCC) meeting on January 28, 2018, under the auspices of the SFA.  At the HCC both sides committed to reinvigorate the TIFA process and to the formation of two bilateral working groups: 1) to simplify Iraq’s visa and residency permit process and 2) to resolve commercial disputes between American companies and the GOI.  The existing TIFA between the governments of Iraq and the United States entered into force in 2013 and the inaugural TIFA Council meeting took place in March 2014 in Washington, D.C. The second TIFA Council is scheduled to take place on June 14, 2019. The TIFA provides a framework for dialogue to increase trade and investment cooperation between the two countries.

Iraq is a signatory to investor protection agreements or memorandums of understanding with 35 bilateral partners and nine multilateral groups.  The agreements include arrangements within the Arab League, as well as arrangements with Afghanistan, Armenia, Bangladesh, France, Germany, India, Iran, Japan, Jordan, Kuwait, Mauritania, the Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam, and Yemen.

Iraq currently has bilateral investment treaties with Armenia, France, Germany, Japan, Jordan, and Kuwait.  Only the BITs with Japan and Kuwait are in force. Iraq’s investment agreements include general provisions on promoting and protecting investments, including clauses on profit repatriation, access to arbitration and dispute settlements, fair expropriation rules, and compensation for losses.  However, the Iraqi government’s ability and willingness to enforce such provisions remains untested.

Iraq joined the Greater Arab Free Trade Area (GAFTA) in 1998 to better integrate economically with other Middle Eastern countries.  However, Iraq withdrew from GAFTA on November 17, 2016, choosing instead to implement tariffs on all the goods coming into the country.

U.S. companies have raised concerns about the Ministry of Finance (MOF)Tax Commission’s use of the “deemed tax” method to calculate corporate taxes, which can be disadvantageous for firms generating less than 20 percent profit, the standard percentage applied to every company, regardless of the firm’s actual profit.  U.S. investors also complain about the application of the social tax, equivalent to 5 percent of employees’ pay and a 12 percent employer contribution, to third country national employees who do not participate in or benefit from the Iraqi health or pension system, which the taxes are used to fund.

3. Legal Regime

Transparency of the Regulatory System

Iraq’s overall regulatory environment remains opaque.  Corruption, unclear regulations, and bureaucratic bottlenecks are major challenges for investors that bid on public procurement contracts or seek to invest in major infrastructure projects.  The KRG rolled out procurement reform measures in 2016 that seek to address some of these issues, yet the efficacy of these measures remains unclear. Iraq’s commercial and civil laws generally fall short of international norms.  There are few provisions regarding commercial competition. The NIL does not establish a full legal framework governing investment.

The absence of other laws in areas of interest to foreign investors also creates ambiguity.  Iraq’s Legislative Action Plan for the Implementation of WTO Agreements – the legislative “road map” for Iraq’s eventual WTO accession – requires competition and consumer protection laws that are critical for leveling the business playing field.  The Council of Representatives (COR) passed a Competition Law and a Consumer Protection Law in 2010; however, the Competition and Consumer Protection Commissions authorized by these laws have yet to be formed. Without these commissions, investors do not have recourse against unfair business practices such as bid rigging or abuse of a dominant position in the market.

The way in which the Iraqi government promulgates regulations can be opaque and lends itself to arbitrary use.  Regulations imposing duties on citizens or private businesses are required to be published in the official government gazette.  However, there is no corresponding requirement for the publication of internal ministerial regulations. This loophole allows bureaucrats to create internal requirements or procedures with little or no oversight, which can result in additional burdens for investors and other businesspersons.

Regulations exist at both the national and the provincial level.  National regulations are the most relevant to foreign businesses. Lack of regulatory coordination between GOI ministries and national and provincial authorities can result in conflicting regulations, which makes it difficult for investors and business people to easily and accurately interpret the regulatory environment.

Publicly listed companies are governed by the Interim Law on Securities and Markets (Coalition Provisional Authority Order Number 74) which is consistent with international norms; however, enforcement of this law is often not effective.  Accounting, legal, and regulatory procedures are opaque, inconsistent, and generally do not meet international standards. Draft bills, including investment laws, are not available for public comment.

The GOI encourages private sector associations but private sector associations are generally not influential, given the dominant role of SOEs in Iraq’s economy.  In the IKR, private sector associations have more influence and many, such as the contractors’ union, are very active in advocacy with the KRG.

The promulgation of new regulations with little advance notice and requirements related to investment guarantees have also slowed projects.  While the Kurdistan Region Investment Law (KRIL) of 2006 does not stipulate that a local partner is necessary to acquire an investment license, government officials sometimes encourage this practice.

Iraq has limited transparency of its public finances or government held debt.  Publicly available budgets included expenditures broken down by ministry and revenues broken down by source and type.  The budget provided limited details regarding allocations to and earnings from state-owned enterprises (SOEs). Financial statements for most SOEs were generally not publicly available.  Limited information on debt obligations was available on the Central Bank and MOF websites. A detailed breakdown of government debt was not made publicly available. 

International Regulatory Considerations

Iraq is not a member of the WTO and is not a signatory to the Trade Facilitation Agreement.

Legal System and Judicial Independence

Iraq has a civil law system, although Iraqi commercial jurisprudence is relatively underdeveloped.  During decades of war and sanctions, Iraqi courts became isolated from developments in international commercial transactions.  Corruption and bureaucratic bottlenecks remain significant problems. As trade with foreign parties increases, Iraqi courts have seen a significant increase in complex commercial cases.  Contracts should be enforceable under Iraqi law. In practice, however, honoring contracts and contract enforcement remains a challenge due to unclear regulations, lack of decision-making authority, and rampant corruption.

Laws and Regulations on Foreign Direct Investment

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the ICSID Convention on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.

Additional information can be found in “A Legal Guide to Investment in Iraq” http://cldp.doc.gov/programs/cldp-in-action/details/1551  .

Competition and Anti-Trust Laws

The COR passed a Competition Law and a Consumer Protection Law in 2010.  However, the Competition and Consumer Protection Commissions authorized by these laws have yet to be formed.  The NIL is supposed to promote fair competition and “competitive capacities” in the local market. However, the NIL does not include provisions related to the competition legislation.  The prominent role of SOEs in Iraq and corruption issues undermine the competitive landscape.

Expropriation and Compensation

Article 23 of the Iraqi Constitution prohibits expropriation, unless done for the purpose of public benefit and in return for just compensation.  The Constitution stipulates that expropriation may be regulated by law, but specific legislation regarding expropriation has not been drafted. Article 9 of the amended NIL also guarantees non-seizure or nationalization of any investment project covered by the provisions of this law, except in cases where a final judicial judgment has been reached.  It prohibits expropriation of an investment project, except in cases of public benefit and with fair compensation. Iraq’s Commercial Court is charged with resolving expropriation cases. Over the past six years, there have not been any government actions or shifts in government policy that would indicate possible expropriations in the foreseeable future.

In the IKR, if the BOI determines that investors are using land awarded under investment licenses for purposes other than those outlined in the license, it can impose fines and potentially confiscate the land.  Article 17 of the IKR investment law outlines an investor’s arbitration rights, which fall under the civil court system. Arbitration clauses should be written into local contracts in order to facilitate enforcement in the event of a dispute.

Dispute Settlement

ICSID Convention and New York Convention

Iraq is considering, but has not yet signed or ratified, the convention on Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the ad hoc arbitration rules and procedures established by the UN Commission on International Trade Law (UNCITRAL Model Law).  The enforcement of arbitral awards must comply with the special requirements set forth in current Iraqi civil procedure law and other related laws.

Investor-State Dispute Settlement

In November 2010, Iraq’s Higher Judicial Council established the First Commercial Court of Iraq, a court of specialized jurisdiction for disputes involving foreign investors as part of a national strategy to improve Iraq’s investment climate.  This court began hearing cases in January 2011. In 2017, a Higher Judicial Council survey of the 16 federal courts of appeals that heard Iraq’s commercial cases showed that 1,565 commercial cases had been filed and 83 percent of those cases had been completed.  Given that all of Iraq’s ministries are located in the capital, and the vast majority of commercial cases involve a foreign party and an Iraqi government agency, the Baghdad Commercial Court reviews far more commercial cases than the general jurisdiction courts in the surrounding provinces.  In 2017, 982 commercial cases were filed with Baghdad’s Commercial Court, representing 63 percent of the total commercial cases filed. In the IKR, commercial disputes are handled through the civil court system.

Additional information can be found in “A Legal Guide to Investment in Iraq:”  http://cldp.doc.gov/programs/cldp-in-action/details/1551  

International Commercial Arbitration and Foreign Courts

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.

Bankruptcy Regulations

Under Iraqi law, an Iraqi debtor may file for bankruptcy, and an Iraqi creditor may file for liquidation of the debtor.  Bankruptcy is not criminalized. The Iraqi Companies Law regulates the process for liquidation of legal entities. Nevertheless, the mechanism for resolving insolvency remains opaque.  Iraq ranks 168 out of 190 countries in the category of Resolving Insolvency, according to the World Bank’s 2018 Doing Business Report.

4. Industrial Policies

Investment Incentives

The amended NIL offers foreign investors several exemptions for qualified investments, including a ten-year exemption from taxes, exemptions from import duties for the necessary equipment and materials throughout the period of project implementation, and exemption from taxes and fees for primary materials imported for commercial operations.  The exemption increases to 15 years if Iraqi investors own more than 50 percent of the project. The NIL also allows investors to repatriate capital brought into Iraq, along with proceeds, in accordance with the law. The Embassy is unaware of any foreign companies that have successfully received these benefits. Foreign investors are able to trade in shares and securities listed on the Iraqi Stock Exchange.  Hotels, tourist institutions, hospitals, health institutions, schools, and colleges also are granted additional exemptions from duties and taxes on their imports of furniture, tools, equipment, machinery, and means of transportation, but foreign companies who sell goods or services to any entity in Iraqi may be subject to Iraqi taxes.

Foreign and domestic companies may also be exempted from taxes on profits if they have contracts with the GOI to execute projects within the National Investment Plan, which is prepared annually by the Ministry of Planning.  The GOI ministries overseeing investment projects are responsible for providing updates for the list of investment contracts to the Tax Commission in the MOF. Companies (foreign and domestic) that have registered businesses in order to execute contracts outside the National Investment Plan do not receive tax exemptions.  However, in some cases, GOI entities have negotiated partial or short-term tax exemptions for companies as part of a project contract.

Income tax language is included in GOI petroleum contracts with the Ministry of Oil (MOO) and applies to each consortium and its partners.  This contract language was ratified by the Council of Representatives and supersedes the Tax Code. Secondary contracts issued by consortiums holding primary petroleum contracts are treated differently.  The consortium is required to withhold 7 percent from secondary contracts for remittance to the GOI. Companies pay a profit tax in the amount of 15 percent unless they operate in the oil sector where a 35 percent tax profit rate applies.  Defining the activities which constitute “petroleum activities” (and are thus subject to the 35 percent vs. the 15 percent tax rate) is a gray area subject to interpretation. Any business or individual considering doing business in Iraq should obtain competent advice from an accountant or attorney.

Under the IKR’s investment law, foreign and national investors are treated equally and are eligible for the same benefits.  Foreign investors may choose to invest in the IKR with or without local partners, and full repatriation of profits is allowed.  While investors have the right to employ foreign employees in their projects, priority is given to awarding projects that employ a high share of local staff and ensure a high degree of knowledge transfer.  Additionally, the law allows an investor to transfer his investment totally or partially to another foreign investor with the approval of the BOI.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Authority Law No. 3/1998 permitted investment in Free Zones (FZ; similar to a U.S. Foreign Trade Zone) through industrial, commercial, and service projects.  This law is implemented through the Instructions for Free Zone Management and the Regulation of Investors’ Business No. 4/1999 and is administered by the Free Zones Commission in the MOF.  Under the law, capital, profits, and investment income from projects in a FZ are exempt from all taxes and fees throughout the life of the project. Goods entering into Iraq’s market from FZs are subject to normal import tariffs; no duty is levied on exports from FZs.

Activities permitted in FZs include:  industrial activities such as assembly, installation, sorting, and refilling processes; storage, re-export, and trading operations; service and storage projects and transport of all kinds; banking, insurance, and reinsurance activities; and supplementary and auxiliary professional and service activities.  Prohibited activities include actions disallowed by other laws in force, such as weapons manufacture and environmentally-polluting industries.

Iraq currently has four FZs with tax exemptions and other incentives for the transportation, industrial, and logistics sectors.  Iraq’s largest FZ is the Basrah/Khor al-Zubair FZ, located 40 miles southwest of Basrah on the Arab Gulf at the Khor al-Zubair seaport.  This 18 square km zone has been operational since June 2004, and hosts a number of local and foreign companies. The Ninewa/Falafel Free Zone is located in the north, near roads and railways that reach Turkey, Syria, Jordan, and the Basrah ports.  An undeveloped zone in Fallujah is in the planning stages. However, none of these areas are operating as a significant focal point for investment or trade. The Falafel and Fallujah zones are located in formerly ISIS-held areas, and the possibility of continued political instability makes further development in the near future unlikely.  There is also a FZ in Baghdad. The Free Zone Commission lacks capacity and is further inhibited by being under the MOF, which lacks a specific mandate to develop the FZs.

In the IKR, there are currently no FZs.  The KRG has approved plans for zones in each of the IKR’s four provinces, however, due to the economic crisis, implementation has ceased.

Performance and Data Localization Requirements

In February 2016, the GOI implemented Labor Law No. 37 which allows for collective bargaining, further limits child labor, and provides improved protections against discrimination and sexual harassment at work.  The law also enshrines the right to strike, banned since 1987. Under the law, the GOI will no longer restrict workers to affiliate with only one union or federation, and coverage is expanded to include all workers not covered by Iraq’s civil service law.  The law describes two categories of workers: local Iraqis and foreign workers employed by Iraqi entities or working in the GOI. The law does not explain how or whether it applies to foreign workers employed by foreign companies in Iraq.

According to the 2015 amended NIL, foreign workers may be hired for investment projects, when needed, after priority has been given to Iraqi workers.  However, according to National Investment Regulation No. 2 of 2009, at least 50 percent of an investment project’s workers must be Iraqi nationals. International companies have noted that Iraq lacks a skilled labor force and it can be a challenge to meet this requirement.  Foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.

In the IKR, hiring locally is encouraged, but not mandated by either the KRIL or the 2011 Employment Policy of the KRG Ministry of Labor and Social Affairs.  In the IKR, foreign employees must obtain a security clearance issued by the KRG Ministry of Interior, a medical clearance which includes an HIV test, and a work permit issued by the KRG Ministry of Labor and Social Affairs (MOLSA) before applying for the residency permit required for legal employment.  Some foreign companies have reported prolonged delays in obtaining necessary residency permits for foreign workers. Additional clearances are required in order to appoint foreign nationals as managers of foreign-owned limited liability companies.

Foreign investors can apply for a visa at Iraqi embassies, or in some cases, through the National Investment Commission.  In other cases, investors can apply for and receive visa approval letters from the Ministry of Interior. Visa approval letters authorize investors to receive a visa upon arrival from Ministry of Interior officials at Iraq’s airports.  Investors must be sponsored by an Iraqi government entity and receive an official invitation letter, approved by the Ministry of Interior, from that entity. Obtaining visas for foreign contractors regularly takes several months and allegations of corruption are commonplace.  In April, the Council of Ministers (COM) considered an official “decision” authorizing Ambassadors, or authorized officials, to grant six month, multiple entry visas. The COM decision would stipulate that the applicant must have at least USD 5,000 in his bank account and present a health certificate indicating that he is free from the Human Immunodeficiency Virus (HIV) as well as a letter from an accredited commercial or industrial chamber attesting to his bona fides as a businessperson.  According to the COM decision, the applicant is permitted to stay in Iraq for a period not exceeding 60 days from the date of entry.

All visitors and new residents to Iraq, with the exception of those traveling on a tourist visa, must have a blood test for HIV and complete the process to obtain a residency permit within 15 days of arrival or face fines.  Once in Iraq, foreign investors and employees must obtain work permits, the process for which is often lengthy and unpredictable. There are frequent instances when work or business travel is delayed because foreign employees are unable to receive a visa.

U.S. citizens traveling to the IKR can obtain an airport-issued IKR visa upon arrival that is valid for 30 days; however, this visa is not valid for travel in Iraq outside the IKR because the GOI does not honor the KRG-issued visa.  U.S. citizens who plan to stay for longer than 30 days require an extension to their IKR visa or must obtain residency permits. The KRG does not require HIV tests if the travel is shorter than 15 days.

Additional information can be found on the U.S. Department of State’s website:  www.travel.state.gov.

The GOI does not follow any forced localization policy in which foreign investors must use domestic content in their goods and technology.  There are no requirements for IT providers to turn over source code and/or provide access to surveillance.

The GOI strongly resists offering ownership or profit sharing with any potential foreign investor.  The government prefers to structure investments by foreign parties as contracts for which the government agrees to pay for services or equipment at a price not tied to profits or returns but which is guaranteed by a clause in the annual budget law.  The KRG, in contrast, has employed “build-own-operate” project structures and production sharing contracts in its management of the energy, oil, and gas sectors.

5. Protection of Property Rights

Real Property

Since 2009, Iraqi law allows foreigners to own land.  The amended NIL allows foreign interests to own land for the express purpose of developing residential real estate projects.  It also allows foreign investors to own land for industrial projects if they have an Iraqi partner. Additionally, foreign investors are permitted to rent or lease land for up to 50 years, with an option to renew.  In December 2010, the GOI approved implementing regulations to the NIL, in the form of a Prime Ministerial decree (regulation seven). The regulations allow investors to obtain land for residential housing projects free of charge on the condition that land value is excluded from the sales price.  The decree requires the Department of Real Estate to revoke the land registration from domestic or foreign investors who do not carry out the obligations of their agreement.

For non-residential, commercial investment projects – including agriculture, services, tourism, commercial, and industrial projects – the decree allows for leasing and allocation of government land, but not sole ownership.  The terms and duration of these leases will vary, depending on the type of project and negotiations between the parties. Land for non-residential projects will be leased free of initial down payment, and compensation will be either a percentage of pre-tax revenue or a specified percentage of the “rent allowance” for the land.  These smaller percentages of the “rent allowance” rate, ranging from one to 25 percent, amount to significant rent reductions for leased land, as specified by type of investment project in the decree.

In the IKR, foreign land ownership is allowed under Law Number 4 of 2006.  The BOI initially awarded more than half of all investment licenses to housing projects, though the lack of a clear sector strategy and speculation in housing properties prompted the board to freeze all new investment licenses issued in the sector in mid-2012, however, licenses are still issued on a case-by-case basis.  Investment licenses that include land ownership are more likely to be issued in the BOI’s priority sector development areas of agriculture, industry, and tourism. However, issues regarding timely transfer of land title have sometimes slowed projects.

Mortgages and liens exist in Iraq, and there is a national record system.  However, mortgages are not common. Iraq ranks 113 out of 190 countries on the 2018 World Bank’s “registering property” index.

Intellectual Property Rights

Legal structures that protect intellectual property  rights (IPR) in Iraq are inadequate, and infringements are common.  There is a significant presence of counterfeit products in the Iraqi marketplace, including pharmaceutical drugs.  According to a 2016 study by the Business Software Alliance on self-reported piracy, 85 percent of Iraq’s software was unlicensed in 2015, consistent with the levels found in each survey since 2009.  During the past year, no new IP-related laws or regulations have been enacted. The GOI attempts to track seizures of counterfeit medicines. Reporting is inconsistent.

The GOI’s ability to enforce IP protections remains weak, and IP responsibilities are currently spread across several ministries.  The Ministry of Culture handles copyrights, and the Ministry of Industry and Minerals (MIM) houses the office that registers trademarks.  The Central Organization for Standardization and Quality Control (COSQC), an agency under the Ministry of Planning, handles the patent registry and the industrial design registry.  The Ministry of Planning’s patent registry office has occasionally included Arab League Israel Boycott questionnaires in the patent registry application. U.S. companies are not allowed under U.S. law to complete Arab League Boycott questionnaires.  IP infringement cases are primarily heard in commercial courts, although on a relatively infrequent basis, cases may be transferred to the criminal courts.

A draft IP law, which would comply with the World Trade Organization’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and consolidate all IP responsibilities into a single body, was redrafted during the past year and sent for parliamentary legislative review in October 2017.  The original draft was completed in mid-2007, but has not moved forward.

In 2018, the Council of Ministers Secretariat (COMSEC) reviewed IP forms and processes for simplification and preparation of implementing eForms.  The patent application, updated in January 2018, is now based on World Intellectual Property Organization (WIPO) standards. However, the application processes for all classes of IP protection favor domestic applicants through requirements for local Iraqi-national agents and optional, but advantageous, in-person review committee meetings.

The U.S. government is continuing efforts to bolster understanding of IPR and build GOI capacity to protect them.  In June 2012, the Federal Court of Cassation, the highest civil court in Iraq, upheld a finding by the Baghdad Commercial Court that ruled in favor of a U.S. firm in a trademark dispute, setting a positive precedent for IP protection in Iraq.  The Commercial Court has jurisdiction over commercial disputes that involve at least one foreign party and disputes over various commerce-related issues including trade, real estate, banking, trademarks and intellectual property, transportation, and other areas.  It was established in November 2010 under the Higher Judicial Council with the assistance of the U.S. Department of Commerce’s Commercial Law Development Program (CLDP), which provided technical assistance and training to Iraqi judges who serve on the court. The head of the patent section and his deputies received training with the U.S. Patent and Trademark Office (USPTO) sponsored by the CLDP.

Iraq is a signatory to several international intellectual property conventions and to regional and bilateral arrangements, which include:  1) the Paris Convention for the Protection of Industrial Property (1967 Act), ratified by Law No. 212 of 1975; 2) the World Intellectual Property Organization (WIPO) Convention, ratified by Law No. 212 of 1975 (Iraq became a member of the WIPO in January 1976); 3) the Arab Agreement for the Protection of Copyrights, ratified by Law No. 41 of 1985; and 4) the Arab Intellectual Property Rights Treaty (Law No. 41 of 1985).

Iraq is not listed in USTR’s Special 301 report or notorious market report.

Iraq has more than one point of contact for IPR:

Ministry of Culture (Copyrights)
Director of the National Center for the Protection of Copyrights and Related Rights
Ms. Hind Al-Hadithi
Email:  henda84.com@gmail.com
Tel.:  (964) 770 335 0655
Official email:  copyrights.iq@gmail.com

Ministry of Planning (Patents)
Chief of Central Organization for Standardization and Quality Control (COSQC)
Registrar of Patents and Industrial Designs
Mr. Saad Abdul Wahab
Email:  cosqc@cosqc.gov.iq
Tel: (964)07901786768

Director of Industrial Property Division
Mr. Wisam Saeed A’asi
Tel.: (964) 770 974 7231
Email:  wisamsaeedipo@yahoo.com

Ministry of Industry and Minerals (Trademarks)
Industrial Organization and Development Directorate
Director General and Trademark Registrar
Mr. Alaa Mousa Ali

Director of Legal Section
Ms. Thanaa Mohan
Email:  thanaam2008@yahoo.com

A copy of a public list of local lawyers can be obtained by emailing BaghdadACS@state.gov.  The American Chamber of Commerce in Iraq can be reached at:  inquiries@amcham-iraq.org.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en  

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 seven state-owned banks, with the three largest, Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), accounting for roughly 85 percent of Iraq’s banking sector assets.  Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.  As of early 2018, 18 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks.  By law, the CBI may only exchange currency to be used for purchases of legitimate goods and services.

Iraq’s economy remains primarily cash-based, with many banks acting as little more than ATMs.  Credit is difficult and expensive to obtain. However, the GOI is implementing a project to distribute public salaries using electronic payments.  Most trade-based letters of credit are with external banks. Iraq ranks 186 out of 190 in terms of ease of getting credit on the World Bank’s 2019 Doing Business Report.  Although the volume of lending by privately-owned banks is growing, most privately-owned banks do more business providing wire transfers and other fee-based exchange services than lending.  Only about 20 of the 50 privately-owned banks have participated in a Small-to-Medium Enterprise lending program funded by the Central Bank of Iraq since 2015. Businesses are largely self-financed or obtain credit from individuals in private transactions.  State-owned banks mainly make financial transfers from the government to provincial authorities or individuals, rather than business loans.

The main purpose of the TBI is to provide financial and related services to facilitate trade, particularly through letters of credit (LCs).  In 2009, the MOF opened the government LC market by granting private banks permission to issue LCs below USD 4 million. The ceiling was later raised to USD 10 million.  Virtually all government LCs are processed by the TBI, which has stated it transfers a number of LCs under USD 5 million to private banks.

The National Investment Law allows foreign investors to purchase shares and securities listed in the Iraqi Stock Exchange (ISX) and the GOI welcomes foreign portfolio investment.

Money and Banking System

The GOI has had little success reforming its two largest state-owned banks, Rafidain and Rasheed, however banking sector reform is a priority of Iraq’s IMF and World Bank programs.  Private banks are mostly active in currency exchanges and wire transfers. The CBI is Iraq’s central bank, headquartered in Baghdad, with branches in Basrah and Erbil. Work continued to fully reconnect CBI’s Erbil branch to the electronic CBI system, which would link the IKR’s state-owned banks.  In January 2018, the KRG MOF announced plans to consolidate the region’s 92 state-owned banks under a single bank, to be named “Nishtiman.”

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 underlying transactions are supported by valid documentation.  The NIL 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 NIL also contains provisions that allow 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 to maintain exchange rate predictability through supplying USD to the Iraqi market.  Banks may engage in spot transactions in any currency but are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes. There are no taxes or subsidies on purchases or sales of foreign exchange.

Remittance Policies

There have not been any 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.

7. State-Owned Enterprises

State-owned enterprises (SOEs) are active across all sectors in Iraq.  GOI ministries currently own and operate over 192 SOEs, a legacy of the state planning system.  Many Iraqi SOEs are unproductive, and the GOI’s continued support of unprofitable entities places a substantial fiscal burden on Iraq.  These firms employ over half a million Iraqis, many of whom are underemployed. The degree to which SOEs compete with private companies varies by sector; SOEs face the most competition in the market for consumer goods.  The GOI has expressed a commitment to reforming the SOEs and taking steps toward privatization as part of its international financing programs.

Law 22 of 1997 and the NIL provide the regulatory framework for the operations of SOEs and joint ventures between foreign companies and SOEs.  Law 22 is complex, and several articles are ambiguous regarding the rights and privileges that SOEs enjoy. Article 15.3 of Law 22 allows Iraqi SOEs to engage in partnership agreements or joint ventures with foreign companies.  However, the lack of clarifying regulations has created difficulty in implementation. Ministries have faced challenges in reviewing partnership agreements without sufficient criteria to determine if the agreements would be effective or successful.  When parent ministries wish to initiate a partnership for an SOE under their purview, they generally advertise the tender on their ministry’s website. Partnerships are negotiated on a case-by-case basis, and the minister’s approval is required. The Ministry of Industry and Minerals (MIM), which oversees the largest number of Iraq’s SOEs, received the Council of Ministers’ approval in 2013 to institute the following requirements for partnerships:  1) change the required minimum duration to three years; 2) add a requirement that the foreign company register a company office in Iraq; and 3) add a requirement that the foreign company participate in the production of goods.

According to the Prime Minister’s Advisory Council, foreign companies have faced challenges in partnerships because the GOI has at times cut subsidies to the SOE after partnerships were formed, the employment policies and salary decisions were dictated by the parent ministry, and gaps between the GOI’s official policy and practices affected their bottom line.  In addition, the MIM has often required that the foreign investor pay all SOE employees’ salaries regardless of whether they are working on the agreed project.

GOI entities are required to give preferential treatment to SOEs under multiple laws.  A 2009 Council of Ministers’ decision requires all Iraqi government agencies to procure goods from SOEs unless the SOE cannot fulfill the quality and quantity requirements of the tender.  A Board of Supreme Audit decision requires government agencies to award SOEs tenders if the SOE’s bid is no more than 10 percent higher than other bids. Furthermore, some GOI entities, including the MIM, have also issued their own internal regulations requiring tenders to select Iraqi SOEs, unless the Iraqi SOE states that it cannot fulfill the order.  Sometimes a foreign firm must form a partnership with an Iraqi firm to fulfill tenders promulgated by SOEs.

Under Article 16 of the 2008 Regulations for Implementing Government Contracts (Law No. 1), SOEs are exempt from bid bond and performance bond requirements.  While the Iraqi budget outlines the funds that the SOEs will receive, both for operational costs as well as for salary payments, the SOEs do not always receive the exact figure allocated.  As a result of years of sanctions and war, most of these SOEs suffer from sclerotic management and dependence on GOI contracts. Many of them are not commercially viable due to bloated payrolls and obsolete equipment, although some have adapted and are producing goods for the domestic market.

In 2015, the MIM developed a plan to restructure its 59 SOEs.  Under the proposed plan, the MIM would rate SOEs based on their profitability and degree of government dependence.  Unprofitable SOEs that are unable to cover payroll obligations would be sold or shut down. However, no action to implement this plan has been undertaken.  Article 14 of the 2017 Federal General Budget Law expanded the potential role of private investment in SOE reform, giving governorates the mandate to expand partnerships with the private sector “as much as possible” with approval of the governorate’s council.

Iraq is not party to the Government Procurement Agreement within the framework of the WTO.

Articles 20-25 of Law 22 specify the selection process of an SOE’s Board of Directors.  The law includes provisions to introduce a degree of autonomy. For example, it requires that the minister’s sole appointment to the Board of Directors receive the approval of an “Opinion Board.”  Nevertheless, in practice, the majority of board members have close personal and political connections to the parent ministry’s leadership.

SOEs do not adhere to OECD Guidelines.  Iraq does not have a centralized ownership entity that exercises ownership rights for each of the SOEs.  SOEs are required to seek their parent ministry’s approval for certain categories of financial decisions and operation expansions.  However, in practice, SOEs defer to the parent ministry for the vast majority of decisions. SOEs submit financial reports to their parent ministry’s audit departments and the Board of Supreme Audit.  These reports are not published and sometimes exclude salary expenses.

Privatization Program

The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors.  Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions. There are, however, no concrete timelines for these initiatives, and entrenched patronage networks tying SOEs to ministries remain a stumbling block.  Presumably, foreign investors would have an opportunity to invest in privatization projects. The IMF Stand-By Arrangement requires the GOI to conduct an audit of state-owned banks and the World Bank’s Development Policy Loan requires Iraq to audit SOEs.

8. Responsible Business Conduct

The international oil companies active in Iraq are required to observe international best practices in corporate social responsibility (CSR) as part of their contracts with the GOI.  Nevertheless, the GOI does not have policies in place to promote CSR and raise awareness of environmental and social issues among investors. The concept of CSR is not widely recognized in Iraq and few NGOs and business associations are monitoring it.  Iraq has not subscribed to the OECD’s Guidelines for Multinational Enterprises. As security and business conditions improve in Iraq, awareness of CSR is likely to increase.

In the IKR, oil companies are mandated in their production sharing contracts with the KRG to give back to the communities in which they work through corporate responsibility agreements.  These agreements require yearly payments from which the KRG prioritizes and allocates funds for projects such as improved roads, university training for local youth in the geotechnical and energy fields, and health clinics.

According to the amended 2015 NIL, investors are required to protect the environment and adhere to quality control systems.  These include soil testing requirements on the land designated for the project as well as conducting an environmental impact study.  In practice, the GOI lacks a mechanism to enforce environmental protection laws and implementation is limited.

Iraq became a member of the Extractive Industries Transparency Initiative (EITI) in 2009.  The Government of Iraq established a 15-person committee to work on EITI, including several Directors General within the MOO, four representatives from NGOs, as well as oil company executives.  The committee provided required reports through 2013. In February 2017, the World Bank approved a USD 350,000 program to assist Iraq with carrying out its EITI obligations.  In November 2017, the EITI Board concluded Iraq had made inadequate progress and temporarily suspended Iraq’s membership and gave Iraq 18 months to carry out corrective actions.  The MOO continues to engage with the EITI Board as it prepares for its next review.

9. Corruption

Iraq ranked 168 out of 180 on Transparency International’s 2017 Corruption Perception Index.  Public corruption is a major obstacle to the development of Iraq’s economy and to political stability.  Corruption is pervasive in government procurement, in the awarding of licenses or concessions, dispute settlement, and Iraq’s customs regime.

On January 29, Prime Minister AAM announced his plan to fight corruption through efforts to strengthen anti-corruption laws as outlined in the National Program.  He asked that the COR do its part in fighting corruption and strictly adhere to the disclosure of property belonging to members of parliament. The Prime Minister announced his intention to re-evaluate the Commission of Integrity (COI).

While large-scale investment opportunities exist in Iraq, particularly for sophisticated investors, corruption remains a significant impediment to conducting business, and foreign investors can expect to contend with corruption in many forms, and at all levels.  While the GOI has moved toward greater effectiveness in reducing opportunities for procurement corruption in sectors such as electricity, oil, and gas, credible reports of corruption in government procurement are widespread, with examples ranging from bribery and kickbacks to awards involving companies connected to political leaders.  Investors may come under pressure to take on well-connected local partners to avoid systemic bureaucratic hurdles to doing business. Similarly, there are credible reports of corruption involving large-scale problems with government payrolls, ranging from “ghost” employees and salary skimming to nepotism and patronage in personnel decisions.  Moving goods into and out of the country continues to be difficult, and bribery of port officials is commonplace; Iraq ranks 181 out of 190 countries in the category of “Trading Across Borders” in the World Bank’s 2018 Doing Business report.

U.S. firms frequently identify corruption as a significant obstacle to foreign direct investment, particularly in government contracts and procurement, as well as performance requirements and performance bonds.

There are three principal institutions specifically designated to address the problem of corruption in Iraq.  CPA Order 57 established Inspectors General (IGs) for each of Iraq’s ministries. Similar to the role of IGs in the U.S. government, these offices are responsible for inspections, audits, and investigations within their ministries.  The Commission of Integrity, initially established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for pursuing anti-corruption investigations, upholding enforcement of laws, and preventing crime.  The COI investigates government corruption allegations and refers completed cases to the Iraqi judiciary. COI Law No. 30, passed in 2011, updated the CPA provisions by granting the COI broader responsibilities and jurisdiction through three newly created directorates:  asset recovery, research and studies, and the Anti-Corruption Academy.

The Board of Supreme Audit (BSA), established in 1927, is an analogue to the U.S. government’s General Accountability Office.  It is a financially and administratively independent body that derives its authority from Law 31 of 2011 – the Law of the Board of Supreme Audit.  It is charged with fiscal and regulatory oversight of all publicly-funded bodies in Iraq and auditing all federal revenues, including any revenues received from the IKR.

None of these organizations has provided an effective check on public corruption.

Neither the COI nor the IGs has effective jurisdiction within the IKR.  The Kurdistan Board of Supreme Audit audits regional revenues with IKP and GOI oversight.  The IKP passed the Commission on Public Integrity (Law No. 3) in 2011, which established a regional Commission of Integrity (KCOI) that began its work in late 2013.  The IKP passed an amendment to the law in May 2014 that gave the KCOI increased jurisdiction over other branches of government, and made the KCOI responsible for investigating money laundering.  The Commission launched an initiative in early 2014 to collect financial declaration forms from public officials at the director general-level and above. They received a 95 percent response rate and have begun to check the disclosure documents against other public records. According to the KCOI 2018 Annual Report, 191 corruption cases were investigated, including 116 that were referred for prosecution in court.  The cases came to the KCOI from different sources such as the Prosecutor’s office, KRG Intelligence, the KCOI Hot Line, and IKR media outlets. The KCOI settled 75 cases in 2018 with 55 ending in sentencing and 20 dismissed.

Iraq is a party but not a signatory to the UN Anticorruption Convention.  Iraq is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

According to Iraqi law, any person or legal entity has the right to submit corruption-related complaints to the COI or the inspector general of the GOI ministry or body engaging in corruption.

Commission for Integrity
Department of Complaints and Reports
Mobile: 07901988559
Landline: 07600000030
Hotline@nazaha.iq

10. Political and Security Environment

On December 9, 2017, former PM Abadi announced all of Iraqi territory had been liberated from ISIS.  Much work remains to prevent the reemergence of ISIS, and Iraqi forces continue to carry out counter-terrorism operations against ISIS cells throughout the country.  Terrorist attacks within the IKR occur less frequently than in other parts of Iraq, although the KRG, U.S. government facilities, and western interests remain possible targets, as evidenced by the April 17, 2015, bombing in the public area outside U.S. Consulate General Erbil.  In addition, anti-U.S. sectarian militias may threaten U.S. citizens and western companies throughout Iraq.

The U.S. government considers the potential threat to USG personnel in Iraq to be serious enough to require them to live and work under strict security guidelines.  State Department guidance to U.S. businesses in Iraq advises the use of protective security details. Detailed security information is available on the U.S. Embassy website: http://iraq.usembassy.gov/.  Some U.S. and third-country business people travel throughout much of Iraq; however, in general their movement is restricted and most travel with security advisors and protective security teams.

11. Labor Policies and Practices

Iraq continues to face high unemployment, a large informal sector, lack of satisfactory work standards, and a large unskilled labor force.  Domestic and foreign investors often cite the lack of skilled Iraqi labor as one of the major impediments to investing in Iraq. Political instability and violence led many highly-educated Iraqis to leave the country in recent years.  Although the Iraqi government’s campaign to defeat ISIS came to a successful end in late 2017, more than 1.7 million Iraqis remained displaced as of April, with most unable to find jobs or pursue livelihood activities to support their families.  Female IDPs continued to be vulnerable to economic exploitation and discriminatory employment conditions.

In 2018, the World Bank estimated the unemployment rate at 16.9 percent.  In 2015, UNDP reported that unemployment among Iraqi youth with higher education was above the national youth unemployment average.  According to UNDP data from 2014, the government accounted for 40 percent of all jobs, with a higher percentage in urban areas (45 percent) than in rural areas (28 percent).  Employment in the agricultural sector represented 23.4 percent and employment in the services sector represented 58.3 percent of all employment. While accounting for 65 percent of Iraq’s GDP and over 90 percent of government revenue, the oil sector employs only 1 percent of the total labor force.

Foreign investors tend to rely on foreign workers.  According to the 2015 amended NIL, foreign workers may be hired for investment projects, when needed, after priority has been given to Iraqi workers.  However, according to National Investment Regulation No. 2 of 2009, at least 50 percent of an investment project’s workers must be Iraqi nationals. International companies have noted that it can be a challenge to meet this requirement.  Foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.

In the IKR, hiring locally is encouraged but not mandated by either the KRIL or the 2011 Employment Policy of the KRG Ministry of Labor and Social Affairs.  Foreign employees must obtain a security clearance issued by the KRG Ministry of Interior and a work permit issued by the KRG MOLSA before applying for the residency permit required for legal employment.  Some companies have reported prolonged delays in obtaining necessary residency permits for foreign workers.

The Iraqi Constitution states that citizens have the right to form and join unions and professional associations.  Iraq is a party to both International Labor Organization (ILO) conventions related to youth employment, including child labor.  Iraqi labor laws also regulate working conditions and prohibit all forms of forced or compulsory labor, including by children. However, the GOI has not effectively monitored or enforced the law, which has resulted in poor working conditions for many workers.

In February 2016, the GOI passed a new labor law that was drafted with the assistance of the ILO and is more consistent with current international standards.  Labor Law No. 37 allows for collective bargaining, further limits child labor, and provides improved protections against discrimination at work. For the first time, the labor law addresses sexual harassment at work and provides protection against it.  The law also enshrines the right to strike, banned since 1987. Under the law, the GOI no longer restricts workers to affiliate with only one union or federation, and coverage is expanded to include all workers not covered by Iraq’s civil service law.

The new labor law was not implemented in the IKR, and the KRG continues to use the previous 1987 labor law.  Demonstrations took place in December 2017 in Sulaimaniya and Erbil provinces to protest the KRG’s non-payment of government salaries and public corruption.  Demonstrations took place March 2018 throughout the IKR regarding the KRG’s payment of civil servant salaries at reduced austerity levels begun in 2015. In response to these protests, the KRG revised the austerity package later that month, though it remained three months in arrears on paying salaries.  On March 10, the KRG announced that it had ended the austerity program and paid the December 2018 salaries at full rates.

The MOLSA sets a minimum monthly wage for unskilled workers.  The private sector sets wages by contract, and the GOI sets wages for those working in the public sector.  The Council of Ministers approved changes to the public sector pay scale, which took effect in January 2015, to reduce the pay gap between low- and high-ranking employees.  The changes also reduced wage disparities among government ministries and canceled extra wages issued to employees in Baghdad’s International Zone. According to Iraqi law, all employers must provide some level of transport, accommodation, and food allowances for each employee.  The law does not fix these allowance amounts. In December 2013, the government launched a Social Safety Net program to assist the unemployed and persons with disabilities in gaining access to financial aid and benefits from the government; as of April 2018, MOLSA’s Directorate of People with Disabilities and Special Needs reported the program covers approximately 4 million individuals.

12. OPIC and Other Investment Insurance Programs

OPIC’s current outstanding commitment in Iraq in loans and insurance is USD 139 million with an additional USD 32 million in loans yet to be disbursed.  OPIC is currently reviewing a number of project proposals, including in the health care, tourism, energy, and housing sectors, and an expansion of a successful microfinance project.  OPIC has one investment project in the IKR and has provided funding for a small- and medium-sized enterprise credit organization. The Investment Incentive Agreement (IIA) between the United States and the GOI provides the basis for OPIC to provide financing and political risk insurance in Iraq.  OPIC has another project to build residential apartments in the Green Zone of Baghdad. The Project will consist of 12 buildings totaling 576 apartments. [Note: 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 OPIC’s political risk insurance.  End note.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

The GOI collects and publishes limited statistics with which to compare international and U.S. investment data.  The NIC and Provincial Investment Commissions (PIC) granted 1067 licenses between 2008 and 2015, the latest statistics available, with a total potential value of USD 53.9 billion.  However, an investment license from the NIC or a PIC does not mean that the proposed investment will be implemented.

In the IKR, the Kurdistan BOI granted 51 licenses in 2018, with a total potential value of USD 3.13 billion.  Compared to 2017, the BOI granted licenses to 18 more projects, representing a capital increase of USD 2.4 billion (340 percent).  The granting of an investment license by the BOI does not mean that the proposed investment will be implemented. All of the licenses granted in 2018 were to national (i.e. Iraqi-owned) projects.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $218,130 2016 $192,061 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2016 $5,911.20 2016 $1,748 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A Data not available N/A Data not available BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2016 3.5% 2016 1% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

*Host Country Statistical Source:  Ministry of Planning; Central Bank of Iraq


Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

14. Contact for More Information

Embassy Baghdad Economic Section
Al-Kindi Street, International Zone, Baghdad
Office: +1-301-985-8841 x3013
USIraqTrade@state.gov
https://iq.usembassy.gov/business/getting-started-iraq/

Israel

Executive Summary

Israel has an entrepreneurial spirit and a creative, highly educated, skilled, and diverse workforce.  It is a leader in innovation in a variety of sectors, and many Israeli start-ups find good partners in American companies.  Popularly known as “Start-Up Nation,” Israel invests heavily in education and scientific research. U.S. firms account for nearly two-thirds of the more than 300 research and development (R&D) centers established by multinational companies in Israel.  Israel has the third most companies listed on the NASDAQ, after the United States and China. Various Israeli government agencies, led by the Israel Innovation Authority, fund incubators for early stage technology start-ups, and Israel provides extensive support for new ideas and technologies while also seeking to develop traditional industries.  Private venture capital funds have flourished in Israel in recent years.

The fundamentals of the Israeli economy are strong, and the economy proved flexible and adaptable through the worldwide financial crisis.  A 2018 International Monetary Fund (IMF) report said Israel’s economy is thriving, enjoying solid growth and historically low unemployment.  With low inflation and fiscal deficits that have usually met targets, most analysts consider Israeli government economic policies as generally sound and supportive of growth.  Israel seeks to provide supportive conditions for companies looking to invest in Israel, through laws that encourage capital and industrial R&D investment. Incentives and benefits include grants, reduced tax rates, tax exemptions, and other tax-related benefits.

The U.S.-Israeli bilateral economic and commercial relationship is strong, anchored by two-way trade in goods that reached USD 35.4 billion in 2018, according to the U.S. Census Bureau, and extensive commercial ties, particularly in high-tech and R&D.  The total stock of Israeli foreign direct investment (FDI) in the United States was USD 39.3 billion in 2017, according to the U.S. Department of Commerce. This year marks the 34th anniversary of the U.S.-Israel Free Trade Agreement (FTA), the United States’ first-ever FTA.  Since the signing of the FTA, the Israeli economy has undergone a dramatic transformation, moving from a protected, low-end manufacturing and agriculture-led economy to one that is diverse, open, and led by a cutting-edge high-tech sector.

The Israeli government generally continues to take slow, deliberate actions to remove some trade barriers and encourage capital investment, including foreign investment.  The continued existence of trade barriers and monopolies, however, have contributed significantly to the high cost of living and the lack of competition in key sectors. The Israeli government maintains some protective trade policies, usually in favor of domestic producers.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 34 of 180 https://www.transparency.org/country/ISR 
World Bank’s Doing Business Report 2019 49 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 11 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 $26,700 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $37,270 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Israel is open to foreign investment and the government actively encourages and supports the inflow of foreign capital.

The Israeli Ministry of Economy and Industry’s ‘Invest in Israel’ office serves as the government’s investment promotion agency facilitating foreign investment.  ‘Invest in Israel’ offers a wide range of services including guidance on Israeli laws, regulation, taxes, incentives, and costs, and facilitation of business connections with peer companies and industry leaders for new investors.  ‘Invest in Israel’ also organizes familiarization tours for potential investors and employs a team of advisors for each region of the world.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Israeli legal system protects the rights of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity.  Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of ongoing privatization efforts, the Israeli government encourages foreign investment in privatizing government-owned entities.

Israel’s policies aim to equalize competition between private and public enterprises, although the existence of monopolies and oligopolies in several sectors stifles competition.  In the case of designated monopolies, defined as entities that supply more than 50 percent of the market, the government controls prices.

Israel does not maintain a centralized investment screening (approval) mechanism for inbound foreign investment.  Investments in regulated industries (e.g. banking and insurance) require approval by the relevant regulator. Investments in certain sectors may require a government license.  Other regulations may apply, usually on a national treatment basis.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its fifth and latest trade policy review of Israel in July 2018.  In the past three years, the Israeli government has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD).  The OECD concluded an Economic Survey of Israel in March 2018.

The 2018 OECD Economic Survey of Israel can be found at http://www.mof.gov.il/Releases/SiteAssets/Pages/OECD18/2018-oecd-economic-survey-Israel.pdf 

Business Facilitation

The Israeli government is fairly open and receptive to companies wishing to register businesses in Israel.  Israel ranked 45th in the “Starting a Business” category of the World Bank’s 2019 Doing Business Report, falling eight places from its 2018 ranking.  Israel continues to institute reforms to make it easier to do business in Israel, but some challenges remain.

The business registration process in Israel is relatively clear and straightforward.  Four procedures are required to register a standard private limited company and take 12 days to complete, on average, according to the Ministry of Finance.  The foreign investor must obtain company registration documents through a recognized attorney with the Ministry of Justice and obtain a tax identification number for company taxation and for value added taxes (VAT) from the Ministry of Finance.  The cost to register a company averages around USD 1,000 depending on attorney and legal fees.

The Israeli Ministry of Economy and Industry’s “Invest in Israel” website provides useful information for companies interested in starting a business or investing in Israel.  The website is http://www.investinisrael.gov.il/Pages/default.aspx  .

Outward Investment

The Israel Export and International Cooperation Institute is an Israeli government agency operating independently, under the Ministry of Economy, that helps facilitate trade and business opportunities between Israeli and foreign companies.  More information on their activities is available at http://www.export.gov.il/eng/About/About/  .

In general, there are no restrictions on Israeli investors seeking to invest abroad.  However, investing abroad may be restricted on national security grounds or in certain countries or sectors where the Israeli government deems such investment is not in the national interest.

2. Bilateral Investment Agreements and Taxation Treaties

Israel has protection of investment agreements with Albania, Argentina, Armenia, Azerbaijan, Belarus, Bulgaria (amending protocol), China, Croatia, Cyprus, Czech Republic, El Salvador, Estonia, Ethiopia, Georgia, Germany, Guatemala, Japan, Kazakhstan, Latvia, Lithuania, Moldova, Mongolia, Montenegro (with Serbia), Burma, Poland, Romania (Amending protocol signed in 2010 but not in force), Serbia (with Montenegro), Slovakia, Slovenia, South Africa (not in force), South Korea, Thailand, Turkey, Turkmenistan, Ukraine, Uruguay, and Uzbekistan.

Israel has free trade agreements with the European Union (EU), European Free Trade Association (a regional trade organization and free trade area consisting of Iceland, Liechtenstein, Norway, and Switzerland), Turkey, Mexico, Canada, Jordan, Egypt, and Mercosur (an economic and political bloc comprising Argentina, Brazil, Paraguay, and Uruguay).  Israel’s free trade agreement with the United Kingdom will come into force only after the United Kingdom exits the European Union. Israel’s free trade agreements with Colombia, Panama, and Ukraine are awaiting ratification by the Knesset (Israeli parliament).​

The United States and Israel signed a free trade agreement in 1985.

Israel has a bilateral tax treaty with United States. Israel signed its Income Tax Treaty with the United States in 1975.

3. Legal Regime

Transparency of the Regulatory System

Israel promotes open governance and has joined the International Open Government Partnership. The government’s policy is to pursue the goals of transparency and active reporting to the public, public participation, and accountability.

Israel’s regulatory system is transparent. Ministries and regulatory agencies give notice of proposed regulations to the public on a government web site: http://www.knesset.gov.il   . The texts of proposed regulations are also published (in Hebrew) on this web site. The government requests comments from the public about proposed regulations.

Israel is a signatory to the WTO Agreement on Government Procurement (GPA), which covers most Israeli government entities and government-owned corporations. Most of the country’s open international public tenders are published in the local press. U.S. companies have recently won a limited number of government tenders, notably in civil aviation. However, government-owned corporations make extensive use of selective tendering procedures. In addition, the lack of transparency in the public procurement process discourages U.S. companies from participating in major projects and disadvantages those that choose to compete. Enforcement of the public procurement laws and regulations is not consistent.

Israel is a member of UNCTAD’s international network of transparent investment procedures. (http://unctad.org/en/pages/home.aspx   ). Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal basis justifying the procedures.

International Regulatory Considerations

Israel is not a member of any major economic bloc but maintains strong economic relations with other economic blocs.

Israeli regulatory bodies in the Ministry of Economy (Standards Institute of Israel), Ministry of Health (Food Control Services), and the Ministry of Agriculture (Veterinary Services and the Plant Protection Service) often adopt standards developed by European standards organizations.  Israel’s adoption of European standards rather than international standards results in the market exclusion of certain U.S. products and added costs for U.S. exports to Israel.

Israel became a member of the WTO in 1995.  The Ministry of Economy and Industry’s Standardization Administration is responsible for notifying the WTO Committee on Technical Barriers to Trade, and regularly does so.

Legal System and Judicial Independence

Israel has a written and consistently applied commercial law based on the British Companies Act of 1948 as amended. The judiciary is independent, but businesses complain about the length of time required to obtain judgments. The Supreme Court is an appellate court that also functions as the High Court of Justice. Israel does not employ a jury system.  Israel established other tribunals to regulate specific issues and disputes in a specific area of law, including labor courts, antitrust issues, and intellectual property related issues.

Laws and Regulations on Foreign Direct Investment

There are few restrictions on foreign investors, except for parts of defense or other industries closed to outside investors on national security grounds.  Foreign investors are welcome to participate in Israel’s privatization program.

Israeli courts exercise authority in cases within the jurisdiction of Israel.  However, if an agreement between involved parties contains an exclusively foreign jurisdiction, the Israeli courts will generally decline to exercise their authority.

Israel’s Ministry of Economy sponsors the web site “Invest in Israel” at www.investinisrael.gov.il  

The Investment Promotion Center of the Ministry of Economy seeks to encourage investment in Israel.  The Center stresses Israel’s high marks in innovation, entrepreneurship, and Israel’s creative, skilled, and ambitious workforce.  The Center also promotes Israel’s strong ties to the United States and Europe.

Competition and Anti-Trust Laws

Israel adopted its comprehensive competition law in 1988.  Israel created the Israel Antitrust Authority (IAA) in 1994 to enforce the competition law.

Expropriation and Compensation

There have been no expropriations of U.S.-owned businesses in Israel in the recent past.  Israeli law requires adequate payment, with interest from the day of expropriation until final payment, in cases of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) of the World Bank and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  Israel ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 in 1959.

Investor-State Dispute Settlement

The Israeli government accepts binding international arbitration of investment disputes between foreign investors and the state.  Israel’s Arbitration Law of 1968 governs both domestic and international arbitration proceedings in the country. The Israeli Knesset amended the law most recently in 2008.  There are no known extrajudicial actions against foreign investors.

International Commercial Arbitration and Foreign Courts

Israel formally institutionalized mediation in 1992 with the amendment of the Courts Law of 1984.  The amendment granted courts the authority to refer civil disputes to mediation or arbitration with party consent.  The Israeli courts tend to uphold and enforce arbitration agreements. Israel’s Arbitration Law predates the United Nations Commission on International Trade Law.

Bankruptcy Regulations

Israeli Bankruptcy Law is based on several layers, some rooted in Common Law, when Palestine was under the British mandate in 1917-1948. Bankruptcy Law in Israel is mostly based on British law enacted in Palestine in 1936 during the British mandate.

Bankruptcy proceedings are based on the bankruptcy ordinance (1980), which replaced the mandatory ordinance enacted in 1936. Therefore, the bankruptcy law in Israel resembles the British law as it was more or less in 1936. Israel ranks 29th in the World Bank’s 2018 Doing Business Report’s “resolving insolvency” category.

4. Industrial Policies

Investment Incentives

The State of Israel encourages both local and foreign investment by offering a wide range of incentives and benefits to investors in industry, tourism, and real estate.  Israel’s Ministry of Economy places a priority on investments in hi-tech companies and R&D activities.

Most investment incentives available to Israeli citizens are also available to foreign investors.  Israel’s Encouragement of Capital Investments Law, 5719-1959, outlines Israel’s investment incentive programs.  The Israel Investment Center (IIC) coordinates the country’s investment incentive programs.

For complete information, potential investors should contact:

Investment Promotion Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036
Tel: 972-2-666-2607
Fax: 972-2-666-2938
Website: www.investinisrael.gov.il  
E-Mail: Investinisrael@moital.gov.il

Israel Investment Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036 490
http://economy.gov.il/English/About/Units/Pages/IsraelInvestmentCenter.aspx  
Tel: 972-2-666-2236
Fax: 972-2-666-2905

Foreign Trade Zones/Free Ports/Trade Facilitation

Israel has bilateral Qualifying Industrial Zone (QIZ) Agreements with Egypt and Jordan.  The QIZ initiative allows Egypt and Jordan to export products to the United States duty-free, as long as these products contain inputs from Israel (8 percent in the Israel-Jordan QIZ agreement, 10.5 percent in the Israel-Egypt QIZ agreement).  Products manufactured in QIZs must comply with strict rules of origin. More information is available at the Israeli Ministry of Economy’s Foreign Trade Administration website: http://economy.gov.il/English/InternationalAffairs/ForeignTrade
Administration/Pages/RegionalCooperation.aspx
 

Israel has one free trade zone, the Red Sea port city of Eilat.  More information on the Eilat Free Zone is available at: http://economy.gov.il/English/Industry/DevelopmentZoneIndustry
Promotion/ZoneIndustryInfo/Pages/EilatNShachoret.aspx
 

Performance and Data Localization Requirements

There are no universal performance requirements on investments, but “offset” requirements are often included in sales contracts with the government.  In some sectors, there is a requirement that Israelis own a percentage of a company. Israel’s visa and residency requirements are transparent. The Israeli government does not impose preferential policies on exports by foreign investors.

5. Protection of Property Rights

Real Property

Israel has a modern legal system based on British common law that provides effective means for enforcing property and contractual rights. Courts are independent. Israeli civil procedures provide that judgments of foreign courts may be accepted and enforced by local courts.  The Israeli judicial system recognizes and enforces secured interests in property. A reliable system of recording such secured interests exists. The Israeli Land Administration, which manages land in Israel on behalf of the government, registers property transactions. Registering or obtaining land rights is a cumbersome process and Israel currently ranks 89th in “Registering Property” according to the World Bank’s 2019 Doing Business Report.

Intellectual Property Rights

The Israel Patent Office (ILPO) within the Ministry of Justice is the principal government authority overseeing the legal protection and enforcement of intellectual property rights (IPR) in Israel.  IPR protection in Israel has undergone many changes in recent decades as the Israeli economy has rapidly transformed into a knowledge-based economy.

In recent years, Israel revised its IPR legal framework several times to comply with newly signed international treaties.  Israel took stronger, more comprehensive steps towards protecting IPR, and the government acknowledges that IPR theft costs rights holders millions of dollars per year, reducing tax revenues and slowing economic growth.

The United States removed Israel from the Special 301 Report in 2014 after Israel passed patent legislation that satisfied the remaining commitments Israel made in a Memorandum of Understanding with the United States in 2010 concerning several longstanding issues regarding Israel’s IPR regime for pharmaceutical products. Israel is not included in the Notorious Markets List.

Israel’s Knesset approved Amendment No. 5 to Israel’s Copyright Law of 2007 on January 1, 2019.  The amendment aims to establish measures to combat copyright infringement on the internet while preserving the balance among copyright owners, internet users, and the free flow of information and free speech.

In July 2017, the Israeli Knesset passed the New Designs Bill, replacing Israel’s existing but obsolete ordinance governing industrial design. The bill, which came into force in August 2018, brings Israel into compliance with The Hague System for International Registration of Industrial designs.

Nevertheless, the United States remains concerned with the limitations of Israel’s copyright legislation, particularly related to digital copyright matters and with Israel’s interpretation of its commitment to protect data derived from pharmaceutical testing conducted in anticipation of the future marketing of biological products, also known as biologics.

While Israel has instituted several legislative improvements in recent years, the United States continues to urge Israel to strengthen and improve its IPR enforcement regime.  Israel lacks specialized courts, common in other countries with advanced IPR regimes. General civil or administrative courts in Israel typically adjudicate IPR cases.

IPR theft in Israel is common and relatively sophisticated.  The EU ranks Israel as a “third tier” priority country concerning the level of IPR protection and enforcement.  The EU cites inadequate protection of innovative pharmaceutical products and end-user software piracy as the main issues with IPR enforcement in Israel.

Israel is a member of the World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO).  It is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Paris Convention for the Protection of Industrial Property, and the Patent Cooperation Treaty.  Israel was obligated to implement the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) by January 1, 2000, but has failed to do so.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/  

6. Financial Sector

Capital Markets and Portfolio Investment

The Israeli government is supportive of foreign portfolio investment.  The Tel Aviv Stock Exchange (TASE) is Israel’s only public stock exchange.

Financial institutions in Israel allocate credit on market terms.  For many years, banks issued credit to only a handful of individuals and corporate entities, some of whom held controlling interests in banks.  However, in recent years, banks significantly reduced their exposure to large borrowers following the introduction of stronger regulatory restrictions on preferential lending practices.

The primary profit center for Israeli banks are consumer-banking fees.  Various credit instruments are available to the private sector and foreign investors can receive credit on the local market.  Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means there are differences from U.S. accounting principles.

In the case of publicly traded firms where ownership is widely dispersed, the practice of “cross-shareholding” and “stable shareholder” arrangements to prevent mergers and acquisitions is common, but not directed particularly at preventing potential foreign investment.  Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

Money and Banking System

The Bank of Israel (BOI) is Israel’s Central Bank and regulates all banking activity and monetary policy.  In general, Israel has a healthy banking system that offers most of the same services as the U.S. banking system.  Fees for normal banking transactions are significantly higher in Israel than in the United States and some services do not meet U.S. standards.  There are 12 commercial banks and four foreign banks operating in Israel, according to the BOI. Five major banks, led by Bank Hapoalim and Bank Leumi, the two largest banks, dominate Israel’s banking sector.  Bank Hapoalim and Bank Leumi control nearly 60 percent of Israel’s credit market. The State of Israel holds six percent of Bank Leumi’s shares. All of Israel’s other banks are privatized.

Foreign Exchange and Remittances

Foreign Exchange

Israel completed its foreign exchange liberalization process on January 1, 2003, when it removed the last restrictions on the freedom of institutional investors to invest abroad.  The Israeli shekel is a freely convertible currency and there are no foreign currency controls. The BOI maintains the option to intervene in foreign currency trading in the event of movements in the exchange rate not in line with fundamental economic conditions, or if the BOI assesses the foreign exchange market is not functioning appropriately.  Israeli citizens can invest without restriction in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange. Israel’s foreign exchange reserves totaled USD 115.3 billion at the end of 2018.

Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7  )

Remittance Policies

Most foreign currency transactions must be carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients.  The authorized dealer must report large foreign exchange transactions to the Controller of Foreign Currency. There are no limitations or significant delays in the remittance of profits, debt service, or capital gains.

Sovereign Wealth Funds

Israel passed legislation to establish the Israel Citizens’ Wealth Fund, a sovereign wealth fund managed by the BOI, in 2014 to offset the effect of natural gas production on the exchange rate.  The BOI expects the fund to begin operating in 2019 and expects it to begin investing money abroad in 2020. The law establishing the fund states that it will begin operating a month after the state’s tax revenues from natural gas exceed USD 275 million (1 billion New Israeli Shekels). Analysts believe tax revenues will not exceed that threshold until at least 2020.

7. State-Owned Enterprises

Israel established the Government Companies Authority (GCA) following the passage of the Government Companies Law. The GCA is an auxiliary unit of the Ministry of Finance. It is the administrative agency for state-owned companies in charge of supervision, privatization, and implementation of structural changes.  The Israeli state only provides support for commercial SOEs in exceptional cases. The GCA leads the recruitment process for SOE board members. Board appointments are subject to the approval of a committee, which confirms whether candidates meet the minimum board member criteria set forth by law.

The GCA oversees some 100 companies, including commercial and noncommercial companies, government subsidiaries, and companies under mixed government-private ownership.  Among these companies are some of the biggest and most complex in the Israeli economy, such as the Israel Electric Corporation, Israel Aerospace Industries, Rafael Advanced Defense Systems, Israel Postal Company, Mekorot Israel National Water Company, Israel Natural Gas Lines, the Ashdod, Haifa, and Eilat Port Companies, Israel Railways, Petroleum and Energy Infrastructures and the Israel National Roads Company.  The GCA does not publish a publicly available list of SOEs.

Israel is party to the Government Procurement Agreement (GPA) of the World Trade Organization.

Privatization Program

In late 2014, Israel’s cabinet approved a privatization plan allowing the government to issue minority stakes of up to 49 percent in state-owned companies on the Tel Aviv Stock Exchange over a three-year period, a plan estimated to increase government revenue by USD 4.1 billion. The plan aimed to sell stakes in Israel’s electric company, water provider, railway, post office and some defense-related contractors.  The GCA will likely auction minority stakes in a public bidding process without formal restrictions on the participation of foreign investors. Restrictions on foreign investors could be possible in the case of companies deemed to be of strategic significance.

According to press reports from February 2018, the GCA is in the initial stages of developing a plan to issue some shares of these same government companies. For example, in March 2018, the government agreed to sell Israel Military Industries to Elbit, an Israel headquartered international defense electronics company.  Those same reports said the sale of shares in Israel Aerospace Industries, Mekorot Israel National Water Company, Israel Post, Haifa Port, and Ashdod Port could generate billions of shekels in revenue for the government.

8. Responsible Business Conduct

There is awareness of responsible business conduct among enterprises and civil society.  Israel adheres to the OECD Guidelines for Multinational Enterprises and a National Contact Point is operating in the Foreign Trade Administration.  Israel is not a member of the Extractive Industries Transparency Initiative.

Israel’s National Contact Point sits in the Responsible Business Conduct unit in the OECD Department of the Foreign Trade Administration in the Ministry of Economy and Industry.  An advisory committee, including representatives from the Ministries of Economy, Finance, Foreign Affairs, Justice, and the Environment, assist the National Contact Point. The National Contact Point also works in cooperation with the Manufacturer’s Association of Israel, workers’ organizations, and civil society to promote awareness of the guidelines.

9. Corruption

Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations.  Israel became a signatory to the OECD Bribery convention in November 2008 and a full member of the OECD in May 2010.  Israel ranks 34 out of 180 countries in Transparency International’s 2018 Corruption Perceptions Index dropping two places from its 2017 ranking.  Several Israeli NGOs focus on public sector ethics in Israel and Transparency International has a local chapter.

Israel is a signatory of the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

The Israeli National Police, state comptroller, Attorney General, and Accountant General are responsible for combating official corruption.  These entities operate effectively and independently and are sufficiently resourced. NGOs that focus on anticorruption efforts operate freely without government interference.

The international NGO Transparency International closely monitors corruption in Israel.

Resources to Report Corruption

Ministry of Justice
Office of the Director General
29 Salah a-Din Street Jerusalem
02-6466533, 02-6466534, 02-6466535
mancal@justice.gov.il

Transparency International Israel
Ms. Ifat Zamir
Tel Aviv University, Faculty of Management
+972 3 640 9176
ifat@ti-israel.org

10. Political and Security Environment

For the latest safety and security information regarding Israel and the current travel advisory level, see the Travel Advisory for Israel, the West Bank, and Gaza (https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/israel-west-bank-and-gaza-travel-advisory.html).

The security situation remains complex in Israel and the West Bank, and can change quickly depending on the political environment, recent events, and geographic location.  Terrorist groups and lone-wolf terrorists continue plotting possible attacks in Israel, the West Bank, and Gaza. Terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets/shopping malls, and local government facilities.  Violence can occur in Jerusalem and the West Bank without warning. Terror attacks in Jerusalem and the West Bank have resulted in the deaths and injury of U.S. citizens and others. Hamas, a U.S. government-designated foreign terrorist organization, controls security in Gaza.  The security environment within Gaza and on its borders is dangerous and volatile.

11. Labor Policies and Practices

The most recent Central Bureau of Statistics data from January 2018 indicates there are nearly 3.9 million people active in the Israeli labor force.  According to a 2018 OECD report, 48 percent of Israeli 25-34-year olds attained a tertiary education. Many university students specialize in fields with high industrial R&D potential, including engineering, computer science, mathematics, physical sciences, and medicine.  According to the Investment Promotion Center, there are more than 135 scientists out of every 100,000 workers in Israel, one of the highest rates in the world. The rapid growth of Israel’s high-tech sector in the late 1990s increased the demand for workers with specialized skills.

The unemployment rate among 25-64 year-olds was 3.6 percent in February 2019, according to the Israeli Central Bureau of Statistics.

According to Israel’s Population and Immigration Authority, at the end of 2018 there were 98,214 foreign workers in Israel, compared with 88,378 at the end of 2017.  There were 16,230 undocumented workers in Israel at the end of 2018, compared with 17,852 at the end of 2017.

The national labor federation, the Histadrut, organizes about one-third of all Israeli workers.  Collective bargaining negotiations in the public sector take place between the Histadrut and representatives from the Ministry of Finance.  The number of strikes has declined significantly as the public sector has gotten smaller. However, strikes remain a common and viable negotiating vehicle in many difficult wage negotiations.

Israel strictly observes the Friday afternoon to Saturday afternoon Jewish Sabbath and special permits must be obtained from the government authorizing Sabbath employment.  At the age of 18, most Israelis are required to perform 2-3 years of national service. Until their mid-40s, Israeli males are required to perform about a month of military reserve duty annually, during which time they receive compensation from national insurance companies.

12. OPIC and Other Investment Insurance Programs

There is an Overseas Private Investment Corporation (OPIC) agreement between Israel and the United States and OPIC is involved in several projects in Israel.  OPIC provided a USD 250 million construction loan for a 110MW concentrated solar power (CSP) project in the Negev. OPIC also finances projects sponsored by U.S. investors in Israel.  Israel is a member of the Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $369,000 2017 $325,000 www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $21,100 2017 $26,700 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $10,900 2017 $10,900 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 35% 2017 35% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* Source for Host Country Data: https://www.cbs.gov.il/en/mediarelease/Pages/2019/Foreign-Direct-Investment-in-Israel-and-Direct-Investment-Abroad-by-Industries-and-Countries-2015-2017.aspx  


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $129,100 100% Total Outward $100,300 100%
United States $21,100 16.3% Holland $48,800 48.6%
Holland $13,500 10.5% United States $10,900 10.9%
Cayman $8,400 6.5% Canada $2,700 2.7%
Canada $4,700 3.6% Switzerland $2,300 2.3%
China $3,600 2.8% United Kingdom $2,200 2.2%
“0” reflects amounts rounded to +/- $500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $147,679 100% All Countries $82,419 100% All Countries $65,260 100%
United States $74,667 51% United States $45,057 55% United States $29,610 45%
Not Specified $26,727 18% United Kingdom $10,107 12% Not Specified $23,863 37%
United Kingdom $11,582 8% Luxembourg $9,530 12% Germany $1,753 3%
Luxembourg $9,949 7% Germany $4,135 5% Netherlands $1,688 3%
Germany $5,888 4% France $3,766 5% France $1,594 2%

14. Contact for More Information

Russ Headlee
Economic Officer
U.S. Embassy Jerusalem – Tel Aviv Branch Office
+972 (0)3 519 7547
HeadleeRC@state.gov

Jordan

Executive Summary

Jordan is a Middle Eastern country centrally located on desert plateaus in southwest Asia and strategically positioned to serve as a regional business platform. Since King Abdullah II’s 1999 ascension to the throne, Jordan has taken steps to encourage foreign investment and to develop an outward-oriented, market-based, and globally competitive economy. Jordan is also uniquely poised as a platform to host investments focused on the reconstruction of Iraq and projects in regional markets.

Jordan’s economy grew by two percent in 2018, despite ongoing domestic and regional challenges.  Jordan’s economic growth has been slowed for several years by regional security concerns, the 2015 closure of Jordan’s borders with Iraq (reopened in August 2017) and Syria (partially re-opened in 2018), and an influx of Syrian refugees. During this time the government ran large annual budget deficits, but has been able to reduce its near-term financing gap with loans, foreign assistance, and savings from economic reform measures enacted as part of an International Monetary Fund (IMF) Extended Fund Facility program that began in August 2016. As a result of these factors, the investment outlook for Jordan began to decline, and by September 2018 foreign direct investment had dropped 60 percent from its level at the end of 2017.

International reports and metrics indicate that Jordan’s overall investment environment is improving. The Kingdom advanced 15 places from 118th to 103rd on the World Bank’s “Doing Business Report 2018” (sliding back one place in 2019 to 104th). Jordan advanced four points on the Global Innovation Index, maintained its rank at 49th place on the Global Entrepreneurship Index 2018, and improved one place on the Global Talent Competitiveness Index from 58 in 2018 to 57, up 13 points from 2017.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 58 of 175 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 104 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 79 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 232  http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 USD 3980 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

The Jordanian Investment Law grants equal treatment to local and foreign investors and grants incentives for local and foreign investment in industry, agriculture, tourism, hospitals, transportation, energy, and water distribution.  In 2017, Jordan passed amendments to the Companies’ Law and a law to regulate and unify monitoring and inspection of economic activities. The government implemented additional reforms in 2018, including the Insolvency Law, Movable Assets and Secured Lending Law and Bylaw, the Venture Capital bylaw, and a new Income Tax Law. The new tax law is dependent on a number of bylaws that the government is still developing.

In 2014, Jordan endorsed the Public Private Partnership Law and Investment Law to support the government’s commitment to broadening the utilization of the public-private sectors partnership, and allowing the private sector to have a larger role in overall economic activity.

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct

Jordan is largely open to foreign investment, and the government is committed to supporting foreign investment. Foreign and local investors are treated equally under the law. The Jordan Investment Commission is the body responsible for implementing the 2014 Investment Law and promoting new and existing investment in Jordan, through a range of measures to incentivize and facilitate investment procedures. The Investment Council, established by the law, which is comprised of the Prime Minister, ministers with economic portfolios, and representatives from the private sector, oversees the management and development of the national investment policy, and is responsible for legislative and economic reforms to facilitate investment.

In 2017, the Jordanian government introduced a new ministerial portfolio for Investment Affairs, and assigned the Minister of State for Investment Affairs as the President of Jordan Investment Commission. Investment Law No. 30/2014 identifies the Commission as the key reference point for investors and grants additional authorities to the Investment Window to facilitate and accelerate investment registration. The President of the Commission and the administrative team supervise and centrally approve investment-related matters within the guidelines set by the Investment Council and approved by the government.

The Investment Commission can expedite the provision of government services and provide a number of investment incentives, tax, and customs exemptions. An investment-dedicated “One Window  ” provides information and technical assistance to investors, with a mandate to simplify registration and licensing procedures for investment projects that benefit from the Investment Law. In 2018, the Commission launched a “Follow-Up and After Care” section with an aim to remove obstacles facing investors and find appropriate solutions as part of the investment process.

Limits on Foreign Control and Right to Private Ownership and Establishment

Investment and property laws allow domestic and foreign entities to establish businesses that engage in remunerative activities. Foreign companies may open regional and branch offices, branch offices may carry out full business activities, and regional offices may serve as liaisons between head offices and Jordanian or regional clients. The Ministry of Industry, Trade and Supply’s Companies Control Department implements the government’s policy on the establishment of regional and branch offices.

Foreign nationals and firms are permitted to own or lease property in Jordan for investment purposes and are allowed one residence for personal use, provided that their home country permits reciprocal property ownership rights for Jordanians.  Depending on the size and location of the property, the Lands and Surveys Department, the Ministry of Finance, and/or the Cabinet may need to approve foreign ownership of land and property, which must then be developed within five years after the date of approval.

Regulations governing foreign ownership include the following exceptions:

  • Foreigners are prohibited from wholly or partially owning investigation and security services, sports clubs (exception: health clubs), stone quarrying operations for construction purposes, customs clearance services, and bakeries of all kinds; and are prohibited from trading in weapons and fireworks. The Cabinet, however, may approve foreign ownership of projects in these sectors upon the recommendation of the Investment Council. To qualify for the exemption, projects must be categorized as being highly valuable to the national economy.
  • Investors are limited to 50 percent ownership in certain businesses and services, including periodical publications, printing/publishing companies, aircraft or maritime vessel maintenance and repair services, land transportation services, and retail and wholesale trading.
  • Foreign firms may not import goods without appointing an agent registered in Jordan; the agent may be a branch office or a wholly owned subsidiary of the foreign firm. The agent’s connection to the foreign company must be direct, without a sub-agent or intermediary. The Commercial Agents and Intermediaries Law No. 28/2001 governs contractual agreements between foreign firms and commercial agents. Private foreign entities, whether licensed under sole foreign ownership or as a joint venture, compete on an equal basis with local companies.

However, according to the Bilateral Investment Treaty with Jordan, U.S. investors are granted several exceptions and are accorded the same treatment as Jordanian nationals, allowing U.S. investors to maintain 100 percent ownership in some restricted businesses. The most up-to-date listing of limitations on investments is available in the FTA Annex 3.1 and may be found at http://www.ustr.gov/trade-agreements/free-trade-agreements/jordan-fta/final-text.

For national security purposes, foreign investors must undergo security screening through the Ministry of Interior, which can be finalized through the “One Window” located at the Investment Commission.

Other Investment Policy Reviews

Jordan has been a World Trade Organization (WTO) member since 2000. The WTO conducted Jordan’s second Trade Policy Review   in November 2015.

In 2012, the United States and Jordan agreed to Statements of Principles for International Investment and for Information and Communication Technology Services, and a Trade and Investment Partnership Bilateral Action Plan, each of which is designed to increase transparency, openness, and governmental and private sector cooperation. The two parties also began discussions on a Customs Administration and Trade Facilitation Agreement.  All current treaties and agreements in force between the United States and Jordan may be found here: https://www.state.gov/s/l/treaty/tif/.

In follow up on OECD’s Investment Policy Review of Jordan and Jordan’s adherence to the OECD Declaration on International Investment and Multinational Enterprises in 2013, the MENA-OECD competitiveness program issued a report in 2018 entitled “Enhancing the legal framework for sustainable investment: Lessons from Jordan” (http://www.oecd.org/mena/competitiveness/Enhancing-the-Legal-Framework-for-Sustainable-Investment-Lessons-from-Jorden.pdf ).

Business Facilitation

Businesses in Jordan need to register with the Ministry of Industry, Trade, and Supply’s Companies Control Department, or the Chambers of Commerce or Industry depending on the type of business they conduct; open a bank account, obtain a tax identification number, and obtain a VAT number. They also need to obtain a vocational license from the municipality, receive a health inspection, and register with the Social Security Corporation. In November 2017, the government issued a decision to cancel all non-security related pre-approvals for registering a business and require all approvals before starting operations.

The “Investment Window” at the Jordan Investment Commission (www.jic.gov.jo  ) serves as a comprehensive investment center for investors. The window provides its services to both local and foreign investors, particularly those in the agricultural sector, medical, tourism, industrial, ICT-Business Process Outsourcing (BPO), and energy sectors. In 2018, the commission introduced a fast track for investors at Queen Alia International Airport.

In 2017, the Commission further streamlined procedures to register and license investment projects in development zones, introducing a Fast Track Investment Window, reducing the number of committee approvals from 23 to 13, and reducing registration procedures from 15 to five. These changes reduced the typical time period required to register in development zones from five days to one day. Additionally, the time period needed to grant or renew the investor card (an ID card for investors used to facilitate various transactions) has been reduced from five working days to two, the time period to grant exemptions under the investment law from two weeks to one, and the time period to grant exemptions under the decisions of the Prime Minister from seven days to one.

Jordan has also adopted a single security approval to replace the 11 approvals that were previously required for new investors. The new approval covers registering and licensing the company, obtaining driving licenses for investors, possessing immovable property for the establishment of investment projects in the industrial and developing zones, in addition to granting residence permits to non-Jordanian investors and their family members. The Companies Control Department has developed and launched a portal for online registration: http://www.ccd.gov.jo/  

The commission has completed the first phase of automating its services. Sixteen services are now fully automated as of March 31, 2019, and a number of guides are now available online, including the investor guide (https://www.jic.gov.jo/en/investor-guide/  ).

The World Bank Group in its Doing Business report   mapped out the registration requirements in Jordan and provided a detailed summary of procedures, time, cost, and legal requirements to incorporate and register a new firm in Jordan. The report compared regulations relevant to the life cycle of a small- to medium-sized domestic business in 188 economies. In the 2019 report, Jordan ranked 104 out of 190, with 12 days needed to complete registration (Link).

Outward Investment

Jordan does not have a mechanism in place to specifically incentivize outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

In addition to the United States, Jordan has signed bilateral investment treaties with 57 countries including the European Union, Singapore, and Canada. Jordan’s bilateral investment treaty with the United States  entered into effect in 2003 and provides reciprocal protection of Jordanian and U.S. individual and corporate investments.

The U.S. Congress enacted the Qualifying Industrial Zone (QIZ)   initiative in 1996 to support the Middle East peace process. Goods produced in the 13 designated QIZs in Jordan can be imported into the United States tariff and quota free under the agreement if at least 35 percent of the product’s content comes from the QIZ, Israel, or West Bank/Gaza. Of that 35 percent, a minimum 11.7 percent of value must be added in the QIZ, eight percent in Israel, and 15.3 percent in a Jordanian QIZ, Israel, or the West Bank/Gaza. The QIZs have attracted over USD 1 billion dollars in capital investments, generated around USD 9.2 billion dollars in exports to the U.S. between 2006 and 2013, and currently employ more than 47,000 workers; about one-quarter of whom are Jordanians. The bulk of QIZ exports continue to be garments.

The U.S.-Jordan Free Trade Agreement (FTA),   which entered into force in 2001 and came into full effect in January 2010, does not supersede or eliminate the QIZ initiative. Nevertheless, exports under QIZ requirements considerably shrank as exporters took advantage of the FTA’s broader mandate. FTA rules of origin simply require 35 percent Jordanian content without other restrictions.

While the United States remains one of Jordan’s top trading partners and largest export market, Jordan maintains an active trade relationship with neighboring countries and has been actively pursuing enhanced trade arrangements globally. Jordan is a member of the Greater Arab Free Trade Area (GAFTA), which has been in force since 1998. The GAFTA reached full trade liberalization of goods in 2005 through full exemption of customs duties and charges for all 17 Arab member states, with the exception of gradual reductions for Sudan and Yemen. Jordan has also signed trade preference agreements and bilateral free trade agreements with various Arab neighbors, including Egypt, Syria, Morocco, Tunisia, the UAE, Algeria, Lebanon, the Palestinian Authority, Kuwait, Sudan, and Bahrain.

An economic association agreement between Jordan and the European Union (EU) entered into force in 2002 to establish free trade over a twelve-year period. This agreement calls for the free movement of capital as well as cooperation on development and political issues. Jordan also signed a Free Trade Area Agreement in 2001 with the European Free Trade Association (EFTA) states (Iceland, Liechtenstein, Norway, and Switzerland); this agreement completed the transitional period in 2014. In 2016, Jordan and the European Union agreed on new rules of origin designed to facilitate Jordanian exports to the EU manufactured with set percentages of Syrian labor content.  Jordan and the EU are discussing potential revisions to this agreement.

With respect to other agreements, Jordan signed a Free Trade Agreement with Singapore in 2004. In addition to enhancing bilateral trade ties, the agreement aimed to create new export opportunities for Jordanian products worldwide through the possibility of diagonal accumulation of origin with countries that have concluded free trade agreements with both Jordan and Singapore. That same year, Jordan completed the Agadir trade agreement with Egypt, Morocco, and Tunisia, and upgraded its trade agreement with Israel to take advantage of accumulation of content provisions in the European Union’s Pan Euro-Mediterranean trade rules of origin. Jordan signed a Free Trade Agreement with Canada in 2009 which came into effect in October 2012. The FTA with Canada eliminates all non-agricultural tariffs and most agricultural tariffs. A similar agreement with Turkey was also signed in November 2009 and entered into effect on March 1, 2011; in early 2018 Jordan announced its intention to suspend this agreement within six months. Jordan has also signed with Iraq a number of Memoranda of Understanding for bilateral cooperation in various sectors such as education, health, energy, transportation, and trade.

Jordan concluded double taxation avoidance agreements with 31 countries including the United Arab Emirates, Qatar, Bahrain, Egypt, Algeria, Tunisia, in addition to Canada, the United Kingdom, France, Turkey, UAE, and others. Jordan signed its first double taxation agreement in 1981 with Romania, and the latest with Saudi Arabia in 2018. The terms of each agreement vary to match the priorities of each signatory, but often include income tax, corporate tax, capital gain, social service tax, and gains generated by the alienation of movable and immovable property.

Jordan does not have a double taxation agreement with the United States.

3. Legal Regime

Transparency of the Regulatory System

Legal, regulatory and accounting policies, applicable to both domestic and foreign investors, are transparent and promote competition. However, historically red tape and bureaucratic procedures, particularly at the local government level, presented problems for foreign and domestic investors.

The government is gradually implementing policies to improve competition and foster transparency in implementation. These reforms aim to change an existing system influenced in the past by family affiliations and business ties. The Jordan Investment Commission (JIC), through its Fast Track Investment Window, introduced a number of measures to streamline the investment process. All laws and regulations are usually published on the website of the Legislative and Opinion Bureau for public commenting, in addition to executive branch consultations, with the legislative branch and key stakeholders.

Most economic regulations are available on the Jordan Investment Commission website (https://www.jic.gov.jo/ar/investment-regulations-2/  ), or on the Ministry of Industry and Trade and Supply website (https://www.mit.gov.jo/Default). All regulations are published in the Official Gazette (http://pm.gov.jo/newspaper  ) or the Legislative and Opinion Bureau (http://www.lob.jo/  ).

The commission issued and published a services and licensing guides outlining processes and fees, in addition to the incentives guide (https://www.jic.gov.jo/en/services-guide/  ). Guides are currently available in Arabic.

Jordan is committed to its fiscal transparency policy, therefore the Ministry of Finance (MoF) publishes a monthly “General Government Finance Bulletin” and that includes detailed information on government’s debt obligations. (www.mof.gov.jo/Portals/0/Mof_content/النشرات والبيانات المالية/نشرة مالية الحكومة/2016/Arabic PDF December 2016.pdf  ).

For further details please contact:

Investment Window
Jordan Investment Commission
Telephone: +962 (6) 5608400/9 Ext: 120
P.O.Box 893
Amman 11821 Jordan
E-mail: info@jic.gov.jo

International Regulatory Considerations

Jordan recognizes and accepts most U.S. standards and specifications. However, Jordan has occasionally required additional product standards for imports. Some of these measures have been viewed as barriers to trade, such as a 2014 restriction imposed on packaging sizes for poultry available for retail resale.

As a member country of the WTO, Jordan is obliged to notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Jordan is a signatory of the WTO Trade Facilitation Agreement. As of March, 2018, Jordan had implemented 81.5 percent of its commitments. Jordan submitted its notifications for Category A before the agreement came into force, and is currently in the final review for categories B and C.

Legal System and Judicial Independence

Jordan has a mixed legal system based on civil law, Sharia Law (Islamic Law), and customary law. The Constitution establishes the judiciary as one of three separate and independent branches of government. Jordanian commercial laws do not make a distinction between Jordanian and non-Jordanian investors. However, plaintiffs complain of judicial backlogs and subsequent delays in legal proceedings. Jordan has introduced economic judicial chambers, established under the Amman First Instance Court and Amman Appeal Court under the provisions of the Law of Formation of the amended Courts No. 30 of 2017. These chambers specialize in the adjudication of certain commercial and investment disputes mentioned in Article 4 of the Courts Formation Law.

Laws and Regulations on Foreign Direct Investment

Jordan’s Investment Law governs local and foreign investment. The law consolidated three entities – the Jordan Investment Board, the Jordanian Development Zones Commission, and the Free Zones Corporation – into the Jordan Investment Commission. The law incorporates a statement of investors’ rights and a legal framework for the newly established Investment Window, which is located at the Investment Commission’s headquarters.

The commission issued and published a services and licensing guides outlining processes and fees, in addition to the incentives guide (https://www.jic.gov.jo/en/services-guide/  ). Guides are currently available in Arabic. The commission is working to amend the bylaw that regulates non-Jordanian investments to increase investors’ confidence and attract more foreign investment.

In September 2017, Parliament passed the Monitoring and Inspection of Economic Activities Law No. 33 / 201, and amendments to Jordan’s Companies Law No. 34 /2017. This law governs the requirements to establish venture capital companies for the purpose of direct investment, or for creating funds, to contribute or invest in high-growth companies that are not listed in the stock market.

In 2018, Jordan passed the Insolvency Law, Movable Assets and Secured Lending Law and Bylaw, the Venture Capital Bylaw in addition to a new Income Tax Law, a number of related bylaws are in the pipeline.

There is no systematic or legal discrimination against foreign participation with respect to ownership and participation in Jordan’s major economic sectors other than the restrictions outlined in the governing regulations. In fact, many Jordanian businesses actively seek engagement with foreign partners as a way to increase their competitiveness and access to other international markets. The government’s efforts have made Jordan’s official investment climate welcoming; however, some U.S. investors have reported hidden costs, citing bureaucratic red tape, vague regulations, and conflicting jurisdictions.

Competition and Anti-Trust Laws

The Jordanian parliament passed amendments to Competition Law No. 33/2004 in 2011 to strengthen the local economic environment and attract foreign investment by providing incentives to improve market competitiveness, protect small and medium enterprises from restrictive anticompetitive practices, and give consumers access to high quality products at competitive prices. The Competition Directorate at the Ministry of Industry, Trade, and Supply conducts market research, examines complaints, and reports violators to the judicial system.

Expropriation and Compensation

Article 11 of the Jordanian Constitution stipulates that expropriations are prohibited unless specifically deemed to be in the public interest. In cases of expropriation, the law mandates provision of fair compensation to the investor in convertible currency.

Dispute Settlement

ICSD and New York Conventions

Since 1972, Jordan has been a contracting state to the International Centre for Settlement of Investment Disputes (ICSID Convention). Only a small number of cases between foreign investors and the Jordanian government have been brought before ICSID tribunals. Jordan is also a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York convention).

In January 2018, the Parliament passed amendments to Arbitration Law 2017, which aims to facilitate the use of arbitration as an alternative to dispute settlement procedures.

Investor-State Dispute Settlement

Under domestic law, foreign investors may seek third party arbitration as a means of settling disputes. Jordan abides by WTO dispute settlement mechanisms, and dispute settlement mechanisms under the U.S.-Jordan FTA are consistent with WTO commitments. Article IX of the United States-Jordan Bilateral Investment Treaty (BIT) establishes procedures for dispute settlements between Jordanians and U.S. persons.

Investment disputes are treated as any other commercial or civil dispute in the Jordanian judicial system. Investment agreements with the Jordanian government as a party generally contain a dispute resolution clause that would refer cases to arbitration in Jordan.  On average, it takes three to four years for cases that go through the local court system to reach a verdict. Cases settled through arbitration take between 12 to 18 months. The main challenge regarding litigating cases is being able to conduct proper process of service upon all concerned parties. Another challenge is the lack of specialized investment and commercial courts, limiting judges’ capacity to adequately review cases.

International Commercial Arbitration and Foreign Courts

Rulings by U.S. courts or other international arbitration committees can be upheld through the filing of an Enforcement of Ruling motion in a Jordanian court.

Bankruptcy Regulations

The Commercial Code, Civil Code, and Companies Law collectively govern bankruptcy and insolvency proceedings. In December 2017, the cabinet endorsed a bankruptcy bylaw which stipulates procedures for optional and compulsory liquidation, along with the mechanism, liquidation plan, and required documentation and reporting. In 2018, Parliament passed the Insolvency Law, which allows individuals and companies to offset their financial position through a debt management plan. The law helps the insolvent entity to continue its economic activity, rather than directly resorting to bankruptcy.

4. Industrial Policies

Investment Incentives

Under Investment Law No. 30/2014, the Council of Ministers, upon the recommendation of the Investment Council, may offer investment incentives in accordance with the law and governing regulations for projects outside the Development and Free Zones. The Investment Council and Investment Commission can also offer certain exemptions for projects in the following sectors:

  1. Agriculture and Livestock
  2. Hospitals and specialized medical centers
  3. Hotel and touristic facilities
  4. Tourism-related entertainment and recreation
  5. Contact and communication centers
  6. Scientific research centers and medical laboratories
  7. Technical and media production

Such incentives include customs exemptions, refunding of the general tax for production inputs, and no sales tax. JIC can provide investors with further information on these exemptions (https://www.jic.gov.jo/en/incentives-outside-the-dz-and-fz/  ). Automatic exemptions are also granted for specific services whether purchased locally or imported. The Income and Sales Tax Department will refund the general tax levied within 30 days from submitting a written request in accordance with the terms and conditions determined by the Regulations Governing Investment Incentives (Number 33 of 2015).

A number of non-automatic exemptions are granted for production requirements and assets of economic, industrial, or handicrafts activities of dual-use. Such exemptions are subject to administrative procedures and approvals obtained from the Jordan Investment Commission Technical Committee and are governed by the previously referenced regulation.

Article 8-A of the 2014 Investment Law allows the cabinet to grant additional advantages, exemptions, or incentives to any economic activities in the Kingdom. Under this article, the cabinet granted additional incentives to the ICT, tourism, and transport sectors in 2016, as published in the Official Gazette.

Net profits generated from most exports were exempt from income tax until December 2018. The new Income Tax Law No. 38 (2018) imposed taxes on income generated from exports, in accordance with WTO agreements.

Foreign Trade Zones/Free Ports/Trade Facilitation

Investments in special economic zones and development zones receive a minimum 30 percent income tax waiver depending on the zone. Additional incentives are also provided for projects under the Industrial Estate Corporation and the Aqaba Special Economic Zone.

The country is divided into three development areas: Zones A, B, and C. Investments in Zone C, the least developed areas of Jordan, receive the highest level of incentives while those in Zone A receive the lowest level. All agricultural, maritime, transport and railway investments are classified as Zone C, irrespective of location. Hotel and tourism-related projects along the Dead Sea, leisure and recreational compounds, and convention and exhibition centers receive Zone A designations. Qualifying Industrial Zones (QIZs) are zoned according to their geographical location unless granted an exemption. The three-zone classification scheme does not apply to nature reserves and environmental protection areas.

Jordan’s 2014 investment law merged the Development and Free Zones Commission (DFZC) into the newly formed Jordan Investment Commission, an independent governmental body responsible for creating, regulating, and monitoring Jordan’s free trade zones, industrial estates, and development zones. The development areas are the King Hussein Bin Talal Development Area (KHBTDA) in Mafraq, the Ma’an Development Area, the Irbid Development Area (IDA), the Dead Sea Development Zone, the Jabal Ajloun Development Zone, and the King Hussein Business Park Development Zone. The Investment Law assigns the Jordan Industrial Estates Corporation (JIEC) and the Development and Free Zones Corporation (DFZC) as main developers of industrial estates and development and free zones, under the supervision of the Investment Commission.

As part of Jordan’s efforts to foster economic development and enhance its investment climate, the government has created four industrial estates in Amman, Irbid, Karak, and Aqaba, in addition to several privately-run industrial parks, including al-Mushatta, al-Tajamouat, al-Dulayl, Cyber City, al-Qastal, Jordan Gateway, and al-Hallabat. These estates provide basic infrastructure for a wide variety of manufacturing activities, reducing the cost of utilities and providing cost-effective land and buildings. Investors in the estates continue to receive incentives until their contracts expire, and receive various additional exemptions, such as a two-year exemption on income and social services taxes, complete exemptions from building and land taxes, and exemptions or reductions on most municipalities’ fees.

Besides the six public free zones in Zarqa, Sahab, Karak, Karama, Mowaqaar, and Queen Alia Airport, Jordan has over 37 designated private free zones administered by private companies under the DFZC’s supervision. The free zones are outside of the jurisdiction of Jordan Customs and provide a duty and tax-free environment for the storage of goods transiting Jordan.

Jordan has announced plans for new specialized development zones in a number of governorates including two solar parks in Ma’an and Ajloun, and four new industrial parks in Salt, Madaba, Tafileh, and Jarash.

The Aqaba Special Economic Zone (ASEZ) is an independent economic zone not governed by the Investment Commission or the articles in the Investment Law governing investments in free zones or development zones. It offers special tax exemptions, a flat five percent income tax, and facilitates customs handling at Aqaba Port. In recent years, ASEZ has attracted projects, mainly in hotel and property development sectors, valued at over USD 8 billion. The government continues to implement development projects aimed at attracting commerce and tourism through the Port of Aqaba. The Aqaba New Port project, initiated in 2010, became operational November 2018 at 40 percent of its design capacity, and is expected to reach 60 percent of operational capacity by June 2019. The new port, 20 km south of the previous port, added four new terminals and expanded general ship berthing and marine services, in addition to adding dedicated terminals for liquefied natural gas, phosphates, and propane.

Investors, either foreign or domestic, face specific requirements in trade, services, and industrial projects in free zones. Industrial projects must be related to one of the following industries:

  • New industries that depend on advanced technology;
  • Industries that require locally available raw material and/or locally manufactured parts;
  • Industries that complement domestic industries;
  • Industries that enhance labor skills and promote technical know-how; or,
  • Industries that provide consumer goods and that contribute to reducing market dependency on imported goods.

For further details, please visit:

  • Jordan Investment Commission (http://www.jic.gov.jo/)
  • Jordan Industrial Estate Corporation (http://www.jiec.com)
  • Aqaba Special Economic Zone (http://www.aqabazone.com/)

Performance and Data Localization Requirements

Jordan has a well-educated and trained labor force of 2.5 million people, of which approximately 700,000 are registered foreign workers. Unofficial indicators speculate that unregistered foreign workers are nearly double this number. Most foreign laborers are employed in construction, agriculture, and domestic housekeeping sectors. Approximately 70,000 also work in the QIZs as textile workers.

The Ministry of Labor regulates foreign worker licensing, licensing fees, prohibited sectors, and employer liability. Along with the Ministry of Interior, the Ministry of Labor is responsible for approving the hiring of professional foreign workers by private businesses.

To date, Jordan has no forced localization policy, but does mandate local-employment quotas depending on the sector.

Jordan does not have requirements for foreign IT providers to turn over source code or provide access to surveillance.

5. Protection of Property Rights

Real Property

The legal system reliably facilitates and protects the acquisition and disposition of property rights.  Foreign ownership of land and assets is governed by The Leasing of Immovable Assets and Their Sale to Non-Jordanian and Judicial Persons Law No. 47/2006. Under Article 3 of the law, if the buyer’s country of residence has a reciprocal relationship with Jordan, foreign nationals are afforded the right of ownership of property within urban borders in Jordan for residential purposes. According to the law, foreign nationals may rent immovable assets for business or accommodation purposes, provided that the plot of land does not exceed 10 acres and the lease is for no more than three years in duration. Interest in real property is recognized and enforced once recorded in a legal registry.

A new Property law was passed by the lower house on March 5, 2019, and went to the Senate for final review and approval. The new law aims to consolidate 13 laws governing property ownership in one legislation, and addresses issues such as zoning, and the facilitation of ownership and leases for foreign investors.

All land plots in Jordan are titled and registered with the Jordanian Land and Survey Department; any land not titled as private property is considered government property.

According the Ease of Doing Business report of 2019, Jordan ranked 72 out of 190 countries in “Registering Property.”

Intellectual Property Rights

Jordan has passed several laws in compliance with international commitments to protect intellectual property rights (IPR). Laws consistent with Trade Related Aspects of Intellectual Property Rights (TRIPS) now protect trade secrets, plant varieties, and semiconductor chip designs. Copyrights are registered with The Ministry of Culture’s National Library Department, and patents are registered with the Registrar of Patents and Trademarks at the Ministry of Industry and Trade. Jordan is a signatory to the Patent Cooperation Treaty and the Madrid Protocol, and accordingly, amended its patent and trademark laws in 2007 to enable ratification of the agreements. Jordan is a signatory to World Intellectual Property Organization (WIPO) treaties on both copyrights and on performances and phonograms, and it has been developing updated laws for copyrights, trademark standards, and customs regulations to meet international standards. Jordanian firms are able to seek joint ventures and licensing agreements with multinational partners.

In 2017, Jordan acceded to the Patent Cooperation Treaty (PCT); the treaty entered into force October 2017. The Ministry of Industry and Trade introduced an e-filing service in 2018 through https://ippd-eservice.mit.gov.jo/  .

Jordan’s record on IPR enforcement has improved in recent years, but more effective enforcement mechanisms and legal procedures are still needed. In particular, a large portion of pirated videos and software remain in the marketplace. Enforcement action against audio/video and software piracy is more frequent and enforcement capability is improving.  Since 2000, 6,011 violations of Jordan’s current copyright law have been referred to the judiciary, including 218 cases in 2018 and 174 cases in 2017. Trademark violations have also been problematic.

The U.S. Patent and Trademark Office has an Intellectual Property Attaché for the Middle East and North Africa region based in the U.S. Embassy in Kuwait City, Kuwait. Please see: https://www.uspto.gov/learning-and-resources/ip-policy/intellectual-property-rights-ipr-attach-program/ip-attach-kuwait   for contact information.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ 

6. Financial Sector

Capital Markets and Portfolio Investment

There are three key capital market institutions: the regulator, Jordan Securities Commission (JSC); the Amman Stock Exchange (ASE); and the custodian for all transaction contracts, clearings, and settlements, Securities Depository Center (SDC). The ASE launched an Internet Trading Service in 2010, providing an opportunity for investors to engage in securities trading regardless of geographic location.

Jordan’s market is among the most open among its regional competitors, as there are no caps in place for foreign ownership. At the end of 2018, non-Jordanian ownership in companies listed on the ASE represented 51.7 percent of the total market value (37.3 percent Arab investors and 14.4 percent for non-Arab investors); Jordanian ownership in the financial sector was 56.5 percent, 18.3 percent in the services sector, and 61.4 percent in the industrial sector. Investors, both foreign and domestic, are permitted to open margin accounts and to engage in short selling (commercial banks hold securities for their clients in a sub-account format).

In spite of recent reforms and technological advances, the ASE suffers from intermittent liquidity problems and low trading activity. The ASE’s market capitalization has grown and shrunk rapidly and repeatedly since 2003. Jordan’s financial market reached its height in 2007-2008, where average trading volumes topped USD 118 million daily. Following the global economic downturn, the market declined precipitously, with market capitalization falling from USD 41 billion in 2007 to USD 22.7 billion as of Dec 31, 2018.

By the end of 2018, the ASE price index had dropped 1908.8 points (10 percent) compared to its level at the end of 2017. In 2018, trading volume totaled USD 3.3 billion, a decline of 21 percent over 2017, with only 1.4 billion shares traded compared to 1.7 billion in 2017. The number of listed companies stood at 195 at the end of 2018 compared to 224 at the end of 2016.

At the same time, the net profits of 193 out of the 195 companies listed in the First and the Second Markets increased by USD 509.8 million in 2018 (according to preliminary financial statements provided to the ASE) reaching USD 1.153 billion, an increase of 44.7 percent over 2017.

Money and Banking System

Jordan has 25 banks, including commercial banks, Islamic banks, and foreign bank branches. Jordan does not distinguish between investment banks and commercial banks. Due to strict regulations on lending, particularly mortgage lending, and limited integration with global financial markets, the banking sector’s indicators remain strong. Banks continue to be profitable and well capitalized with deposits being the primary funding base. Liquidity ratios and provisioning remain high, while non-performing loan ratios modestly decreased over the past couple of years. Jordan’s rate of non-performing loans, as a percentage of all bank loans, was 4.2 percent in 2017, and reached 4.6 percent in the first half of 2018.

The banking law also does not discriminate between local and foreign banks. However, the minimum capital requirements differ with JD 50 million (USD 70.6 million) required for foreign banks and JD 100 million (USD 141 million) for local banks.

Banking Law No.28 / 2000 protects depositors’ interests, diminishes money market risk, guards against the concentration of lending, and includes articles on electronic banking practices and money laundering. The CBJ set up an independent Deposit Insurance Corporation (DIC) in 2000 that insures deposits up to JOD 50,000 (USD 71,000). The DIC also acts as the liquidator of banks as directed by the CBJ.

In January 2017, the CBJ and the 25 banks operating in the kingdom agreed to establish the “Jordan Payments and Clearing Company”, a private shareholding company based in Amman. The company began operations in 2018, with an aim to establish and develop digital retail and micro payments along with the investment in the innovative technology and digital financial services.

There is no legal impediment to applying block-chain technologies in banking transactions. The Central Bank actively supports the technology and is running two pilot projects deploying block-chain technologies: the Mobile Payment System (JoMoPay), and another for the verification of bank documents.

Foreign Exchange and Remittances

Foreign Exchange

The Central Bank of Jordan (CBJ) supervises and licenses all currency exchange businesses. These entities are exempt from paying commissions on exchange transactions and therefore enjoy a competitive edge over banks.

The Jordanian Dinar (JD or JOD) is fully convertible for all commercial and capital transactions. Since 1995, the JD has been pegged to the U.S. dollar at an exchange rate of JD 1 to USD 1.41.

Other notable foreign exchange regulations include:

  • Non-residents are allowed to open bank accounts in foreign currencies. These accounts are exempted from all transfer-related commission fees charged by the CBJ.
  • Banks are permitted to purchase unlimited amounts of foreign currency from their clients in exchange for JODs on a forward basis. Banks are permitted to sell foreign currencies in exchange for JODs on a forward basis for the purpose of covering the value of imports.
  • There is no restriction on the amount of foreign currency that residents may hold in bank accounts, and there is no ceiling on the amount residents may transfer abroad. Banks do not require prior CBJ approval for a transfer of funds, including investment-related transfers.

Remittance Policies

Jordanian law entitles foreigners to remit abroad all returns, profits, and proceeds arising from the liquidation of investment projects. Non-Jordanian workers are permitted to transfer their salaries and compensation abroad.

Sovereign Wealth Funds

Jordan does not have a sovereign wealth fund.

7. State-Owned Enterprises

A number of state-owned enterprises (SOEs) exist in Jordan. Currently, 17 SOEs of different sizes and mandates are fully owned by the government, five of which were established in 2016 and are not yet operational. Assets of wholly-owned SOEs exceed USD 11 billion in 2018, and the SOEs employ around 3,000 individuals.

Most of the operational SOEs are small in terms of the size of operations, assets, number of employees, and income. The largest SOEs are: National Electrical Power Company (NEPCO), Samra Electric Power Company, the Yarmouk Water Company, and Aqaba Development Corporation (ADC).

Jordan’s economy is private sector led, accounting for 71 percent of GDP and 75 percent of net cumulative investment. SOEs in Jordan exercise delegated governmental powers and operating in fields that are not yet open for investment, such as managing the transmission and distribution of electrical power and water. Other activities include logistics, mining, storage and inventory management of strategic products, in addition to economic development activities. The government supports these companies as necessary, for example, the government has issued and guaranteed Treasury bonds for NEPCO since 2011 to ensure continuous power supply for the country.

SOEs generally compete on largely equal terms with private enterprises with respect to access to markets, credit, and other business operations. The law does not provide preferential treatment to SOEs, and they are held accountable by their Board of Directors, typically chaired by the sector-relevant Minister and the Audit Bureau.

The government, enterprises and NGOs are progressively taking initiatives to incorporate Responsible Business Conduct into their practices.

Jordan is not a party to the Government Procurement Agreement.

Privatization Program

Over the last fifteen years, the Jordanian government has engaged in a wide-scale privatization program, including in the telecom, energy, and transportation sectors. The few remaining government assets not privatized, including Jordan Silos and Supply Company, have elicited little private sector interest.

Government is following a Public Private Partnership (PPP) model for new projects rather that full privatization.  Currently the PPP law is under review to make it easier for local and foreign investors to participate in bids.

8. Responsible Business Conduct

There is general awareness of responsible business conduct among both manufacturers and consumers in Jordan, with many local and multinational companies voluntarily developing and adopting corporate social responsibility (CSR) programs. CSR efforts predominantly focus on improving infrastructure in adjoining communities or providing better access to educational opportunities.

The amended companies’ law regulates the work of companies through applying the rules of company governance and enhancing the monitoring authorities of shareholders at public liability companies.

The American Chamber of Commerce published in 2016 a framework code of conduct for the private sector, Jordan Integrity and Anti-Corruption Commission (JIACC) approved and embedded as part of the governance chapter in the amended companies’ law. In addition, there have been programs released and revised by the Jordanian government such as the Golden List Program. The Customs Department released and revised a Golden List Program, which encourages good corporate citizenship amongst trading companies and international best practice for trade across borders.

9. Corruption

Jordan was the first Middle-Eastern country to sign and ratify the United Nations Convention against Corruption (UNCAC) in 2005 and has initiated several reforms in similar spirit over the last two decades; including a code of conduct for the public sector in 2006. Furthermore, the government drafted an action plan to address corruption with Jordan’s National Integrity System (NIS), developed in 2012.

Jordanian Anti-Corruption law defines corruption as any act that violates official duties, all acts related to favoritism and nepotism that could deprive others from their legitimate rights, economic crimes, and misuse of power. However, the use of family, business, and other personal connections to advance personal business interests is endemic and regarded by many Jordanians as part of the culture. In 2006, Parliament approved an Illicit Gains Law, which officially required public office holders and specified government officials to declare their assets. The 2018 amendments to the Illicit Gain Law expanded the employees subject to the financial disclosure requirement to include heads and members of ad hoc municipal councils, executive directors of municipalities and heads and members of governorate councils. The Law necessitates the prime minister, Cabinet members and senior employees to provide their own financial disclosures and those of their spouses and minor children.

In 2006, Parliament also enacted an Anti-Corruption Law that created the Anti-Corruption Commission (ACC) to investigate allegations of corruption. In 2016, the Integrity and Anti-Corruption Commission (“IACC”) came into force by Law No. 13/2016 (“IACC Law”). Two Authorities were merged into one, cancelling of the Bureau of Ombudsman Law No. 11 of 2008 and the Anti-Corruption Law No. 62/2006.

The IACC received 790 new investigation files on corruption in 2018, of which 173 cases were referred to the Public Prosecutor in the commission, 342 files were saved because neither corruption offenses were found and therefore no administrative action required to  correct / rectify the situation, and 275 files still are under investigation.

In 2018, the government issued the Code of Governance Practices of Policies and Legislative Instruments in Government Departments, to improve the predictability of legal and regulatory framework governing the business environment.

A new Audit Bureau Law was enacted in October 2018 to strengthen the Bureau performance, capacity and independence in line with INTOSAI standards.

Other related laws include the Penal/Criminal Code, Anti-Money Laundering Law, Right to Access Information Law, and the Economic Crimes Law.

Jordan is not a party to the OECD Convention on Combatting Bribery.

Resources to Report Corruption

H.E. Mohannad Hijazi
Chairman
Jordan Integrity and Anti-Corruption Commission (JIACC)
P.O. Box 5000, Amman, 11953, Jordan
+962 6 550 3150

Contact at “watchdog” organization:

Sawsan Gharaibeh
Director
+962 079 905 2555
swmkgf@gmail.com

And/ Or

Abeer Mdanat
Executive Director
Rasheed Coalition
P.O. Box 582662, Amman, 111585, Jordan
+962 5 585 2528
amdanat@rasheedti.org

10. Political and Security Environment

While politically motivated violence is rare in Jordan, the threat of terrorism remains high.  Terrorist organizations, including the self-proclaimed Islamic State of Iraq and Syria (ISIS), its affiliates, and sympathizers, have successfully conducted attacks in Jordan and continue to plot assaults in the country.  Jordan’s prominent role in the Defeat-ISIS Coalition and its shared borders with Iraq and Syria maintains potential for future terrorist incidents. Within the last year, Jordanian authorities have disrupted terrorist plots. Visitors should consult current State Department public announcements at www.travel.state.gov before traveling to Jordan.

Peaceful protests occur frequently, but are usually limited to a few hundred (and often only a few dozen) participants.  Most demonstrations focus on frustration with perceived economic inequality and corruption or on the Israeli-Palestinian conflict and the status of Jerusalem. Protests in June 2018 led to the dismissal of the prime minister and his cabinet.  Protestors state they will continue to gather periodically until the government takes concrete action on their concerns.

11. Labor Policies and Practices

According to the Department of Statistics annual report for 2018, the total population of Jordan is 10.3 million, of which 69 percent are Jordanians (6.6 million) and approximately 30 percent are non-Jordanians, including 1.3 million Syrian refugees.  UNHCR has registered 659,063 Syrian refugees in Jordan.

Approximately 70 percent of the population is estimated to be under the age of 30.  Literacy rates are 95.4 percent for men and 91.1 percent for women. Jordan has a generally well-educated labor force of about 1.8 million Jordanians. According to the Department of Statistics, official unemployment in 2018 reached 18.7percent.

Certain types of work are restricted to Jordanians only.  However, employers may request the Ministry of Labor to review applications for foreign workers in restricted sectors if local expertise cannot be found; these requests have generally been approved. Local labor requirement in development and free zones varies based on the type of economic activity.

Labor unions serve primarily as intermediaries between workers and the Ministry of Labor (MOL) and may engage in collective bargaining on behalf of workers. The 17 recognized unions are all members of the General Federation of Jordanian Trade Unions. Estimates put union membership at less than 10 percent of the labor force.  Additionally, there are 40 active professional associations, including many that have mandatory membership, in addition to 15 Independent Unions covering the rest of the professions and trades. According to official figures, about 30 percent of the total labor force, including government workers, belongs to either a union or a professional association. There is a labor mechanism in place for labor dispute resolution beginning with labor inspector mediation. If mediation fails, the Minister of Labor reviews the case, followed by the Conciliation Council, then finally by the Labor Court under the Magistrate and Penalty Court to resolve the case within seven days.

The labor law does not require employers to include retirement plans in employment packages.  However, if the employer agreed to provide retirement benefits when the worker was contracted, the employer must fulfill that commitment. The law addresses layoffs to include require ministerial notification and guarantee of legitimate and entitled benefits and severance, but also allows firing without prior notice on certain conditions. Companies with the appropriate justification may obtain permission from the Ministry of Labor (MOL) to reduce their staff as a result of business restructuring. The social security system provides up to six months of unemployment benefits.

In 2017, Jordan introduced amendments to the labor law regarding flexible work hours and the provision of daycare; the amendments were passed by the lower house in March 2019, and are currently pending Senate approval. The amendments establish flexible work hour as agreements to be negotiated between employers and employees, but does not mandate them as an employee right. The current law governing daycare requires a businesses with at least 20 female employees with children between the age of one day and four years, to make daycare services available to the employees.  The proposed amendments will require employers with employees, regardless of gender, that cumulatively have 15 or more children under the age of five years, to provide a suitable child care facility for them.

The government has been reforming and strengthening its legal framework and labor inspections since 2006. In 2010, Jordan fully implemented its Free Trade Agreement (FTA) with the United States, which requires Jordan to continuing making improvements on labor rights issues.

The Better Work Jordan program (BWJ), funded by the U.S. Department of Labor (USDOL), was launched in 2008 as a joint project between the Ministry of Labor, the International Labor Organization (ILO), and the International Finance Corporation to improve garment sector labor standards and conditions, and raise compliance levels through public reporting and technical assistance. In 2016, USDOL removed the Jordanian garment industry from its “List of Goods Produced by Child Labor or Forced Labor.” As of December 2018, 86 garment factories were enrolled in the BWJ program. Following its successes, BWJ is expanding its mandate to cover manufacturing and industrial sectors in order to facilitate their obligations to the European Union’s under newly relaxed rules-of-origin trade agreement requirements. At the end of 2018, 12 companies qualified to benefit from the simplified rules-of-origin initiative.

12. OPIC and Other Investment Insurance Programs

Investments in Jordan are eligible for Overseas Private Investment Corporation (OPIC) insurance and private financing. Projects require a minimum of 25 percent U.S. equity in order to qualify. Over the past several years, OPIC backed significant investments in Jordanian private equity ventures and in mortgage financing, with over USD 1 billion in investments in Jordan. OPIC is also active in financing projects in Jordan’s burgeoning renewable energy sector. In 2011, OPIC signed a USD 250 million loan guarantee program and established, the Jordan Loan Guarantee Facility (JLGF) in partnership with USAID, as an inclusive finance activity aimed at improving access to finance for small and medium sized enterprises in Jordan. OPIC previously extended a USD 250 million loan to support the USD 1 billion Disi water project to bring water to Amman from the Disi aquifer in the south.

Jordan is a member of the Multilateral Investment Guarantee Agency (MIGA), a World Bank agency which guarantees investment against non-commercial risks such as civil war, nationalization, and policy changes. The program covers investments in Jordan irrespective of the investor’s nationality in addition to Jordanian investments abroad.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $40,824 2017 $40,068 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2017 $232 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 $72% 2017 83.7% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: Central Bank of Jordan, data published Q2 2018.


Table 3: Sources and Destination of FDI

Data not available.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries Amount 100% All Countries Amount 100% All Countries Amount 100%
USA 4,489 64% West Bank 225 33% USA 4337 69%
West Bank 976 13% USA 152 22% West Bank 751 12%
Luxemburg 373 5% Lebanon  128 19% Luxemburg  346 5%
Ireland 175 3% UK 53 8% Ireland 166 3%
UK 171 2% Cayman Island 46 7% Germany 153 2%

Source: http://data.imf.org/regular.aspx?key=60587812  

14. Contact for More Information

Shaden Al-Majali
Senior Economic Specialist
Al Umawyeen Street-Amman
+962 (6) 590-6317
MajaliSA@state.gov

Nigeria

Executive Summary

Nigeria’s economy – Africa’s largest – exited recession in 2017, assisted by the Central Bank’s more rationalized foreign exchange regime.  Growth is expected to remain weak in the near term however – the IMF forecasts growth of 2.1 percent in 2019 and 2.53 percent in 2020, still under Nigeria’s population growth rate of around 2.6 percent.  With the largest population in Africa (estimated at over 195 million), Nigeria continues to represent a large consumer market for investors and traders. A very young country with nearly two-thirds of its population under the age of 25, Nigeria offers abundant natural resources and a low-cost labor pool, and enjoys mostly duty-free trade with other member countries of the Economic Community of West African States (ECOWAS).  Nigeria’s full market potential remains unrealized because of significant impediments such as pervasive corruption, inadequate power and transportation infrastructure, high energy costs, an inconsistent regulatory and legal environment, insecurity, a slow and ineffective bureaucracy and judicial system, and inadequate intellectual property rights protections and enforcement. The Nigerian government has undertaken reforms to help improve the business environment, including making starting a business faster by allowing electronic stamping of registration documents, and making it easier to obtain construction permits, register property, get credit, and pay taxes.  In 2017, these reforms helped boost Nigeria’s ranking on the World Bank’s annual Doing Business rankings from 169th to 145th place out of 190 economies. In 2018, it dropped one spot to 146th place.

Nigeria’s underdeveloped power sector remains a particular bottleneck to broad-based economic development.  Power on the national grid currently averages 4,000 megawatts, forcing most businesses to generate much of their own electricity.  The World Bank currently ranks Nigeria 171 out of 190 countries for ease of obtaining electricity for business. Reform of Nigeria’s power sector is ongoing, but investor confidence continues to be shaken by tariff and regulatory uncertainty.  The privatization of distribution and generation companies in 2013 was based on projected levels of transmission and progress toward a fully cost reflective tariff to sustain operations and investment. However, tariff increases were reversed in 2015, and revenues have been severely impacted due to decreased transmission levels and currency devaluation, as well as high aggregate technical, commercial, and collections losses, resulting in a severe liquidity crisis throughout the power sector value chain.  The Nigerian government, in partnership with the World Bank, published a Power Sector Recovery Plan (PSRP) (approved by the Federal Executive Council) in March 2017. However, two years after its launch, differing perspective on various PSRP interventions have complicated implementation. The Ministry of Finance appears to be driving the implementation effort and has convened three Federal Government of Nigeria (FGN) committees charged with moving the process forward in the areas of regulation, policy, and finances.  Discussions between FGN and World Bank appear to going forward, but sector players report skepticism that the World Bank’s USD 1 billion loan will be enacted, though FGN may proceed without itThe plan is ambitious and will require political will from the administration, external investment to address the accumulated deficit, and discipline in implementing plans to mitigate future shortfalls.  It is, nevertheless, a step in the right direction, and recognizes explicitly that the Nigerian economy is losing on average approximately USD 29 billion annually due to lack of adequate power.

Nigeria’s trade regime remains protectionist in key areas.  High tariffs, restricted forex availability for 43 categories of imports, and prohibitions on many other import items have the aim of spurring domestic agricultural and manufacturing sector growth.  Nigeria’s imports rose in 2018, largely as a result of the country’s continued recovery from the 2016 economic recession. U.S. goods exports to Nigeria in 2017 were USD 2.16 billion, up nearly 60 percent from the previous year, while U.S. imports from Nigeria were USD 7.05 billion, an increase of 68.7 percent.  U.S. exports to Nigeria are primarily refined petroleum products, used vehicles, cereals, and machinery. Crude oil and petroleum products continued to account for over 95 percent of Nigerian exports to the United States in 2016. The stock of U.S. foreign direct investment (FDI) in Nigeria was USD 5.8 billion in 2017 (latest data available), a substantial increase from USD 3.8 billion in 2016, but only a modest increase from 2015’s USD 5.5 billion in FDI.  U.S. FDI in Nigeria continues to be led by the oil and gas sector. There is also investment from the United States and other countries in Nigeria’s power, telecommunications, real estate (commercial and residential), and agricultural sectors.

Given the corruption risk associated with the Nigerian business environment, potential investors often develop anti-bribery compliance programs.  The United States and other parties to the Organisation for Economic Co-operation and Development (OECD) Anti-Bribery Convention aggressively enforce anti-bribery laws, including the U.S. Foreign Corrupt Practices Act (FCPA).  A high-profile FCPA case in Nigeria’s oil and gas sector resulted in 2010 U.S. Securities Exchange Commission (SEC) and U.S. Department of Justice rulings that included record fines for a U.S. multinational and its subsidiaries that had paid bribes to Nigerian officials.  Since then, the SEC has charged an additional four international companies with bribing Nigerian government officials to obtain contracts, permits, and resolve customs disputes. See SEC enforcement actions at https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml.

Security remains a concern to investors in Nigeria due to high rates of violent crime, kidnappings for ransom, and terrorism.  The ongoing Boko Haram and Islamic State in West Africa (ISIS-WA) insurgencies have included attacks against civilian and military targets in the northeast of the country, causing general insecurity and a major humanitarian crisis there.  Multiple bombings (the majority linked to the insurgent groups) of high-profile targets with multiple deaths have occurred outside of Nigeria’s northeast region as well since 2010, but the pace of such attacks has dipped significantly in recent years.  In the Niger Delta region, militant attacks on oil and gas infrastructure restricted oil production and export in 2016, but a restored amnesty program and more federal government engagement in the Delta region have brought a reprieve in violence and allowed restoration of shut-in oil and gas production.  The longer-term impact of the government’s Delta peace efforts, however, remains unclear and criminal activity in the Delta – in particular, rampant oil theft– remains a serious concern. Maritime criminality in Nigerian waters, including incidents of piracy and crew kidnap for ransom, has increased in recent years and law enforcement efforts have been limited or ineffectual.  Onshore, international inspectors have voiced concerns over the adequacy of security measures at some Nigerian port facilities. Businesses report that bribery of customs and port officials remains common to avoid delays, and smuggled goods routinely enter Nigeria’s seaports and cross its land borders.

Freedom of expression and of the press remains broadly observed, with the media often engaging in open, lively discussions of challenges facing Nigeria.  However, security services detain and harass journalists in some cases, including for reporting on sensitive topics such as corruption and security. Some journalists practice self-censorship on sensitive issues.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 144 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report “Ease of Doing Business” 2019 146 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 118 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in Nigeria ($M USD, stock positions) 2017 $5,800 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $2,100 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

In 1995 the Nigerian Investment Promotion Commission Act dismantled years of controls and limits on foreign direct investment (FDI), opening nearly all sectors to foreign investment, allowing for 100 percent foreign ownership in all sectors (with the exception of the petroleum sector, where FDI is limited to joint ventures or production sharing contracts), and creating the Nigerian Investment Promotion Commission (NIPC) with a mandate to encourage and assist investment in Nigeria.  The NIPC features a One-Stop Investment Center (OSIC) that nominally includes participation of 27 governmental and parastatal agencies (not all of which are physically present at the OSIC, however) in order to consolidate and streamline administrative procedures for new businesses and investments. Foreign investors receive largely the same treatment as domestic investors in Nigeria, including tax incentives. However, without strong political and policy support, and because of the unresolved challenges to investment and business in Nigeria, the ability of the NIPC to attract new investment has been limited.

The Nigerian government has continued to promote import substitution policies such as trade restrictions and local content requirements in a bid to attract investment that would develop domestic capacity to produce products and services that would otherwise be imported.  The import bans and high tariffs used to advance Nigeria’s import substitution goals have been undermined by smuggling of targeted products (most notably rice and poultry) through the country’s porous borders, and by corruption in the import quota systems developed by the government to incentivize domestic investment.  Despite the government’s stated goal to attract investment, investors generally find Nigeria a difficult place to do business.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are currently no limits on foreign control of investments in Nigeria.  However, in some instances regulatory bodies may insist on Nigerian equity as a prerequisite to doing business.  The NIPC Act of 1995 liberalized the ownership structure of business in Nigeria, so that foreign investors can now own and control 100 percent of the shares in any company (as opposed to the earlier arrangement of 60 percent – 40 percent in favor of Nigerians).

The lack of restrictions applies to all industries, except in the oil and gas sector where investment is limited to joint ventures or production-sharing agreements.  Additional laws restrict industries to domestic investors if they are considered crucial to national security, such as firearms, ammunition, and military and paramilitary apparel.  Foreign investors must register with the NIPC after incorporation under the Companies and Allied Matters Decree of 1990. The Act prohibits the nationalization or expropriation of foreign enterprises except in cases of national interest.

Other Investment Policy Reviews

The OECD completed an investment policy review of Nigeria in May 2015. (http://www.oecd.org/countries/nigeria/oecd-investment-policy-reviews-nigeria-2015-9789264208407-en.htm   ).  The WTO published a trade policy review of Nigeria in 2017 which also includes a brief overview and assessment of Nigeria’s investment climate.  That review is available at: https://www.wto.org/english/tratop_e/tpr_e/tp456_e.htm   .

The United Nations Council on Trade and Development (UNCTAD) published an investment policy review of Nigeria and a Blue Book on Best Practice in Investment Promotion and Facilitation in 2009 (available at unctad.org).  The recommendations from its reports continue to be valid: Nigeria needs to diversify FDI away from the oil and gas sector by improving the regulatory framework, investing in physical and human capital, taking advantage of regional integration and reviewing external tariffs, fostering linkages and local industrial capacity, and strengthening institutions dealing with investment and related issues.  NIPC and the Federal Inland Revenue Service (FIRS) developed a compendium of investment incentives which is available online at: https://nipc.gov.ng/compendium 

Business Facilitation

Although the NIPC offers the One-Stop Investment Centre, Nigeria does not have an online single window business registration website, as noted by Global Enterprise Registration (www.GER.co).  The Nigerian Corporate Affairs Commission (CAC) maintains an information portal, and in 2018 the Trade Ministry launched an online portal for investors called ‘iGuide Nigeria’ (https://theiguides.org/public-docs/guides/nigeria).  While many steps for business registration can be completed online, the final step requires submitting original documents to a CAC office in exchange for final registration.  On average, it takes eight procedures and 10 days to establish a foreign-owned limited liability company (LLC) in Nigeria (Lagos), significantly faster than the regional average for Sub-Saharan Africa at 23 days.  Time required is likely to vary in different parts of the country. Only a local legal practitioner accredited by the Corporate Affairs Commission can incorporate companies in Nigeria. According to the Nigerian Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, foreign capital invested in an LLC must be imported through an authorized dealer, which will issue a Certificate of Capital Importation.  This certificate entitles the foreign investor to open a bank account in foreign currency. Finally, a company engaging in international trade must get an import-export license from the Nigerian Customs Service.

Although not online, the One-Stop Investment Center co-locates relevant government agencies in one place in order to provide more efficient and transparent services to investors.  Investors may pick up documents and approvals that are statutorily required to establish an investment project in Nigeria. The Center assists with visas for investors, company incorporation, business permits and registration, tax registration, immigration, and customs issues.  The Nigerian government has not established uniform definitions for micro, small, and medium enterprises (MSMEs) with different agencies using different definitions, so the process may vary from one company to another.

Outward Investment

The Nigerian Export Promotion Council administered an Export Expansion Grant (EEG) scheme to improve non-oil export performance, but the government suspended the program in 2014 due to concerns about corruption on the part of companies who collected the grants but did not actually export.  After a period of re-evaluation and revision, the program was relaunched in 2018. The federal government set aside 5.12 billion naira (roughly USD 14.2 million) in the 2019 budget for the EEG scheme. The Nigerian Export-Import (NEXIM) Bank provides commercial bank guarantees and direct lending to facilitate export sector growth, although these services are underused.  NEXIM’s Foreign Input Facility provides normal commercial terms of three to five years (or longer) for the importation of machinery and raw materials used for generating exports.

Agencies created to promote industrial exports remain burdened by uneven management, vaguely-defined policy guidelines, and corruption.  Nigeria’s inadequate power supply and lack of infrastructure coupled with the associated high production costs leave Nigerian exporters at a significant disadvantage.  Many Nigerian businesses fail to export because they find meeting international packaging and safety standards is too difficult or expensive. Similarly, firms often are unable to meet consumer demand for a consistent supply of high-quality goods in quantities sufficient to support exports as well as the domestic market.  Therefore, the vast majority of Nigeria’s manufacturers remain unable or uninterested in competing in the international market, especially given the size of Nigeria’s domestic market.

2. Bilateral Investment Agreements and Taxation Treaties

The Nigerian government signed a Trade and Investment Framework Agreement (TIFA) with the United States in 2000.  U.S. and Nigerian officials held their latest round of TIFA talks in April 2016. In 2017, Nigeria and the United States signed a Memorandum of Understanding to formally establish the U.S. – Nigeria Commercial and Investment Dialogue (CID), a new bilateral policy instrument focused on improving trade and investment between the two nations.  The aim of the CID is to promote increased, diverse, and sustained trade and investment with an initial focus on infrastructure, agriculture, digital economy, investment, and regulatory reform.

Nigeria has bilateral investment agreements with Algeria, Austria, Bulgaria, Canada, China, Egypt, Ethiopia, France, Finland, Germany, Italy, Jamaica, the Republic of Korea, Kuwait, Morocco, the Netherlands, Romania, Russia, Serbia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, Uganda, and the United Kingdom.  Fifteen of these treaties (those with China, France, Finland, Germany, Italy, the Republic of Korea, The Netherlands, Romania, Serbia, South Africa, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom) have been ratified by both parties. Nigerian government officials blame treaty partners for the lack of ratification, but the ratification process within Nigeria has not proven proactive or well-organized.

Nigeria is a party to double taxation agreements with the following 23 countries: Belgium, Canada, China, Czech Republic, France, Ghana, Italy, Kenya, the Republic of Korea, Mauritius, the Netherlands, Pakistan, the Philippines, Poland, Qatar, Romania, Singapore, Slovakia, South Africa, Spain, Sweden, United Arab Emirates, and the United Kingdom.  The most recent agreement was signed with Ghana in July 2018; however, it and a number of the other agreements remain to be ratified. Nigeria does not have such an agreement with the United States.

3. Legal Regime

Transparency of the Regulatory System

Nigeria’s legal, accounting, and regulatory systems comply with international norms, but enforcement remains uneven.  Opportunities for public comment and input into proposed regulations sometimes occur. Professional organizations set standards for the provision of professional services, such as accounting, law, medicine, engineering, and advertising.  These standards usually comply with international norms. No legal barriers prevent entry into these sectors.

Ministries and regulatory agencies develop and make public anticipated regulatory changes or proposals and publish proposed regulations before their application.  The general public has the opportunity to comment through targeted outreach, including business groups and stakeholders, and during the public hearing process before a bill becomes law.  There is no specialized agency tasked with publicizing proposed changes and the time period for comment may vary. Ministries and agencies do conduct impact assessments, including environmental assessments, but impact assessment methodology may vary.  The National Bureau of Statistics reviews regulatory impact assessments conducted by other agencies. Laws and regulations are publicly available.

Fiscal management occurs at all three tiers of government: national, 36 state governments and Federal Capital Territory (FCT), and 774 local governments.  Revenues from oil and non-oil sources are collected into the federation account and then shared among the different tiers of government by the Federal Account Allocation Committee (FAAC) in line with a statutory sharing formula.  All state governments are allowed to collect internally generated revenues, which vary from state to state. However, the fiscal federalism structure does not compel states to be accountable to the federal government or transparent about revenues generated or received from the federation account.  The national government’s finances are more transparent as budgets are made public and the financial data are published by agencies such as the CBN, Debt Management Office, and the National Bureau of Statistics. However, the financial dealings of the state-owned oil company, the Nigerian National Petroleum Corporation, are very opaque.

The Debt Management Office (DMO) puts Nigeria’s total debt stock at USD 79.4 billion as of December 2018 – USD 25.2 billion or nearly 32 percent of which is external.  Debts owed by state governments rose 110 percent from USD 5.92 billion between 2014 and 2017, during which the national government had allocated USD 4.8 billion to bail out several states that could not pay salaries.  The total debt figures presented by the DMO usually do not include off-balance-sheet financing such as sovereign guarantees.

International Regulatory Considerations

Foreign companies operate successfully in Nigeria’s service sectors, including telecommunications, accounting, insurance, banking, and advertising.  The Investment and Securities Act of 2007 forbids monopolies, insider trading, and unfair practices in securities dealings. Nigeria is not a party to the WTO’s Government Procurement Agreement (GPA).  Nigeria generally regulates investment in line with the WTO’s Trade-Related Investment Measures (TRIMS) Agreement, but the government’s local content requirements in the oil and gas sector and the ICT sector may conflict with Nigeria’s commitments under TRIMS.

In December 2013, the National Information Technology Development Agency (NITDA), under the auspices of the Ministry of Communication, issued the Guidelines for Nigerian Content Development in the ICT sector.  These guidelines require original ICT equipment manufacturers, within three years from the effective date of the guidelines, to use 50 percent local manufactured content and to use Nigerian companies in providing 80 percent of value added on networks.  The guidelines also require multinational companies operating in Nigeria to source all hardware products locally; all government agencies to procure all computer hardware only from NITDA-approved original equipment manufacturers; and ICT companies to host all consumer and subscriber data locally, use only locally manufactured SIM cards for telephone services and data, and to use indigenous companies to build cell towers and base stations.  Enforcement of the guidelines is largely inconsistent.  The Nigerian government generally lacks the capacity and resources to monitor labor practices, technology compliancy, and digital data flows.  There are reports that individual Nigerian companies periodically lobby the National Assembly and/or NITDA to address allegations (warranted or not) against foreign firms that they are in non-compliance with the guidelines.

The goal is to promote development of domestic production of ICT products and services for the Nigerian and global markets, but the guidelines pose impediments and risks to foreign investment and U.S. companies by interrupting their global supply chain, increasing costs, disrupting global flow of data, and stifling innovative products and services.  Industry representatives remain concerned about whether the guidelines would be implemented in a fair and transparent way towards all Nigerian and foreign companies. All ICT companies, including Nigerian companies, use foreign manufactured products as Nigeria does not have the capacity to supply ICT hardware that meets international standards.

Nigeria is a member of the Economic Community of West African States (ECOWAS), which implemented a Common External Tariff (CET) beginning in 2015 with a five-year phase in period.  An internal CET implementation committee headed by the Fiscal Policy/Budget Monitoring and Evaluation Department of the Nigeria Customs Service was set up to develop the implementation work plans that were consistent with national and ECOWAS regulations by the year 2020.  The country has also put in place a CET monitoring committee, domiciled at the Ministry of Finance consisting of a number of Ministries, Departments and Agencies (MDAs) that have issues related to the CET. Under the CET, Nigeria applies five tariff bands: zero duty on capital goods, machinery, and essential drugs not produced locally; 5 percent duty on imported raw materials; 10 percent duty on intermediate goods; 20 percent duty on finished goods; and 35 percent duty on goods in certain sectors such as palm oil, meat products, dairy and poultry that the Nigerian government seeks to protect.  Under the CET, ECOWAS member governments are permitted to assess import duties higher than the maximum allowed in the tariff bands (but not to exceed a total effective duty of 70 percent) for up to 3 percent of the 5,899 tariff lines included in the ECOWAS CET.

Legal System and Judicial Independence

Nigeria has a complex, three-tiered legal system comprised of English common law, Islamic law, and Nigerian customary law.  Common law governs most business transactions, as modified by statutes to meet local demands and conditions. The Supreme Court sits at the pinnacle of the judicial system and has original and appellate jurisdiction in specific constitutional, civil, and criminal matters as prescribed by Nigeria’s constitution.  The Federal High Court has jurisdiction over revenue matters, admiralty law, banking, foreign exchange, other currency and monetary or fiscal matters, and lawsuits to which the federal government or any of its agencies are party. The Nigerian court system is slow and inefficient, lacks adequate court facilities and computerized document-processing systems, and poorly remunerates judges and other court officials, all of which encourages corruption and undermines enforcement.  Judges have frequently failed to appear for trials.  In addition, the pay for court officials is low, and they often lack proper equipment and training.

Although the constitution and law provide for an independent judiciary, the judicial branch remains susceptible to pressure from the executive and legislative branches.  Political leaders have influenced the judiciary, particularly at the state and local levels.

The World Bank’s publication, Doing Business 2019, ranked Nigeria 92 out of 190 on enforcement of contracts, a significant improvement from previous years.  The Doing Business report credited business reforms for improving contract enforcement by issuing new rules of civil procedure for small claims courts which limit adjournments to unforeseen and exceptional circumstances but noted that there can be variation in performance indicators between cities in Nigeria (as in other developing countries).  For example, resolving a commercial dispute takes 476 days in Kano but 447 days in Lagos. In the case of Lagos, the 447 days includes 40 days for filing and service, 265 days for trial and judgment and 142 days for enforcement of the judgment with total costs averaging 42 percent of the claim. In Kano, however, filing and service only takes 21 days with enforcement of judgement only taking 90 days, but trial and judgment accounts for 365 days with total costs averaging lower at 28.4 percent of the claim.  In comparison, in OECD countries the corresponding figures are an average of 582 days and averaging 21.2 percent of the claim and in sub-Saharan countries an average of 655 days and averaging 42.3 percent of the claim.

Laws and Regulations on Foreign Direct Investment

The NIPC Act of 1995 allows 100 percent foreign ownership of firms, except in the oil and gas sector where investment remains limited to joint ventures or production-sharing agreements.  Laws restrict industries to domestic investors if they are considered crucial to national security, such as firearms, ammunition, and military and paramilitary apparel. Foreign investors must register with the NIPC after incorporation under the Companies and Allied Matters Decree of 1990.  The Act prohibits the nationalization or expropriation of foreign enterprises except in cases of national interest, but the Embassy is unaware of specific instances of such interference by the government.

Competition and Anti-Trust Laws

After years of debate, the Nigerian government enacted the Federal Competition and Consumer Protection Act in February 2019.  The bill repealed the Consumer Protection Act of 2004 and replaced the previous Consumer Protection Council with a Federal Competition and Consumer Protection Commission while also creating a Competition and Consumer Protection Tribunal to handle issues and disputes arising from the operations of the Act.  Under the terms of the Act, businesses will be able to lodge anti-competitive practices complaints against other firms in the Tribunal.  The bill prohibits agreements made to restrain competition, such as agreements on price fixing, price rigging, collusive tendering, etc. (with specific exemptions for collective bargaining agreements and employment, among other items). The bill empowers the President of Nigeria to regulate prices of certain goods and services on the recommendation of the Commission.

The law prescribes stringent fines for non-compliance.  A general fine imposed by this law for offences committed by companies is an amount up to 10 percent of the company’s annual turnover in the preceding business year.  The law will supersede previous systems whereby particular regulatory agencies had consumer protection oversight and the Investment and Securities Act had provisions on competition.

Expropriation and Compensation

The Nigerian government has not expropriated or nationalized foreign assets since the late 1970s, and the NIPC Act of 1995 forbids nationalization of a business or assets unless the acquisition is in the national interest or for a public purpose.  In such cases, investors are entitled to fair compensation and legal redress. A U.S.-owned waste management investment expropriated by Abia State in 2008 is the only known U.S. expropriation case in Nigeria.

Dispute Settlement

ICSID Convention and New York Convention

Nigeria is a member of the International Center for Settlement of Investment Disputes and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (also called the “New York Convention”).  The Arbitration and Conciliation Act of 1988 provides for a unified and straightforward legal framework for the fair and efficient settlement of commercial disputes by arbitration and conciliation. The Act created internationally-competitive arbitration mechanisms, established proceeding schedules, provided for the application of the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules or any other international arbitration rule acceptable to the parties, and made the New York Convention applicable to contract enforcement, based on reciprocity.  The Act allows parties to challenge arbitrators, provides that an arbitration tribunal shall ensure that the parties receive equal treatment, and ensures that each party has full opportunity to present its case. Some U.S. firms have written provisions mandating International Chamber of Commerce (ICC) arbitration into their contracts with Nigerian partners. Several other arbitration organizations also operate in Nigeria.

Investor-State Dispute Settlement

Nigeria’s civil courts have jurisdiction over disputes between foreign investors and the Nigerian government as well as between foreign investors and Nigerian businesses.  The courts occasionally rule against the government. Nigerian law allows the enforcement of foreign judgments after proper hearings in Nigerian courts. Plaintiffs receive monetary judgments in the currency specified in their claims.

Section 26 of the NIPC Act of 1995 provides for the resolution of investment disputes through arbitration as follows:

  1. Where a dispute arises between an investor and any Government of the Federation in respect of an enterprise, all efforts shall be made through mutual discussion to reach an amicable settlement.
  2. Any dispute between an investor and any Government of the Federation in respect of an enterprise to which this Act applies which is not amicably settled through mutual discussions, may be submitted at the option of the aggrieved party to arbitration as follows:
    1. in the case of a Nigerian investor, in accordance with the rules of procedure for arbitration as specified in the Arbitration and Conciliation Act; or
    2. in the case of a foreign investor, within the framework of any bilateral or multilateral agreement on investment protection to which the Federal Government and the country of which the investor is a national are parties; or
    3. in accordance with any other national or international machinery for the settlement of investment disputes agreed on by the parties.
  3. Where in respect of any dispute, there is disagreement between the investor and the Federal Government as to the method of dispute settlement to be adopted, the International Centre for Settlement of Investment Dispute Rules shall apply.

Nigeria is a signatory to the 1958 Convention on Recognition and Enforcement of Foreign Arbitral Awards.  Nigerian courts have generally recognized contractual provisions that call for international arbitration. Nigeria does not have a bilateral investment treaty or free trade agreement with the United States.

International Commercial Arbitration and Foreign Courts

Bankruptcy Regulations

Reflecting Nigeria’s business culture, entrepreneurs generally do not seek bankruptcy protection.  Claims often go unpaid, even in cases where creditors obtain judgments against defendants. Under Nigerian law, the term bankruptcy generally refers to individuals whereas corporate bankruptcy is referred to as insolvency.  The former is regulated by the Bankruptcy Act of 1990, as amended by the Bankruptcy Decree 109 of 1992. The latter is regulated by Part XV of the Companies and Allied Matters Act Cap 59 1990 which replaced the Companies Act, 1968.  The Embassy is not aware of U.S. companies that have had to avail themselves of the insolvency provisions under Nigerian law.

4. Industrial Policies

Investment Incentives

The Nigerian government maintains different and overlapping incentive programs.  The Industrial Development/Income Tax Relief Act, Cap 17, Laws of the Federation of Nigeria, 2004 provides incentives to pioneer industries deemed beneficial to Nigeria’s economic development and to labor-intensive industries, such as apparel.  There are currently 99 industries and products that qualify for the pioneer status incentive through the NIPC, following the addition of 27 industries and products which were added to the list in late 2017. The government has added a stipulation calling for a review of the qualifying industries and products to occur every two years.  Companies that receive pioneer status may benefit from a tax holiday from payment of companies income tax for an initial period of three years, extendable for one or two additional years. A pioneer industry sited in an economically disadvantaged area is entitled to a 100 percent tax holiday for seven years and an additional 5 percent depreciation allowance over and above the initial capital depreciation allowance.  Additional tax incentives are available for investments in domestic research and development, for companies that invest in local government areas (LGAs) deemed disadvantaged, for local value-added processing, for investments in solid minerals and oil and gas, and for a number of other investment scenarios. For a full list of incentives, refer to the Nigerian Investment Promotion Commission website at: https://www.nipc.gov.ng/investment-incentives/.

The Nigerian Export Promotion Council administers an Export Expansion Grant (EEG) scheme to improve non-oil export performance.  The program was suspended in 2014 due to concerns about corruption on the part of companies who collected the grants but did not actually export, but was revised and relaunched in 2018.  The federal government set aside 5.12 billion naira (roughly USD 14.2 million) in the 2019 budget for the EEG scheme. The Nigerian Export-Import (NEXIM) Bank provides commercial bank guarantees and direct lending to facilitate export sector growth, although these services are underused.  NEXIM’s Foreign Input Facility provides normal commercial terms for the importation of machinery and raw materials used for generating exports. Repayment terms are typically up to seven years, including a moratorium period of up to two years depending on the loan amount and the project being finance.  Agencies created to promote industrial exports remain burdened by uneven management, vaguely-defined policy guidelines, and corruption.

The NIPC states that up to 120 percent of expenses on (R&D) are tax deductible, provided that such R&D activities are carried out in Nigeria and are connected with the business from which income or profits are derived. Also, for the purpose of R&D on local raw materials, 140 percent of expenses are allowed.  For cases in which the research is long-term, it will be regarded as a capital expenditure and will be written off against profit.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Nigerian Export Processing Zone Authority (NEPZA) allows duty-free import of all equipment and raw materials into its export processing zones.  Up to 100 percent of production in an export processing zone may be sold domestically based on valid permits and upon payment of applicable duties. Investors in the zones are exempt from foreign exchange regulations and taxes and may freely repatriate capital.  The Nigerian government also encourages private sector participation and partnership with state and local governments under the free trade zones (FTZ) program, resulting in the establishment of the Lekki FTZ (owned by Lagos state), and the Olokola FTZ (which straddles Ogun and Ondo states and is owned by those two states, the federal government, and private oil companies).  Workers in FTZs may unionize, but may not strike for an initial ten-year period.

Nigeria ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and the Agreement entered into force in February 2017.  Nigeria already implements items in Category A under the TFA and has identified, but not yet implemented, its Category B and C commitments.  In August 2016, Nigeria requested additional technical assistance to implement and enforce its Category C commitments.  (See https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm   )

Performance and Data Localization Requirements

Foreign investors must register with the NIPC, incorporate as a limited liability company (private or public) with the Corporate Affairs Commission, procure appropriate business permits, and register with the Securities and Exchange Commission (when applicable) to conduct business in Nigeria.  Manufacturing companies sometimes must meet local content requirements. Long-term expatriate personnel do not require work permits, but they remain subject to needs quotas requiring them to obtain residence permits that allow salary remittances abroad. Expatriates looking to work in Nigeria on a short-term basis can either request a temporary work permit, which is usually granted for a two-month time period but can be extended up to six months, or a business visa, if only traveling to Nigeria for the purpose of meetings, conferences, seminars, trainings, or other brief business activities.  Authorities permit larger quotas for professions deemed in short supply, such as deep-water oil-field divers. U.S. companies often report problems in obtaining quota permits. The Nigerian government’s Immigration Regulations 2017 introduced additional means by which foreigners can obtain residence in Nigeria. Foreign nationals who have imported an annual minimum threshold of capital over a certain period of time may be issued a permanent residence permit, as long as the investment is not withdrawn. The Nigerian Oil and Gas Content Development Act, 2010 (NOGCDA) restricts the number of expatriate managers to 5 percent of the total number of personnel for companies in the oil and gas sector.

Technology Transfer Requirements

The National Office of Industrial Property Act of 1979 established the National Office for Technology Acquisition and Promotion (NOTAP).  NOTAP’s main objective is to regulate the international acquisition of technology while creating an environment conducive to local technology.  To this end, NOTAP recommends local technical partners to Nigerian users in a bid to reduce the level of imported technology, which currently accounts for over 90 percent of technology in use in Nigeria.  One of NOTAP’s major activities is the review of Technology Transfer Agreements (TTAs), a requirement for importing technology into Nigeria and for companies operating in Nigeria to access foreign currency.  NOTAP reviews three major aspects prior to approval of TTAs and subsequent issuance of a certificate:

  • Legal – ensuring that the clauses in the agreement are in accordance with Nigerian laws and legal frameworks within which NOTAP operates;
  • Economic – ensuring prices are fair for the technology offered; and
  • Technical – ensuring transfer of technical knowledge.

One of the chief complaints among American firms concerning the TTA is the length of the approval process which can take up to three months.  NOTAP took steps to automate the TTA approval process in order reduce the approval process to one month or less. However, total number of days for processing TTAs by NOTAP from the date of filing the application to the issuance of confirmation of reasonableness is still 60 business days. See https://notap.gov.ng/sites/default/files/stages_involved.pdf  .

The NOGCDA has technology-transfer requirements that may violate a company’s intellectual property rights.

Data Storage

The Guidelines for Nigerian Content Development in the ICT sector issued by the National Information Technology Development Agency (NITDA) on December 3, 2013, require ICT companies to host all consumer and subscriber data locally to ensure the security of government data and promote development of the ICT by mandating all government ministries, departments and agencies to source and procure software from only local and indigenous software development companies.  Enforcement of the guidelines is largely absent as the Nigerian government lacks capacity and resources to monitor digital data flows. Federal government data is hosted locally in data centers that meet international standards. In 2019 NITDA updated the 2013 Guidelines for Data Protection (https://nitda.gov.ng/wp-content/uploads/2019/01/Nigeria percent20Data percent20Protection percent20Regulation.pdf) and rolled out the regulatory framework for providers of public internet access services such that only registered, verified and vetted providers can provide public internet access service in Nigeria.

Customs

The Nigerian Customs Service (NCS) and the Nigerian Ports Authority (NPA) exercise exclusive jurisdiction over customs services and port operations.  Nigerian law allows importers to clear goods on their own, but most importers employ clearing and forwarding agents to minimize tariffs and lower landed costs.  Others ship their goods to ports in neighboring countries, primarily Benin, after which they transport overland and smuggle into the country. The Nigerian government implements a destination inspection scheme whereby all inspections occur upon arrival into Nigeria, rather than at the ports of origin.  In December 2013, the NCS regained the authority to conduct destination inspections, which had previously been contracted to private companies. NCS also introduced the Nigeria Integrated Customs Information System (NICIS) platform and an online system for filing customs documentation via a Pre-Arrival Assessment Report (PAAR) process but the NCS still carries out 100 percent cargo examinations and shipments take more than 20 days to clear through the process.

Shippers report that efforts to modernize and professionalize the NCS and the NPA have largely been unsuccessful – port congestion persists and clearance times are long.  The 2017 presidential directive for the Apapa Port, which handles over 40 percent of Nigeria’s legal trade, to run a 24-hour operation and achieve 48-hour cargo clearance is not effective.  The port is congested, inefficient and the proliferation of customs units incentivizes corruption from official and unofficial middle men who complicate and elongate the clearance process.  Freight forwarders usually resort to bribery of customs agents and port officials to avoid extended delays clearing imported goods through the NPA and NCS.  Other ports are not viable or efficient and are virtually idle. Smuggled goods routinely enter Nigeria’s seaports and cross its land borders.

Visa Requirements

Investors sometimes encounter difficulties acquiring entry visas and residency permits. Foreigners must obtain entry visas from Nigerian embassies or consulates abroad, seek expatriate position authorization from the NIPC, and request residency permits from the Nigerian Immigration Service.  In 2018, Nigeria instituted a visa-on-arrival system, which generally works relatively well, but still requires lengthy processing at an embassy or consulate abroad before an authorization is issued. Some U.S. businesses have reported being solicited for bribes in the visa-on-arrival program.  Visa on arrival is not valid for employment or residence. Investors report that the residency permit process is cumbersome and can take from two to 24 months and cost from USD 1,000 to USD 3,000 in facilitation fees. The Nigerian government announced a new visa rule in August 2011 to encourage foreign investment, under which legitimate investors can obtain multiple entry-visas at points of entry into Nigeria.  Obtaining a visa prior to traveling to Nigeria is strongly encouraged.

5. Protection of Property Rights

Real Property

The Nigerian government recognizes secured interests in property, such as mortgages.  The recording of security instruments and their enforcement remain subject to the same inefficiencies as those in the judicial system.  In the World Bank Doing Business 2019 Report, Nigeria ranked 184 out of the 190 countries surveyed for registering property, a decline of five points over its 2018 ranking.  In Lagos, property registration required an average of 12 procedures over 105 days at a cost of 11.1 percent of the property value while in Kano registering property averages 11 procedures over 47 days at a cost of 11.8 percent of the property value.

Fee simple property rights remain rare.  Owners transfer most property through long-term leases, with certificates of occupancy acting as title deeds.  Property transfers are complex and must usually go through state governors’ offices, as state governments have jurisdiction over land ownership.  Authorities have often compelled owners to demolish buildings, including government buildings, commercial buildings, residences, and churches, even in the face of court injunctions. Therefore, acquiring and maintaining rights to real property can be problematic.

Clarity of title and registration of land ownership remain significant challenges throughout rural Nigeria, where many smallholder farmers have only ancestral or traditional use claims to their land.  Nigeria’s land reforms have attempted to address this barrier to development but with limited success.

Intellectual Property Rights

Nigeria’s legal and institutional infrastructure for protecting intellectual property rights (IPR) is in need of further development and funding.  Even though there are laws for enforcing most IPR, the legislation is deficient with respect to online piracy, geographical indications, and plant and animal breeders’ rights.  A bill to establish the Industrial Property Commission to oversee the registration of trade marks, patents, designs, plant varieties, animal breeders and farmers’ rights, as well as supervise the new registries created under the Industrial Property Act, has been in the works since 2016.  No new IPR legislation has been enacted.

Copyright protection in Nigeria is governed by the Copyright Act of 1988, as amended in 1992 and 1999, which provides an adequate basis for enforcing copyright and combating piracy.  The Act is administered by the Nigerian Copyright Commission (NCC), a division of the Ministry of Justice. The International Anti-Counterfeiting Coalition (IACC) has long noted that the Copyright Act should be amended to provide stiffer penalties for violators.  Nigeria is a member of the World Intellectual Property Organization (WIPO) and in 2017 passed legislation to ratify the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty, both of which it signed in 1997. These treaties have becoming increasingly relevant since they address important digital communication and broadcast issues.  The 2016 Draft Copyright Bill was revised to bring it into compliance with these two treaties and was sent to the National Assembly in December 2017.

Local content guidelines issued by the Ministry of Communication Technology (MCT) in 2013 and titled the Guidelines for Nigerian Content Development in Information and Communications Technology have raised IPR concerns about the future ability of the Nigerian government to protect data and trade secrets since the localization processes require the disclosure of source code and other sensitive design elements as a condition of doing business.  The IT industry in Nigeria has pushed back strongly against several of the measures in those guidelines, which remain in effect but have not been fully enforced. While the National Information Technology Development Agency (NITDA) does not currently require in-country product manufacturing due to the difficult business environment in Nigeria, it has noted that it would continue to press for local information and communications technology (ICT) capacity building programs.

Violations of Nigerian IPR laws continue to be widespread due in large part to a culture of inadequate enforcement.  That culture stems from several factors, including insufficient resources among enforcement agencies, lack of political will and focus on IPR, porous borders, entrenched trafficking systems that make enforcement difficult (and sometimes dangerous), and corruption.  The NCC, which has primary responsibility for copyright enforcement, is widely viewed as understaffed and underfunded relative to the magnitude of the IPR challenge in Nigeria. Nevertheless, the NCC continues to carry out enforcement actions on a regular basis. According to its report for 2018, the NCC conducted five anti-piracy operations and seized 288 copyrighted works, including DVDs, books, MP3s, and software.  Anti-piracy operations in 2018 led to seven arrests.

The Nigeria Customs Service (NCS) has general authority to seize and destroy contraband.  Under current law, copyrighted works require a notice issued by the rights owner to Customs to treat such works as infringing, but implementing procedures have not been developed and this procedure is handled on a case-by-case basis between the NCS and the NCC.  Once seizures are made, the NCS invites the NCC to inspect and subsequently take control of the fake goods for further investigation since the NCC has the statutory responsibility to investigate and prosecute copyright violations. The NCC is responsible for the cost of moving and storing infringing goods.  If, after investigations, any persons are identified as associated with the infringing materials, a decision may be taken to prosecute. When no person is identified, the NCC may obtain an order of court to destroy such works. The NCC works in cooperation with rights owners’ associations and stakeholders in the copyright industries on such matters.

Many U.S. government agencies, including the Department of Justice, the U.S. Patent and Trademark Office, the U.S. Copyright Office, the Department of Homeland Security, the Internal Revenue Service, and others have recently led or participated in IPR capacity building efforts that have included participants from Nigeria’s Economic and Financial Crimes Commission, the Nigerian Customs Service, the Nigerian Police, the Nigerian Copyright Commission, the Nigerian Trademarks, Patents, and Designs Registry, the Standards Organization of Nigeria, and the National Agency For Food and Drug Administration and Control.

Nigeria was not included in the United States Trade Representative (USTR) 2019 Special 301 Report or the 2018 Notorious Markets List.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

6. Financial Sector

Capital Markets and Portfolio Investment

The NIPC Act of 1995 liberalized Nigeria’s foreign investment regime, which has facilitated access to credit from domestic financial institutions.  Foreign investors who have incorporated their companies in Nigeria have equal access to all financial instruments. Some investors consider the capital market, specifically the Nigerian Stock Exchange (NSE), a financing option, given commercial banks’ high interest rates and the short maturities of local debt instruments.

After a strong performance in 2017, the NSE experienced significant contractions and decline in 2018, losing nearly 20 percent on its all-share index year-on-year.  The stark reverse in performance was mostly attributed to government regulatory uncertainty and the 2019 presidential elections. As of December 2018, the NSE had 169 listed companies and a total market capitalization of USD 32.5 billion, a 13.9 percent decrease from 2017.  The Nigerian government has considered requiring companies in certain sectors such as telecoms, oil and gas or over a certain size to list on the NSE, as a means to encourage greater corporate participation and sectoral balance in the NSE, but those proposals have not been enacted to date.

The government employs debt instruments, issuing bonds of various maturities ranging from two to 20 years.  Nigeria has issued bonds to restructure the government’s domestic debt portfolio from short-term to medium- and long-term instruments.  Some state governments have issued bonds to finance development projects, while some domestic banks have used the bond market to raise additional capital.  The Nigerian Securities and Exchange Commission (NSEC) has issued stringent guidelines for states wishing to raise funds on capital markets, such as requiring credit assessments conducted by recognized credit rating agencies.

Money and Banking System

The Central Bank of Nigeria (CBN) currently licenses 21 deposit-taking commercial banks in Nigeria.  Following a 2009 banking crisis, CBN officials intervened in eight of 24 commercial banks (roughly one-third of the system by assets) due to insolvency or serious undercapitalization and established the government-owned Asset Management Company of Nigeria (AMCON) to address bank balance sheet disequilibria via discounted purchases of non-performing loans.  The Nigerian banking sector emerged stronger from the crisis thanks to AMCON and a number of other reforms undertaken by the CBN, including the adoption of uniform year-end IFRS financial reporting to increase transparency, a stronger emphasis on risk management and corporate governance, and the nationalization of three distressed banks. In 2013 the CBN introduced a stricter supervision framework for the country’s top eight banks, identified as “Systemically Important Banks” (SIBs) as they account for more than 70 percent of the industry’s total assets, loans and deposits, and their failure or collapse could disrupt the entire financial system and the country’s real economy.  These eight banks are: First Bank of Nigeria, United Bank for Africa, Zenith Bank, Access Bank, Ecobank Nigeria, Guaranty Trust Bank, Skye Bank, and Diamond Bank. Under the new supervision framework, the operations of SIBs are closely monitored with regulatory authorities conducting stress tests on the SIBs’ capital and liquidity adequacy. Moreover, SIBs are required to maintain a higher minimum capital adequacy ratio of 15 percent. In September 2018, the CBN revoked the operating license of Skye Bank Plc, due to the deterioration of its share capital and its board’s failure to recapitalize the bank. The CBN reported that total non-performing loans (NPLs) grew by 14.8 per cent in 2017 while they dropped to 14.2 percent of outstanding loans at the end of 2018.  Nigerian government and private sector analysts assess that the volume of non-performing loans may be higher than these figures, owing in part to banks not reporting non-performing insider loans made to banks’ owners and directors.

The CBN supports non-interest banking.  Several banks have established Islamic banking operations in Nigeria including Jaiz Bank International Plc, Nigeria’s first full-fledged Non-Interest Bank which commenced operations in 2012.  There are five licensed merchant banks – Altitude Microfinance Bank Limited, Coronation Merchant Bank Limited, FBN Merchant Bank, FSDH Merchant Bank Ltd and Rand Merchant Bank Nigeria Limited.

The CBN has issued regulations for foreign banks regarding mergers with or acquisitions of existing local banks in the country.  Foreign institutions’ aggregate investment must not be more than 10 percent of the latter’s total capital.

Foreign Exchange and Remittances

Foreign Exchange Policies

Foreign currency for most transactions is procured through local banks in the inter-bank market.  Low value foreign exchange may also be procured at a premium from foreign exchange bureaus, called Bureaus De Change.  Nigerian, American, and other foreign businesses have frequently expressed strong concern about the CBN’s foreign exchange restrictions, which they report prevent them from importing needed equipment and goods and from repatriating naira earnings.  Foreign exchange demand remains high because of the dependence on foreign inputs for manufacturing and refined petroleum products.

In 2015 the CBN published a list of 41 product categories which could no longer be imported using official foreign exchange channels; the number of categories has since been increased to 43.  Affected businesses (American and Nigerian) have complained publicly and privately that the policy in effect bans the import of some 700 individual items and severely hampers their ability to source inputs and raw materials.  While the CBN has often referred to the list as temporary, the restriction remains in place, with an additional item added in 2018, bringing the number to 43. In February 2019, the Governor of the Central Bank commented that the Bank is currently considering adding more items to the list and bringing the number as high as 50 items.

https://www.cbn.gov.ng/out/2015/ted/ted.fem.fpc.gen.01.011.pdf 

In 2017, the CBN began providing more foreign exchange to the interbank market via wholesale and retail forward contract auctions, in order to meet some of the demand that had been forced to the parallel market.  These actions satisfied some of the pent-up demand for dollars in the economy and resulted in a strengthening of the naira at the parallel market from a low of 520 naira to the dollar in January 2017 to around 390 naira to the dollar in April 2017.  The CBN also established an “investors and exporters” window in 2017 which allows trades through that window to occur at around 360 naira to the dollar. This, combined with increased oil revenue, has boosted CBN reserves and helped stabilize the foreign exchange market.  Most trade happens at the investors and exporters window, which provides the value of the naira quoted by financial markets globally, while the CBN continues to peg the official interbank rate at 305 naira to the dollar for government transactions. The CBN also maintains separate window for “invisibles” such as education and medical expenses abroad, and a retail window which subsidizes imports of petroleum products, raw materials, agricultural equipment and the aviation sector.

Remittance Policies

The NIPC guarantees investors unrestricted transfer of dividends abroad (net a 10 percent withholding tax).  Companies must provide evidence of income earned and taxes paid before repatriating dividends from Nigeria. Money transfers usually take no more than 48 hours.  In 2015, the CBN implemented restrictions on foreign exchange remittances. All such transfers must occur through banks. Such remittances may take several weeks depending on the size of the transfer and the availability of foreign exchange at the remitting bank.  Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7  ).

Sovereign Wealth Funds

The Nigeria Sovereign Investment Authority (NSIA) is the manager of Nigeria’s sovereign wealth fund.  It was created by the Nigeria Sovereign Investment Authority Act in 2011 and began operation the following year with seed capital of USD 1 billion.  Its most recent annual report (calendar year 2017) reported total assets of nearly USD 533.88 million, an almost 27 percent increase over 2016. It was created to receive, manage, and grow a diversified portfolio that will eventually replace government revenue currently drawn from non-renewable resources, primarily hydrocarbons.

The NSIA is a public agency that subscribes to the Santiago Principles which are a set of 24 guidelines that assign “best practices” for the operations of Sovereign Wealth Funds globally. The NSIA invests through three funds:  the Future Generations Fund for diversified portfolio of long term growth, the Nigeria Infrastructure Fund for domestic infrastructure development, and the Stabilization Fund to act as a buffer against short-term economic instability.  NSIA does not take an active role in management of companies. The Embassy has not received any report or indication that the activities of the NSIA limit private competition.

7. State-Owned Enterprises

The Nigerian government does not have an established practice that is consistent with the OECD guidelines on Corporate Governance for State-Owned Enterprises (SOEs), but SOEs do have enabling legislation that governs their ownership.  To legalize the existence of SOEs, provisions have been made in the Nigerian constitution under socio-economic development in section 16 (1) of the 1979 and 1999 constitutions respectively. The government has privatized many former SOEs to encourage more efficient operations, such as the state-owned telecommunications company, Nigerian Telecommunications (NITEL) and its mobile subsidiary Mobile Telecommunications, (MTEL) in 2014.

Nigeria does not operate a centralized ownership system for its SOEs.  The enabling legislation for each SOE stipulates its ownership and governance structure.  The Boards of Directors are usually appointed by the President on the recommendation of the relevant Minister.  The Boards operate and are appointed in line with the enabling legislation which usually stipulates the criteria for appointing Board members.  Directors are appointed by the Board within the relevant sector. In a few cases, however, some Board appointments have been viewed as a reward to political affiliates.

In the case of Nigeria’s most prominent SOE, the Nigerian National Petroleum Corporation (NNPC), Board appointments are made by the presidency but the day-to-day running of business is overseen by the Group Managing Director (GMD).  The GMD reports to the Minister of Petroleum and although in the current administration the President has retained that ministerial role for himself, the appointed Minister of State for Petroleum acts as the de facto Minister of Petroleum in the President’s stead.  Nigeria’s National Assembly passed a Petroleum Industry Governance Bill in March 2018 but the President sent it back to the National Assembly, requesting amendments to the bill. The bill would clarify regulatory, policy, and operational roles in the petroleum sector and pave the way for partial privatization of NNPC.

Responsible for exploration, refining, petrochemicals, products transportation, and marketing, the NNPC is Nigeria’s biggest and arguably most important state-owned enterprise.  It owns and operates Nigeria’s four refineries (one each in Warri and Kaduna and two in Port Harcourt), all of which operate far below their original installed capacity. Nigeria’s tax agency receives taxes on petroleum profits and other hydrocarbon-related levies, while the Department of Petroleum Resources collects rents, royalties, license fees, bonuses, and other payments.  In an effort to provide greater transparency in the collection of revenues that accrue to the government, the Buhari administration requires these revenues, including some from the NNPC, to be deposited in the Treasury Single Account.

Another key SOE is the Transmission Company of Nigeria (TCN), responsible for the operation of Nigeria’s national electrical grid.  Private power generation and distribution companies have accused the TCN grid of significant inefficiency and inadequate technology which greatly hinder the nation’s electricity output and supply.  The TCN emerged from the defunct National Electric Power Authority (NEPA) as an incorporated entity in November 2005. It was the only major component of Nigeria’s electric power sector not to have been privatized in 2013.

Privatization Program

The Privatization and Commercialization Act of 1999 established the National Council on Privatization, the policy-making body overseeing the privatization of state-owned enterprises (SOEs), and the Bureau of Public Enterprises (BPE), the implementing agency for designated privatizations.  The BPE has focused on the privatization of key sectors, including telecommunications and power, and calls for core investors to acquire controlling shares in formerly state-owned enterprises.

Since 1999, the BPE has privatized and concessioned more than 140 enterprises, including an aluminum complex, a steel complex, cement manufacturing firms, hotels, a petrochemical plant, aviation cargo handling companies, vehicle assembly plants, and electricity generation and distribution companies.  The electricity transmission company remains state-owned. Foreign investors can and do participate in BPE’s privatization process. The BPE also retains partial ownership in some of the privatized companies. (It holds a 40 percent stake in the power distribution companies, for instance.)

The National Assembly has questioned the propriety of some of these privatizations, with one ongoing case related to an aluminum complex privatization the subject of a Supreme Court ruling on ownership.  In addition, the failure of the 2013 power sector privatization to restore financial viability to the sector has raised criticism of the privatized power generation and distribution companies. Nevertheless, the government’s long-delayed sale in December 2014 of the state-owned NITEL and MTEL shows a continued commitment to the privatization model.

8. Responsible Business Conduct

There is no specific Responsible Business Conduct (RBC) law in Nigeria.  Several legislative acts incorporate within their provisions certain expectations that directly or indirectly regulate the observance or practice of Corporate Social Responsibility.  In order to reinforce responsible behavior, various laws have been put in place for the protection of the environment. These laws stipulate criminal sanctions for non-compliance. There are also regulating agencies which exist to protect the rights of consumers.  While the Nigerian government has no specific action plan regarding OECD RBC guidelines, most government procurements are done transparently and in line with the Public Procurement Act which stipulates advertisement and a transparent bidding process.

Nigeria participates in the Extractive Industries Transparency Initiative (EITI) and is an EITI compliant country.  Specifically, in February 2019 the EITI Board determined that Nigeria had made satisfactory progress overall with implementing the EITI Standard after having fully addressed the corrective actions from the country’s first Validation in 2017.  The next EITI Validation study of Nigeria will occur in 2022.

The Department of Petroleum Resources (DPR), an arm of the Ministry of Petroleum Resources, also ensures comprehensive standards and guidelines to direct the execution of projects with proper consideration for the environment.  The DPR Environmental Guidelines and Standards (EGAS) of 1991 for the petroleum industry is a comprehensive working document with serious consideration for the preservation and protection of the Niger Delta.

The Nigerian government provides oversight of competition, consumer rights, and environmental protection issues.  The Federal Competition and Consumer Protection Commission (FCCPC), the National Agency for Food and Drug Administration and Control, the Standards Organization of Nigeria, and other entities have the authority to impose fines and ensure the destruction of harmful substances which otherwise may have sold to the general public.  The main regulators and enforcers of corporate governance are the Securities and Exchange Commission (SEC) and the Corporate Affairs Commission (which register all incorporated companies). Nigeria has adopted multiple reforms on corporate governance. Environmental pollution by multinational oil companies has resulted in fines being imposed locally while some cases have been pursued in foreign jurisdictions resulting in judgments being granted in favor of the oil producing communities.

The Companies Allied Matter Act 1990 (CAMA) and the Investment Securities Act provide basic guidelines on company listing.  More detailed regulations are covered in the Nigeria Stock Exchange Listing rules. Publicly listed companies are expected to disclose indicate their level of compliance with the Code of Corporate Governance in their Annual Financial Reports.

9. Corruption

Government Procurement

Foreign companies, whether incorporated in Nigeria or not, may bid on government projects and generally receive national treatment in government procurement, but may also be subject to a local content vehicle (e.g., partnership with a local partner firm or the inclusion of one in a consortium) or other prerequisites which are likely to vary from tender to tender.  Corruption and lack of transparency in tender processes has been a far greater concern to U.S. companies than discriminatory policies based on foreign status. Government tenders are published in local newspapers, a “tenders” journal sold at local newspaper outlets, and on occasion in foreign journals and magazines. The Nigerian government has made modest progress on its pledge to conduct open and competitive bidding processes for government procurement with the introduction of the Nigeria Open Contracting Portal (NOCOPO) in 2017 under the Bureau of Public Procurement (BPP).

The Public Procurement Law of 2007 established the BPP as the successor agency to the Budget Monitoring and Price Intelligence Unit.  The BPP acts as a clearinghouse for government contracts and procurement and monitors the implementation of projects to ensure compliance with contract terms and budgetary restrictions.  Procurements above 100 million naira (about USD 277,550) reportedly undergo full “due process,” but government agencies routinely flaunt public procurement requirements. Some of the 36 states of the federation have also passed public procurement legislation.

The reforms have also improved transparency in procurement by the state-owned Nigerian National Petroleum Company (NNPC).  Although U.S. companies have won contracts in a number of sectors, difficulties in receiving payment are not uncommon and can deter firms from bidding.  Supplier or foreign government subsidized financing arrangements appear in some cases to be a crucial factor in the award of government procurements. Nigeria is not a signatory to the WTO Agreement on Government Procurement.

In July 2016, Nigeria announced its participation in the Open Government Partnership (OGP), a potentially significant step forward on public financial management and fiscal transparency.  In December 2016, the Ministry of Justice presented Nigeria’s National Action Plan (NAP) for the OGP.  Implementation of its 14 commitments has been slow, but some progress has been made, particularly on the issues such as tax transparency, ease of doing business, and asset recovery. The NAP, which runs through 2019, covers five major themes: ensuring citizens’ participation in the budget cycle, implementation of open contracting and the adoption of open contracting data standards, increasing transparency in the extractive sectors, adopting common reporting standards like the Addis Tax initiative, and improving the ease of doing business.  Full implementation of the NAP would be a significant step forward for Nigeria’s fiscal transparency, although Nigeria has not fully completed any commitment to date.

Businesses report that bribery of customs and port officials remains common, and often necessary to avoid extended delays in the port clearance process, and that smuggled goods routinely enter Nigeria’s seaports and cross its land borders.

Domestic and foreign observers identify corruption as a serious obstacle to economic growth and poverty reduction.  Nigeria scored 27 out of 100 in Transparency International’s 2018 Corruption Perception Index (CPI), placing it in the 144th position out of the 180 countries ranked, a one-point decline from its 2016 score of 28 and a stagnant score from 2017.  The Economic and Financial Crimes Commission (EFCC) Establishment Act of 2004 established the EFCC to prosecute individuals involved in financial crimes and other acts of economic “sabotage.” Traditionally, the EFCC has encountered the most success in prosecuting low-level internet scam operators.  A relative few high-profile convictions have taken place, such as a former governor of Adamawa state, a former governor of Bayelsa State, a former Inspector General of Police, and a former Chair of the Board of the Nigerian Port Authority. However, in the case of the convicted governor of Bayelsa State, the President of Nigeria pardoned him in March 2013.  The case of the former governor of Adamawa, who was convicted in 2017, is under appeal and he is currently free on bail.

Since taking office in 2015, President Buhari has focused on implementing a campaign pledge to address corruption, though his critics contend his anti-corruption efforts often target political rivals.  Since then, the EFCC arrested a former National Security Advisor (NSA), a former Minister of State for Finance, a former NSA Director of Finance and Administration and others on charges related to diversion of funds intended for government arms procurement.

The Corrupt Practices and Other Related Offences Act of 2001 established an Independent Corrupt Practices and Other Related Offences Commission (ICPC) to prosecute individuals, government officials, and businesses for corruption.  The Act punishes over 19 offenses, including accepting or giving bribes, fraudulent acquisition of property, and concealment of fraud. Nigerian law stipulates that giving and receiving bribes constitute criminal offences and, as such, are not tax deductible.  Since its inauguration, the ICPC has secured convictions in 71 cases (through 2015, latest data available) with nearly 300 cases still open and pending as of July 2018. In April 2014, a presidential committee set up to review Nigeria’s ministries, departments, and agencies (MDAs) recommended that the EFCC, the ICPC, and the Code of Conduct Bureau (CCB) be merged into one organization.  The federal government, however, rejected this proposal to consolidate the work of these three anti-graft agencies.

Nigeria gained admittance into the Egmont Group of Financial Intelligence Units (FIUs) in May 2007.  In September 2018, the Egmont Group lifted its suspension of Nigeria’s membership, put in place in July 2017 due to concerns about the Nigeria FIU’s operational autonomy and ability to protect classified information.  The suspension was lifted due to the Nigerian government’s efforts to address the concerns, through the passage of the Nigerian Financial Intelligence Agency Act in July 2018.

The Paris-based Financial Action Task Force (FATF) removed Nigeria from its list of Non-Cooperative Countries and Territories in June 2006.  In October 2013, the FATF decided that Nigeria had substantially addressed the technical requirements of its FATF Action Plan and agreed to remove Nigeria from its monitoring process conducted by FATF’s International Cooperation Review Group (ICRG).  Nigeria, as a member of the Inter-governmental Action Group Against Money Laundering in West Africa (GIABA), is an associated member of FATF.

The Nigeria Extractive Industries Transparency Initiative (NEITI) Act of 2007 provided for the establishment of the NEITI organization, charged with developing a framework for transparency and accountability in the reporting and disclosure by all extractive industry companies of revenue due to or paid to the Nigerian government.  NEITI serves as a member of the international Extractive Industries Transparency Initiative (EITI), which provides a global standard for revenue transparency for extractive industries like oil and gas and mining. Nigeria is party to the United Nations Convention Against Corruption. Nigeria is not a member of the OECD and not party to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Economic and Financial Crimes Commission

Headquarters:  No. 5, Fomella Street, Off Adetokunbo Ademola Crescent, Wuse II, Abuja, Nigeria. Branch offices in Ikoyi, Lagos State; Port Harcourt, Rivers State; Independence Layout, Enugu State; Kano, Kano State; Gombe, Gombe State.

Hotline: +234 9 9044752 or +234 9 9044753

Independent Corrupt Practices and Other Related Offences Commission:

Abuja Office – Headquarters
Plot 802 Constitution Avenue, Central District, PMB 535, Garki Abuja
Phone/Fax: 234 9 523 8810
Email: info@icpc.gov.ng

10. Political and Security Environment

Political, religious, and ethnic violence continue to affect Nigeria.  The Islamist group Jama’atu Ahl as-Sunnah li-Da’awati wal-Jihad, popularly known as Boko Haram, and the Islamic State in West Africa (ISIS-WA) have waged a violent campaign to destabilize the Nigerian government, killing tens of thousands of people, forcing over two million to flee to other areas of Nigeria or into neighboring countries, and leaving more than seven million people in need of humanitarian assistance in the country’s northeast.  Boko Haram has targeted markets, churches, mosques, government installations, educational institutions, and leisure sites with improvised explosive devices (IEDs) and suicide vehicle-borne IEDS across nine Northern states and in Abuja. In 2017, Boko Haram employed hundreds of suicide bombings against the local population. Women and children carried out many of the attacks. There were multiple reports of Boko Haram killing entire villages suspected of cooperating with the government.  ISIS-WA targeted civilians with attacks or kidnappings less frequently than Boko Haram. ISIS-WA employed targeted acts of violence and intimidation against civilians in order to expand its area of influence and gain control over critical economic resources. As part of a violent and deliberate campaign, ISIS-WA also targeted government figures, traditional leaders, and contractors.

President Buhari has focused on matters of insecurity in Nigeria and in neighboring countries.   While the two insurgencies maintain the ability to stage forces in rural areas and launch attacks against civilian and military targets across the Northeast, Nigeria is also facing increased rural violence in the Middle Belt.

Due to challenging security dynamics in the North, the U.S. Diplomatic Mission to Nigeria has significantly limited official travel north of Abuja.  Such trips occur only with security measures designed to mitigate the threats of car-bomb attacks and abductions.

Decades of neglect, persistent poverty, and environmental damage caused by oil spills have left Nigeria’s oil rich Niger Delta region vulnerable to renewed violence.  Though each oil-producing state receives a 13 percent derivation of the oil revenue produced within its borders, and several government agencies, including the Niger Delta Development Corporation (NDDC) and the Ministry of Niger Delta Affairs, are tasked with implementing development projects, bureaucratic mismanagement and corruption have prevented these investments from yielding meaningful economic and social development in the region.  Niger Delta militants have demonstrated their ability to attack and severely damage oil instillations at will as seen when they cut Nigeria’s production by more than half in 2016.  Attacks on oil installations have since decreased due to a revamped amnesty program and continuous high-level engagement with the region.

Other security challenges facing Nigeria include increasing rural violence caused by criminal actors and by conflicts between migratory pastoralists and farmers, and thousands of refugees fleeing to Nigeria from Cameroon’s English-speaking region due to tensions there.

11. Labor Policies and Practices

Nigeria’s skilled labor pool has declined over the past decade due to inadequate educational systems, limited employment opportunities, and the migration of educated Nigerians to other countries, including the United Kingdom, the United States, and South Africa.  The low employment capacity of Nigeria’s formal sector means that almost three-quarters of all Nigerians work in the informal and agricultural sectors or are unemployed. Companies involved in formal sector businesses such as banking and insurance possess an adequately skilled workforce.  Manufacturing and construction sector workers often require on-the-job training. The result is that while individual wages are low, individual productivity is also low which means overall labor costs can be high. The Buhari Administration is pushing reforms in the education sector to improve the supply of skilled workers, but this and other efforts run by state governors are in their initial stages.

Labor organizations in Nigeria remain politically active and are prone to call for strikes on a regular basis against the national and state governments.  While most labor actions are peaceful, difficult economic conditions fuel the risk that these actions could become violent.

The Right of Association

Nigeria’s constitution guarantees the rights of free assembly and association, and protects workers’ rights to form or belong to trade unions.  Several statutory laws, nonetheless, restrict the rights of workers to associate or disassociate with labor organizations. Nigerian unions belong to one of three trade union federations:  the Nigeria Labor Congress (NLC), which tends to represent junior (i.e., blue collar) workers; the United Labor Congress of Nigeria (ULC), which represents a group of unions that separated from the NLC in 2015; and the Trade Union Congress of Nigeria (TUC) representing the “senior” (i.e., white collar) workers.  According to figures provided by the Ministry of Labor and Employment, total union membership stands at roughly 7 million. A majority of these union members work in the public sector, although unions exist across the private sector. The Trade Union Amendment Act of 2005 allowed non-management senior staff to join unions.

Collective Bargaining

Collective bargaining occurred throughout the public sector and the organized private sector in 2018.  However, public sector employees have become increasingly concerned about the Nigerian governments’ and state governments’ failure to honor previous agreements from the collective bargaining process.

Collective bargaining in the oil and gas industry is relatively efficient compared to other sectors. Issues pertaining to salaries, benefits, health and safety, and working conditions tend to be resolved quickly through negotiations.

Workers under collective bargaining agreements cannot participate in strikes unless their unions comply with the requirements of the law, which includes provisions for mandatory mediation and referral of disputes to the Nigerian government.  Despite these restrictions on staging strikes, unions occasionally conduct strikes in the private and public sectors without warning. Localized strikes occurred in the education, government, energy, power, and healthcare sectors in 2018. The law forbids employers from granting general wage increases to workers without prior government approval, but the law is not often enforced.  Major negotiations between the main labor unions and the federal government occurred in 2018 regarding the minimum wage and the unions’ demands for it to be raised from 18,000 naira (USD 50) per month to 30,000 naira (USD 83) per month. The National Assembly passed the 2019 Appropriations bill which included the newly agreed upon minimum wage in January 2019, though it has yet to be fully implemented. The minimum wage bill awaits the president’s assent although several state governments already announced their inability to pay.

The Nigerian Minister of Labor and Employment may refer unresolved disputes to the Industrial Arbitration Panel (IAP) and the National Industrial Court (NIC).  In 2015, the National Industrial Court launched an Alternative Dispute Resolution Center. Union officials question the effectiveness and independence of the NIC, believing it unable to resolve disputes stemming from Nigerian government failure to fulfill contract provisions for public sector employees.  Union leaders criticize the arbitration system’s dependence on the Minister of Labor and Employment’s referrals to the IAP.

Child Labor

Nigeria’s laws regarding minimum age for child labor and hazardous work are inconsistent. Article 59 of the Labor Act of 1974 sets the minimum age of employment at 12, and it is in force in all 36 states of Nigeria.  The Act also permits children of any age to do light work alongside a family member in agriculture, horticulture, or domestic service.

The Federal 2003 Child Rights Act (CRA) codifies the rights of children in Nigeria and must be ratified by each state to become law in its territory.  To date, 24 states and the Federal Capital Territory have ratified the CRA, with all 12 of the remaining states located in northern Nigeria.

The CRA states that the provisions related to young people in the Labor Act apply to children under the CRA, but also that the CRA supersedes any other legislation related to children.  The CRA restricts children under the age of 18 from any work aside from light work for family members; however, Article 59 of the Labor Act applies these restrictions only to children under the age of 12.  This language makes it unclear what minimum ages apply for certain types of work in the country.

While the Labor Act forbids the employment of youth under age 18 in work that is dangerous to their health, safety, or morals, it allows children to participate in certain types of work that may be dangerous by setting different age thresholds for various activities.  For example, the Labor Act allows children age 16 and older to work at night in gold mining and the manufacturing of iron, steel, paper, raw sugar, and glass. Furthermore, the Labor Act does not extend to children employed in domestic service. Thus, children are vulnerable to dangerous work in industrial undertakings, underground, with machines, and in domestic service.  In addition, the prohibitions established by the Labor Act and CRA are not comprehensive or specific enough to facilitate enforcement. In 2013, the National Steering Committee for the Elimination of the Worst Forms of Child Labor in Nigeria (NSC) validated the Report on the Identification of Hazardous Child Labor in Nigeria. The report has languished with the Ministry of Labor and Employment and still awaits the promulgation of guidelines for operationalizing the report.

The Nigerian government adopted the Trafficking in Persons (Prohibition), Enforcement, and Administration Act of 2015 on March 26, 2015.  While not specifically directed against child labor, many sections of the new law support anti-child labor efforts.   The Violence against Persons Prohibition Act was signed into law in on May 25, 2015 and again while not specifically focused on child labor, it covers related elements such as “depriving a person of his/her liberty,” “forced financial dependence/economic abuse,” and “forced isolation/separation from family and friends” and is applicable to minors.

Acceptable Conditions of Work

Nigeria’s Labor Act provides for a 40-hour work week, two to four weeks of annual leave, and overtime and holiday pay for all workers except agricultural and domestic workers.  No law prohibits compulsory overtime. The Act establishes general health and safety provisions, some of which specifically apply to young or female workers, and requires the Ministry of Labor and Employment to inspect factories for compliance with health and safety standards.  Under-funding and limited resources undermine the Ministry’s oversight capacity, and construction sites and other non-factory work sites are often ignored. Nigeria’s labor law requires employers to compensate injured workers and dependent survivors of workers killed in industrial accidents.

Draft legislation, such as a new Labor Standards Act which includes provisions on child labor, and an Occupational Safety and Health Act that would regulate hazardous work, have remained under consideration in the National Assembly since 2006.

Foreign Workers

Admission of foreign workers is overseen by the Federal Ministry of the Interior.  Employers must seek the consent of the Ministry in order to employ foreign workers by applying for an “expatriate quota.”  The quota allows a company to employ foreign nationals in specifically approved job designations as well as specifying the validity period of the designations provided on the quota.

There are two types of visas which may be granted, depending on the length of stay.  For short-term assignments, an employer must apply for and receive a temporary work permit, allowing the employee to carry out some specific tasks.  The temporary work permit is a single-entry visa, and expires after three months. There are no numerical limitations on short-term visas, and foreign nationals who meet the conditions for grant of a visa may apply for as many short-term visas as required.

For long-term assignments, the employer should apply for a “subject-to-regularization” visa (STR). To apply for an STR, an employer must apply for and obtain an expatriate quota.  The expatriate quota lists positions in the company that will be occupied by expatriate staff. Upon arrival in Nigeria, the employee will need to validate his or her visa by applying for a work and residence permit.

12. OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) offers all its credit and risk products to U.S. investors in Nigeria.  OPIC has a number of active projects in Nigeria, which primarily include power generation, finance (micro and SME), insurance, and education (including the American International School in Abuja).  Nigeria concluded an investment incentive agreement with OPIC in 1999.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($B USD) 2018 $355,000 2017 $375,750 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Partner Country ($M USD, stock positions) 2018 N/A 2016 $2,480 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm   
Host Country’s FDI in the United States ($M USD, stock positions) 2018 N/A 2016 $53 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm   
Total Inbound Stock of FDI as % host GDP 2018 N/A 2017 26.0% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* https://www.nigerianstat.gov.ng/   


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $78,322 100% No Data Available
Bermuda $13,639 17.4%
Netherlands $13,278 16.9%
France $8,847 11.3%
United Kingdom $7,995 10.2%
United States $7,471 9.5%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Data not available.

14. Contact for More Information

Trade and Investment Officer
Plot 1075 Diplomatic Drive
Abuja, Nigeria
Telephone: +234 9 461 4000
Email: EconNigeria@state.gov

Pakistan

Executive Summary

Despite a relatively open foreign investment regime, Pakistan remains a challenging environment for foreign investors.  An improving but unpredictable security situation, difficult business climate, lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement, and inconsistent taxation policies have contributed to lower Foreign Direct Investment (FDI), as compared to regional competitors.  Pakistan ranked 136 out of 190 countries in the World Bank’s Doing Business 2019 rankings, gaining 11 places from 2018.

The Pakistan Tehreek-e-Insaf (PTI) government elected in July 2018 pledged to improve Pakistan’s economy, restructure tax collection, enhance trade and investment, and eliminate corruption.  Since taking power, the PTI government has faced a rapidly expanding current account deficit and declining foreign reserves.  Due to the inherited balance of payments crisis, the PTI government has worked on immediate needs to acquire external financing rather than medium- to long-term structural reforms.  Progress has been slow on key structural reforms including broadening the tax base, reforming the tax authority, and privatizing state owned enterprises.  Current tax policies negatively affect large businesses, as the government relies heavily on them for meeting its tax collection targets.  The PTI government has not announced new policies to attract FDI yet, but is reportedly working on a five-year FDI strategy.  The strategy reportedly aims to gradually increase FDI to USD 7.4 billion by Fiscal Year (FY) 2022-23.

The United States has consistently been one of the largest sources of FDI in Pakistan and one of its most significant trading partners.  Two-way trade in goods between the United States and Pakistan exceeded USD 6.6 billion in 2018, a record for bilateral trade, and included a 4.3-percent increase in U.S. exports to Pakistan.  Agriculture remained the largest growth area for U.S. exports.  The Karachi-based American Business Council, an affiliate of the U.S. Chamber of Commerce, has 65 U.S. member companies, most of which are Fortune 500 companies operating in Pakistan across a range of industries.  The Lahore-based American Business Forum – which has 25 founding members and 18 associate members – also assists U.S. investors.  American companies have profitable investments across a range of sectors, notably, but not limited to, fast-moving consumer goods and financial services.  Other sectors attracting U.S. interest include franchising, information and communications technology (ICT), thermal and renewable energy, and healthcare services.

In 2003, the United States and Pakistan signed a Trade and Investment Framework Agreement (TIFA) to serve as a key forum for bilateral trade and investment discussion.  The TIFA seeks to address impediments to greater trade and investment flows and increase economic linkages between our respective business interests.  Themost recent TIFA meeting was held in October 2016 in Islamabad, led by United States Trade Representative Michael Froman.  The last TIFA intersessional, a working level meeting to review the decisions taken in TIFA, was in June 2017 in Washington.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 117 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 136 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 109 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $518 http://www.bea.gov/international/factsheet/
World Bank GNI per capita (USD) 2017 $1,580 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

In the past decade, Pakistan was unable to attract sufficient foreign investments to support desired growth objectives and remains a low priority country for foreign investors.  The previous government recognized Pakistan’s need for foreign investment and introduced an Investment Policy, in 2013, to attract foreign investment and also signed an economic co-operation agreement with China, the China Pakistan Economic Corridor (CPEC), in April 2015.  CPEC is focused mainly on infrastructure and energy production.  Given that several large CPEC energy projects went online in 2018, Pakistan’s government has been able to develop sufficient power generation capacity in the country, though deficiencies in the transmission and distribution network remain.

The previous government also introduced incentives, which remain in place under the current PTI government, through the Strategic Trade Policy Framework (STPF) and Export Enhancement Packages (EEP).  These incentives are largely industry-specific and include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services.  The current government is reportedly working on its own STPF, but has not announced a new policy.  Pakistan also designated special economic zones (SEZs), which the PTI government continues to develop, which offer a separate basket of incentives to potential investors.  None of the SEZs are fully operational, but they have attracted some investment and are available to any company, domestic or foreign.

Net inflows of FDI peaked at USD 5.4 billion in fiscal year FY2008.  [Note:  Pakistan’s fiscal year in runs from July 1 to June 30.  End Note.]  In FY2018, net FDI was USD 3.1 billion, approximately 14.8 percent higher than FY2017.  According to the State Bank of Pakistan (SBP), the largest share of FDI (USD 997 million) was in the power sector (largely due to Chinese FDI in CPEC projects), followed by USD 708 million in the construction sector, and USD 400 million in financial business.  Most analysts believe that the improved security environment, large energy projects under CPEC, and improvements in macroeconomic stability have played a key role in the improvement of FDI in FY2018.  China remained the single largest FDI contributor in Pakistan, contributing more than 58 percent of Pakistan’s total FDI in FY2018.  During the last five years, cumulative FDI inflows remained USD 10 billion, over 81 percent in non-manufacturing sectors.  Since the PTI government started in 2018, Pakistan has signed Memorandum of Understandings (MoUs) with Saudi Arabia, the United Arab Emirates, and Malaysia.  These MoUs agreed to bring investments of over USD 21 billion, largely in the areas of energy, agriculture and oil and gas exploration.

Notwithstanding the substantial increase in Chinese FDI, non-Chinese sources are limited.  Compared to the region, low FDI is attributed to Pakistan offering competitive returns in only a few sectors.  For example, multinational companies in the consumer goods sector have witnessed steady profits, while pharmaceuticals have been obstructed by opaque and restrictive government regulations.  Power companies have also experienced an uptick in business since CPEC, but mostly by conventional energy providers; renewable energy providers have encountered obstacles in the form of inconsistent and discouraging policies from regulators.  The current government is working on introducing new energy policy for the next 25 years.  It aims to have 20-30 percent share of all energy come from renewable energy by 2030, compared to the current share of 2-3 percent.  The ICT sector has risen steadily, albeit from a relatively low base.  Growth has come from companies engaged in outsourcing services and software development.

Pakistan has a low tax-to-gross domestic product (GDP) ratio of approximately 13 percent in FY2018, which slightly increased from FY2017.  [Note:  For comparison, OECD countries averaged 32-34 percent over the past decade.  End Note]  Pakistan relies heavily on multinational corporations for a significant portion of the tax collections.  Foreign investors in Pakistan regularly report that both federal and provincial tax regulations are difficult to navigate.  The World Bank’s Doing Business 2019 report notes that companies pay 47 different taxes, compared to an average of 24.8 in other South Asian countries.  On average, calculating these payments requires that business spend on average over 293 hours per year.  In addition, companies frequently lament the lack of transparency in the assessment of taxes.  Since 2013, the government has requested advance tax payments from companies, complicating businesses’ operations as the government intentionally delays tax refunds.

The Foreign Private Investment Promotion and Protection Act, 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection of foreign investors and investment in Pakistan.  All sectors and activities are open for foreign investment unless specifically prohibited or restricted for reasons of national security and public safety.  Specified restricted industries include arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.

The specialized investment promotion agency of Pakistan is the Board of Investment (BOI).  The BOI is responsible for the promotion of investment, facilitating local and foreign investors for implementation of their projects, and to enhance Pakistan’s international competitiveness.  They assist companies and investors who intend to invest in Pakistan and facilitate the implementation and operation of their projects.

Limits on Foreign Control and Right to Private Ownership and Establishment

The 2013 Investment Policy eliminated minimum initial capital investment requirements across sectors so that no minimum investment requirement or upper limit on the share of foreign equity is allowed, with the exception of the airline, banking, agriculture, and media sectors.  Foreign investors in the services sector may retain 100 percent equity – subject to obtaining permission, a no objection certificate, or license from the concerned agency, as well as fulfilling the requirements of respective sectoral policy.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agricultural sector, the threshold is 60 percent – with an exception for corporate agriculture farming, where 100 percent ownership is allowed.  There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a USD 100,000 limit on initial franchise investments and a cap on subsequent royalty payments of 5 percent of net sales for five years.  Royalties and technical payments are subject to a 15 percent income tax, and subject to remittance restrictions listed in Chapter 14, section 12 of the SBP Foreign Exchange Manual (http://www.sbp.org.pk/fe_manual/index.htm ).  The tourism, housing, construction, and information and communications technology sectors have been granted “industry status,” eligible for lower tax and utility rates compared to “commercial sector” enterprises, including banks and insurance companies.  Small-scale mining valued at less than PKR 300 million (roughly USD 2.6 million) is restricted to Pakistani investors.

With the exception of arms, ammunition, high explosives, radioactive substances, private security companies, currency, and consumable alcohol, foreign investors are allowed in all sectors.  There are no restrictions or mechanisms that specifically exclude U.S. investors.

Since signing the World Trade Organization (WTO) Financial Services Agreement in December 1997, Pakistan’s financial services commitments have improved.  Foreign banks can establish locally incorporated subsidiaries and branches, provided they have USD 5 billion or belong to one of the regional organizations or associations to which Pakistan is a member (e.g., Economic Cooperation Organization (ECO) or the South Asian Association for Regional Cooperation (SAARC)).  Absent these requirements, foreign banks are limited to a 49-percent maximum equity stake in locally incorporated subsidiaries.  Foreign and local banks must submit an annual branch expansion plan to the SBP for approval.  The SBP approves branch openings based on the bank’s net worth, adequacy of capital structure, future earnings prospects, credit discipline, and the needs of the local population.  All banks are required to open 20 percent of their new branches in small cities, towns, and villages.

The Foreign Private Investment Promotion and Protection Act stipulates that foreign investments will not be subject to higher income taxes than similar investments made by Pakistani citizens.  While Pakistan’s legal code and economic policy do not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.  Pakistani courts have not upheld some international arbitration awards.

Pakistan maintains investment screening mechanisms for inbound foreign investment.  The BOI is the lead organization for such screening.  Pakistan blocks foreign investments if the screening process determines the investment could negatively affect Pakistan’s national security.

Other Investment Policy Reviews

Pakistan has not undergone any third-party investment policy reviews in last three years.  The International Monetary Fund assessed the nation’s overall macro economy under Article-IV consultation in 2018; however, that review was not specific to investment policy.

Business Facilitation

Pakistan works with the World Bank to improve its overall ease of doing business standing.  The government has simplified pre-registration and registration facilities and automated land records to simplify property registrations.  To improve cross border trade, it has also improved electronic submissions and processing of trade documents.  Even so, Pakistan ranked 130 out of 190 countries in the World Bank Doing Business 2019 report’s “Starting a Business” category.  Pakistan is ranked 26 out of 190 for protecting minority investors.  Starting a business in Pakistan normally involves 10 procedures and takes at least 16.5 days.

The Securities and Exchange Commission of Pakistan (SECP) manages company registrations.  Both foreign and domestic companies begin the registration by providing a company name and paying the requisite registration fees to the SECP.  Companies then supply documentation on the proposed business, including information on corporate offices, location of company headquarters, and a copy of the company charter.  Companies must apply for national tax numbers with the Federal Board of Revenue (FBR) to facilitate payment of income and sales taxes.  Industrial or commercial establishments with five or more employees must register with Pakistan’s Federal Employees Old-Age Benefits Institution (EOBI) for social security purposes.  Depending on the location, registration with provincial governments may be required.

The SECP website (www.secp.gov.pk ) offers the Virtual One Stop Shop (OSS) where companies can register with the SECP, FBR, and EOBI simultaneously.  OSS is also available for foreign investors.

The government’s investment policy provides both domestic and foreign investors the same incentives, concessions, and facilities for industrial development.  Though some incentives are included in the federal budget, the government relies on Statutory Regulatory Orders (SROs) for industry specific taxes or incentives.  For example, an SRO issued in February 2019 imposed additional labeling requirements for imported goods, creating non-tariff barriers.

Outward Investment

Pakistan does not promote or incentivize outward investment.  Although the government does not explicitly prohibit Pakistanis from investing abroad, the process of approvals is so cumbersome it normally takes years, discouraging potential investors.

2. Bilateral Investment Agreements and Taxation Treaties

Though U.S.-Pakistan Bilateral Investment Treaty (BIT) negotiations began in 2004 and closed the text in 2012, the agreement has not been signed due to reservations from Pakistani stakeholders.  According to the BOI, Pakistan has signed BITs with 49 countries with only 27 entered into force.

Pakistan does not have a Free Trade Agreement (FTA) with United States.  However, both countries have Trade and Investment Framework Agreement (TIFA) in place.  Pakistan has trade agreements with China, Malaysia, Sri Lanka, Iran, Mauritius, and Indonesia.  It is also a signatory of the South Asian Free Trade Agreement (SAFTA) and the Afghanistan Pakistan Transit Trade Agreement (APTTA).  Pakistan is negotiating FTAs with Turkey and Thailand and re-negotiating its existing FTA with China.

A U.S.-Pakistan bilateral tax treaty was signed in 1959.  Pakistan has double taxation agreements with 63 other countries and a multilateral tax treaty between the SAARC countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) came into force in 2011.  The treaty provides additional provisions for the administration of taxes.  In 2018, Pakistan updated its tax treaty with Switzerland and has approached the United States government to request the same.

In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  The Convention will help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks.  Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package.

3. Legal Regime

Transparency of the Regulatory System

Since the 2010 introduction of the 18th amendment to Pakistan’s constitution, foreign companies must address provincial, and sometimes local, government laws in addition to national law.  Respective regulatory authorities conduct in-house post-implementation reviews for regulations in consultation with relevant stakeholders.  However, these assessments are not made publicly available.  Prior to implementation, non-government sectors and private sector associations can provide feedback to the government on different laws and policies, but authorities are not bound to collect nor implement their suggestions.  Many foreign businesses in Pakistan complain about the inconsistencies in laws and policies from different regulatory authorities.  Since the implementation of the 18th amendment, which devolved certain powers from the federal to provincial governments, inconsistencies have affected sales of U.S. companies, particularly in food and beverages; the two largest provinces, Punjab and Sindh, have different regulations for beverages.  However, there are no rules or regulations in place that discriminate specifically against U.S. investors.

The SECP is the main regulatory body for foreign companies in Pakistan.  However, the SECP is not the sole regulator.  Company financial transactions are regulated by SBP, labor by the Social Welfare or EOBI, and specialized functions are overseen by bodies such as the National Electric Power Regulatory Authority or Alternate Energy Development Board.  Each body is overseen by autonomous management but all are required to go through the Ministry of Law and Justice before submitting their policies and laws to parliament or, in some cases, the executive branch; parliament or the Prime Minister is the final authority for any operational or policy related legal changes.

The SECP is technically empowered to notify accounting standards to companies in Pakistan.  Pakistan has adopted most, though not all, International Financial Reporting Standards.  Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.

Most draft legislations are made available for public comment but there is no centralized body to collect public responses.  The relevant authority gathers public comments, if deemed necessary; otherwise legislation is directly submitted to the legislative branch.  For business and investment laws and regulations, the Ministry of Commerce collects feedback from local chambers and associations – such as the American Business Council and Overseas Investors Chamber of Commerce and Industry (OICCI).  Rather than publishing regulations online for public review, the Ministry relies on stakeholder discussion forums for comment.

The government publishes limited debt obligations in the budget document in two broad categories: capital receipts and public debt, which are published in the “Explanatory Memorandum on Federal Receipts.”  These documents are available at http://www.finance.gov.pk , http://www.fbr.gov.pk , and http://www.sbp.org.pk/edocata .  The government does not adequately disclose the terms of bilateral debt obligations, including financing on China-Pakistan Economic Corridor projects.

International Regulatory Considerations

Pakistan has bilateral trade agreements with China, Indonesia, Iran, Malaysia, Mauritius, and Sri Lanka, although most are limited to a few hundred tariff lines and do not cover all trade.  It is negotiating additional trade agreements with Turkey and Thailand.  Pakistan is a member of the South Asia Free Trade Area, SAARC, the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).

Pakistan has been a World Trade Organization (WTO) member since January 1, 1995, and provides most favored nation (MFN) treatment to all member states, except India and Israel.  Since 2012, the government has maintained a “negative” list of products that cannot be imported from India.  The list contains approximately 1,200 products.  Pakistan does not recognize the State of Israel and thus does not trade with Israel.

In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA).  Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement.  Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Most international norms and standards incorporated in Pakistan’s regulatory system are influenced by British laws.  Laws governing domestic or personal matters are strongly influenced by Islamic Sharia Law.  Of the two courts – superior (high) courts and the subordinate (lower) courts – the superior judiciary is composed of the Supreme Court, the Federal Sharia Court, and five High Courts (Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court), and decisions have national standing.  The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government.  A 2015 constitutional amendment allows military courts to try civilians for terrorism, sectarian violence, and other charges; parliament renewed this authority in January 2017 for an additional two years, which lapsed in March 2019.  The sitting PTI government favors an extension of these courts for another two years but opposition benches are not supportive.  For extension, parliament needs a two-thirds majority to pass the bill, which the PTI government lacks.  Additionally, the government also use special civilian terrorism courts to try a wide range of cases, not necessarily limited to terrorism, including any crimes involving violence and acts or speech deemed by the government to foment religious hatred, including blasphemy.  The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, smuggling, drug trafficking, terrorism, tax law, environmental law, consumer protection, insurance, and cases of corruption.  Pakistan’s judiciary is influenced by the government and other stakeholders.  The lower judiciary is influenced by the executive branch and seen as lacking competence and fairness.  It currently faces a significant backlog of unresolved cases.

Pakistan has a written contractual/commercial law with the Contract Act of 1872 as the main source for regulating Pakistani contracts.  English decisions, where relevant, are also cited in courts.

Laws and Regulations on Foreign Direct Investment

Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors of the economy, subject to obtaining relevant permissions.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed.  In the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.  A majority of foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP.

While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations.  If the chief executive is not a Pakistani national, she or he is required to obtain a multiple entry work visa.  Companies operating in Pakistan are statutorily required to retain full-time audit services and legal representation.  Companies must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, and other pertinent details to the SECP within 15 days of the change.

To address long process delays, in 2013, the SECP introduced the issuance of a provisional “Certificate of Incorporation” prior to the final issuance of a “No Objection Certificate” (NOC).  The Certificate includes a provision noting that company shares will be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fails to obtain a NOC.

Pakistan’s judicial system allows specialized tribunals as a means of alternative dispute resolution.  Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes.  However, due to an active but weak and inefficient judiciary, most foreign investors include contract provisions that provide for international arbitration to avoid protracted disputes.

Competition and Anti-Trust Laws

Established in 2007, the Competition Commission of Pakistan (CCP) ensures private and public sector organizations are not involved in any anti-competitive or monopolistic practices.  Complaints regarding anti-competition practices can be lodged with CCP, which conducts the investigation and is legally empowered to award penalties; complaints are reviewable by the CCP appellate tribunal in Islamabad and the Supreme Court of Pakistan.  The CCP appellate tribunal is required to issue decisions on any anti-competition practice within six months from the date in which it becomes aware of the practice.

Expropriation and Compensation

Two Acts, the Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976, protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests.  Pakistan does not have a strong history of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID).  Pakistan ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2005.

Investor-State Dispute Settlement

In 2008, the Pakistani government instituted a Rental Power Plant (RPP) plan to help alleviate the chronic power shortages throughout the country.  Walters Power International Limited was a participant in three RPP plants and brought the power generation equipment into Pakistan to service these plants.  Subsequently, in 2010, the Supreme Court of Pakistan nullified all RPP contracts due to widespread corruption in cash advances made to RPP operators.  Walters Power International Limited settled with the Pakistan National Accountability Bureau (NAB) and the Central Power Generation Company Limited by returning advance payments plus interest.  In mid-2012, NAB formally acknowledged that settlement with the Walters Power International Limited had been made, which under Pakistani law released Walters Power International Limited from any further liability, criminal or civil, and should have permitted re-export of equipment.

However, the Government of Pakistan has (a) refused to allow the plant be exported so that some salvage value could be obtained, and (b) prevented the plant to operate despite critical need for power in the country.  This plant was internationally advertised in a competitive bidding process and went through seven levels of regulatory approvals.  Despite repeated efforts by Walters Power International Limited, NAB has declined to instruct the appropriate parties to issue a Notice of Clearance to Pakistan Customs to allow the re-export of the equipment.  Walters Power International Limited alleges that the unreasonable delay in permitting re-export of equipment following settlement constitutes expropriation.  The case is still pending with NAB.

International Commercial Arbitration and Foreign Courts

Foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms.  Protracted arbitration cases are a major concern.  Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve.  To mitigate such risks, most foreign investors include contract provisions that provide for international arbitration.

Pakistan is not a signatory of any treaty or investment agreement in which binding international arbitration of investment disputes is required.  With the exception of arbitration, there is no alternative dispute resolution (ADR) mechanism available as a means for settling disputes between two private parties.

Bankruptcy Regulations

Pakistan was ranked 53 of 190 for ease of “resolving insolvency” rankings in the World Bank’s Doing Business 2019 report.  On average, Pakistan requires 2.6 years to resolve insolvency issues and has a recovery rate of 44.5 percent.

Pakistan does not have a single, comprehensive bankruptcy law.  Foreclosures are governed under the Companies Act 2017 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions.  Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.

The Companies Act 2017 regulates mergers and acquisitions.  Mergers are allowed between international companies, as well as between international and local companies.  In 2012, the government enacted legislation for friendly and hostile takeovers.  The law requires companies to disclose any concentration of share ownership over 25 percent.  There are no laws or regulations authorizing private firms to adopt articles of incorporation discriminating against foreign investment.

Pakistan has no dedicated credit monitoring authority.  However, SBP has authority to monitor and investigate the quality of the credit commercial banks extend.

4. Industrial Policies

Investment Incentives

Pakistan currently does not provide any formal investment incentives such as grants, tax credits or deferrals, access to subsidized loans, or reduced cost of land to individual foreign investors.  The 2013 investment policy revolves around business facilitation and not direct incentives.  However, in 2016, the government reduced or eliminated custom duties on the imports of equipment and machinery and introduced temporary tariff concessions for the automobile manufacturing sector.  The government does not offer research and development incentives.  Nonetheless, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives.

In general, the government does not issue guarantees or jointly finance foreign direct investment projects.  However, the government made an exception for CPEC related projects; the Government of Pakistan provided sovereign guarantees for the investment and returns, and provided joint financing for specific projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Providing unique fiscal and institutional incentives exclusively for export-oriented industries, the government established the first Export Processing Zone (EPZ) in Karachi in 1989.  Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, RekoDek, and Duddar; today, only Karachi, Risalpur, Sialkot, and Saindak remain operational.  EPZs offer investors tax and duty exemptions on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window,” which facilitates import and export authorizations.  The 2012 Special Economic Zones Act allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs.  Despite offering substantial financial, investor service, and infrastructure benefits to reduce the cost of doing business, Pakistan’s SEZs have struggled to attract investment due to lack of basic infrastructure.

Pakistan intends to establish nine SEZs under China Pakistan Economic Corridor (CPEC).  The government plans to inaugurate the first one in Rashakai, Khyber Pakhtunkhwa, in June 2019.  Most CPEC SEZs remain in nascent stages of development.

Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOU) – a stand-alone industrial entity exporting 100 percent of its production.  Export-Oriented Units incentives include duty and tax exemptions for imported machinery and raw materials, as well as the duty-free import of vehicles.  Export-Oriented Units are allowed to operate anywhere in the country.  Pakistan provides the same investment opportunities to foreign investors and local investors.

Performance and Data Localization Requirements

Foreign business officials have struggled to get business visas to Pakistan.  When permitted, business people typically received single-entry visas with a short duration validity.  Once in country, Pakistan required NOCs to visit locations outside of Islamabad, Karachi, or Lahore, making it difficult to inspect factories, supply chains, or goods outside of these three cities.  Pakistan announced updates to its visa and NOC policies to attract foreign tourists and businesspeople, but the more open polices have not been fully implemented.  New visa policies will not apply to U.S. passport holders.  Technical and managerial personnel working in sectors that are open to foreign investments are typically not required to obtain special work permits.  The new NOC policy permits travel throughout Pakistan, with exceptions for travel near Pakistan’s borders that still requires an NOC.

Foreign investors are not required to use domestic content in goods or technology or hire Pakistani nationals, either as laborers or as representatives on the company’s board of directors.  Likewise, there are no specific performance requirements for foreign entities operating in the country, and the same investment incentives are available to both local and foreign investors.  Similarly, there are no special performance requirements on the basis of origin of the investment.

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information.  According to the country’s 2013 Investment Policy, manufacturers introducing new technologies that are unavailable in Pakistan receive the same incentives available to companies operating in Pakistan’s SEZs.

The embassy has not received complaints regarding encryption issues from IT companies operating in Pakistan.  Officially, accreditation from the Electronic Certification Accreditation Council (under the Ministry of Information Technology) is required for entities using encryption and cryptography services, though it is not consistently enforced.  Despite the company’s April 2016 announcement that it would employ end-to-end encryption, WhatsApp is widely used.  The Pakistan Telecommunication Authority (PTA) initially demanded unfettered access to Research in Motion’s BlackBerry customer information, but the issue was resolved when the company agreed to assist law enforcement agencies in the investigation of criminal activities.  PTA and SBP prohibit telecom and financial companies from transferring customer data overseas.  Other data, including emails, can be legally transmitted and stored outside the country.

5. Protection of Property Rights

Real Property

Though Pakistan’s legal system supports the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of property rights.  With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding land lease or acquisition by foreign or non-resident investors exists.  Corporate farming by foreign-controlled companies is permitted if the subsidiaries are incorporated in Pakistan.  There are no limits on the size of corporate farmland holdings, and foreign companies can lease farmland for up to 50 years, with renewal options.

The 1979 Industrial Property Order safeguards industrial property in Pakistan against government use of eminent domain with insufficient compensation for both foreign and domestic investors.  The 1976 Foreign Private Investment Promotion and Protection Act guarantees the remittance of profits earned through the sale or appreciation in value of property.

Though protection for legal purchasers of land are provided, even if unoccupied, clarity of land titles remains a challenge.  Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments dedicating significant resources to digitizing land records.

Intellectual Property Rights

The Government of Pakistan has identified intellectual property rights (IPR) protection as a key economic reform and has taken concrete steps over the past 15 years to strengthen its IPR regime.  In 2005, Pakistan created the Intellectual Property Organization (IPO) to consolidate government control over trademarks, patents, and copyrights.  Three ministries handled these areas previously: the Ministry of Education for copyright, Ministry of Commerce for trademarks, and the Ministry of Industries for patents.  The IPO’s mission also includes coordinating and monitoring the enforcement and protection of IPR through law enforcement agencies.  Enforcement agencies include local police, the Federal Investigation Agency, customs officials at the Federal Board of Revenue (FBR), the Securities & Exchange Commission (SECP), the Competition Commission of Pakistan (CCP), the Drug Regulatory Authority of Pakistan (DRAP), and the Print and Electronic Media Regulatory Authority.

Although the creation of the IPO consolidated policy-making institutions, confusion surrounding enforcement agencies’ roles still constrains IPO performance on IPR enforcement, leaving IPR holders struggling to identify the right forum in which to address IPR infringement.  The IPO constituted seven new enforcement coordination committees for better IPR enforcement and signed an MOU with the FBR to share information.  The IPO is in initial stages to sign MOUs with the CCP and SECP.  However, the IPO labors to coordinate disparate bodies under current laws.  Weak penalties and agencies’ redundancies allow counterfeiters to evade punishment, while companies struggle to identify the correct forum to file complaints.  Pakistan is the fourth largest source of counterfeit and pirated goods seized by U.S. customs and border protection.

In 2016, Pakistan established three specialized IP tribunals – in Karachi covering Sindh and Balochistan, in Lahore covering Punjab, and in Islamabad covering Islamabad and Khyber Pakhtunkhwa.  There are plans to create tribunals for Peshawar and Quetta as well.  The Lahore and Islamabad IP tribunals became fully operational in 2016, and the Karachi tribunal came online in April 2017.  The IP tribunals have already ruled on 800 cases, many of which have resulted in injunction orders.  Numerous U.S. companies have successfully defended their IPR in the new tribunals, but a lack of capacity and consistency of the presiding officers remains a concern.  In under three years, the Islamabad and Lahore tribunals have each seated three different presiding officers while Karachi had two, and high court justices without expertise in IP law often overrule tribunals’ decisions.  While these three tribunals are fully operational and have improved IPR enforcement, they have not made any major rulings, and it remains too early to assess their long-term influence on Pakistan’s IPR environment.

In 2018, the CCP investigated and imposed a fine of USD 47,000 on a local coffee house on charges of unauthorized use of the Starbucks trademark.

Pakistan has sought to encourage investment in the seed industry through enhanced regulatory structure.  Over the past three years officials have revised the 1976 Seed Act, cautiously resumed  the biotechnology approval process, and received parliamentary approval of the Plant Breeders’ Rights Act (approved December 2016), which, once implementing rules are written, is expected to provide Pakistan’s first-ever intellectual property protection for seeds.  While current and potential investors have expressed concern over enforcement capacity and would like to accelerate the approval process for new technologies, the Government of Pakistan is taking steps to solidify federal (rather than provincial) oversight of the sector and respond to industry input.  Access to modern seed technology is vital to the development of Pakistan’s agricultural sector.

Pakistan is a party to the Berne Convention for the Protection of Literary and Artistic Works and is a member of the World Intellectual Property Organization (WIPO).  In July 2004, Pakistan acceded to the Paris Convention for the Protection of Industrial Property.  Pakistan has not yet ratified the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty.

In 2016, Pakistan was upgraded from Priority Watch List to Watch List with an Out-of-Cycle Review on the U.S. Trade Representative’s Special 301 Report.  Pakistan currently remains on the Watch List for the 2019 Special 301 Report, which acknowledged certain achievements by the government but highlighted the lack of enforcement on violations, particularly with respect to copyrights, pharmaceutical data, and media piracy.  Pakistan is not included on the Notorious Markets List.

Pakistan does not track and report on seizure of counterfeit goods.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ 

6. Financial Sector

Capital Markets and Portfolio Investment

The Government of Pakistan does not provide any investment incentives except the incentives offered to attract new capital inflows in specialized sectors and SEZs.  These incentives for specific sector and SEZs include tax exemptions, tariffs reductions, infrastructure, and investor facilitation services in designated special economic zones.  Since 1997, Pakistan has established and maintained a largely open investment regime.  The PML-N government introduced the Investment Policy 2013 that further liberalized investment policies in most sectors.  However, in addition to expressing concern about the deteriorating law and order situation, foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and an established a clear and consistent policy of upholding contractual obligations and settlement of tax disputes.

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE) in January 2016.  As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSE is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions.  In 2016, the government imposed a capital gains tax of 10 percent on stocks held for less than six months, and eight percent on stocks held for more than six months but less than a year and no capital gains tax for holdings that exceed 12 months.  However, in 2017, the government modified the capital gain tax and imposed 15 percent on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 months.  The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.  Per the Foreign Exchange Regulations, foreign investors can invest in shares and securities listed on the PSE and can repatriate profits, dividends, or disinvestment proceeds.  The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.

The free flow of financial resources for domestic and foreign investors is supported by financial sector policies, with the SBP and SECP providing regulatory oversight of financial and capital markets.  Interest rates depend on the reverse repo rate (also called the policy rate).  The SBP steadily lowered the policy rate from a high of 10 percent at the fourth quarter 2014 to 6 percent in November 2017, but has increased the rate to 10.75 percent in March 2019.

Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.

Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits.

The banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of banks’ equity with effect from December 2013.  Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves.

For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital.  While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending.  Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in early stages of development.  There are a limited number of venture capitalists operating in Pakistan.

Money and Banking System

The State Bank of Pakistan (SBP) is the central bank of Pakistan.

According to the most recent statistics published by the SBP, only 23 percent of the adult population uses formal banking channels to conduct financial transactions while 24 percent are informally served by the banking sector.  The remaining 53 percent of the adult population do not use any formal financial services.

The overall financial sector has done well in Pakistan over the last few years.  The SBP’s December 2018 banking sector review noted improving asset quality, stable liquidity, robust solvency, and increased investment in the banking sector.  The asset base of the banking sector expanded by 7.3 percent during 2018.  The risk profile of the banking sector remained satisfactory because profitability and asset quality improved as the non-performing loans to gross loans (infection) rate declined to its lowest level in a decade, 8 percent, at the end of 2018.

The five largest banks, one of which is state owned, control 52.3 percent of all banking sector assets.  In 2018, total assets of the banking industry were USD 140.6 billion[1].  As of December 2018, net non-performing bank loans totaled approximately USD 785.7 million – 1.4 percent of net total loans.

The penetration of foreign banks in Pakistan is relatively low and do not account for a significant portion of the local banking industry and overall economy.  According to a study conducted by the World Bank Group in 2018, the share of foreign banks to GDP stands at 3.5 percent.  In the wake of the global financial crisis, foreign banks have scaled down their operations and businesses in Pakistan mainly due to policies to shrink operations in small and struggling markets.  Banks closing down or limiting their operations included the Royal Bank of Scotland and Citibank, which sold its consumer banking portfolio to Habib Bank Limited and restricted its operations to corporate banking.  Other foreign banks operating in Pakistan are Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the newly established Bank of China.

International banks are involved in two major types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations.

SBP requires that foreign banks hold at minimum USD 300 million in capital reserves at their Pakistan flagship location, and maintain at least an eight percent capital adequacy ratio.  In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

  • 1 to 5 branches: USD 28 million in assigned capital;
  • 6 to 50 branches: USD 56 million in assigned capital;
  • Over 50 branches: USD 94 million in assigned capital.

Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan.  There are no further other restrictions to prevent foreigners from opening and operating a bank account.  However, most foreigners prefer to use a foreign bank to conduct their banking transactions.

Foreign Exchange and Remittances

Foreign Exchange

SBP maintains strict controls over the exchange rate and monitors foreign exchange transactions in the open market.  Banks are required to report and justify outflows of foreign currency.  Travelers leaving or entering Pakistan are allowed to physically carry a maximum of USD 10,000 in cash.  While cross-border payments of interest, profits, dividends, and royalties are allowed without submitting prior notification, banks are required to report loan information so SBP can verify remittances against repayment schedules.  Exchange companies are permitted to buy and sell foreign currency for individuals, banks, and other exchange companies, and can also sell foreign currency to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees.  Exchange companies are playing an increasingly important role in facilitating remittances from Pakistanis working overseas.

There is no clear policy on convertibility of funds associated with investment to other global currencies.  SBP deals with such cases and opts for an ad-hoc approach on a case to case and situational basis.

The embassy has provided advocacy for U.S. companies that have struggled to repatriate their profits.  Although no formal policy bars profit repatriation, U.S. companies have faced delays in repatriation from the SBP.

The Ministry of Finance and the SBP jointly manage Pakistan’s exchange rate.  Even though the exchange rate is determined by the market, over the past few years the SBP has intervened to stabilize the exchange rate or manage its decline.  Falling foreign exchange reserves have constrained the SBP’s ability to directly intervene in the market by injecting dollars into it.

Remittance Policies

The 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels.  Remittance of full capital, profits, and dividends over USD 5 million are permitted while dividends are tax-exempt.  No limits exist for dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law.  However, large transactions that have the potential to influence Pakistan’s foreign exchange reserves require approval from the government’s Economic Coordination Committee.  Similarly, banks are required to account for outflows of foreign currency.  Investor remittances must be registered with the SBP within 30 days of execution and can only be made against a valid contract or agreement.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law.  Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

[1] Even though the value of total assets has increased in PKR, due to devaluation of the rupee, the converted number in USD has decreased from 2017.

7. State-Owned Enterprises

The second round of the Government of Pakistan’s extensive 15-year privatization campaign came to an abrupt halt after 2006 when the Supreme Court reversed a proposed deal for the privatization of Pakistan Steel Mills, setting a precedent for future offerings.  As a result, large and inefficient state-owned enterprises (SOEs) retain monopolistic powers in a few key sectors, requiring the government to provide annual subsidies to cover SOE losses.  Three of the country’s largest SOEs include Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM).  According to the IMF, the total debt of SOEs now amounts to 3.6 percent of GDP (almost USD 10 billion) in 2018.

There are 197 SOEs in the power, oil and gas, banking and finance, insurance, and transportation sectors.  Some are profitable; others suffer losses.  They provide stable employment and other benefits for more than 420,000 workers.  According to the IMF, in 2018, Pakistan’s total debts and liabilities for SOEs exceeded PKR 1.2 trillion (USD 10 billion), or 3.6 percent of GDP – a 22 percent increase since 2016, but roughly the same since 2017.  Some SOEs have governing boards, but they are not effective.

The following links provides details of the Government of Pakistan’s privatized transactions over the past 18 years since 1991.  http://privatisation.gov.pk/?page_id=125 

SOEs competing in the domestic market receive non-market based advantages from the host government.  Two examples include PIA and PSM, which are operating at loss, but the Government of Pakistan continues to provide them with financial bailout packages.  The embassy is not aware of any negative impact to the U.S firms in this regard.

PR is the only provider of rail services in Pakistan and the largest public sector employer, with approximately 90,000 employees.  PR’s freight traffic has declined by over 75 percent since 1970 and only about 250 of PR’s 458 locomotives are serviceable.  PR has attempted to recapture the market share previously ceded to the trucking industry, and in 2016, the company purchased 55 new locomotives from GE for its freight operations.  PR has received commitments for USD 8.2 billion in CPEC loans and grants to modernize its mail rail lines.  PR relies on monthly government subsidies of approximately USD 2.8 million to cover its ongoing obligations.  In FY2018, government payments to PR totaled approximately USD 321 million.  Pakistan no longer intends to privatize PR, and the Privatization Commission has removed it from the list of SOEs identified for privatization.

Even though the government is still publicly committed to privatizing its national airline, the process has been stalled since early 2016 when three labor union members were killed during a violent protest of the government’s decision to convert PIA into a limited company.  The move would have allowed shares to be transferred to a non-government entity and pave the way for privatization.  The legislature eventually passed a bill, but it requires that the Pakistan government retain 51 percent equity in the airline in the event it is privatized, reducing the attractiveness of the company to potential investors.  In 2018, the Government of Pakistan extended bailout packages worth USD 300 million to PIA.

Established to avoid importing foreign steel, PSM has accumulated losses of approximately USD 3.77 billion per annum.  The company loses USD 5 million a week, and has not produced steel since June 2015, when the national gas company cut power supplies due to over USD 340 million in outstanding bills.  Like PIA, the government attempted to privatize PSM under the IMF program but was stymied by domestic and political opposition.  The government is reportedly considering leasing or selling a portion of PSM’s 19,000 acres, coupled with a basket of incentives that would provide for a 10-year tax holiday and duty-free import of any machinery and equipment upgrades to potential leases.

The Securities and Exchange Commission of Pakistan (SECP) introduced corporate social responsibility (CSR) voluntary guidelines in 2013, though adherence to the OECD guidelines is not known.

Privatization Program

Terms to purchase public shares of SOEs and financial institutions for both foreign and local investors are the same.  Under the 2013 IMF EFF program, the government identified 31 SOEs for either partial or total privatization.  In 2015, the government successfully offloaded stakes in several banks and publicly traded firms, and in 2016 sold its 40 percent stakes in PSE.  However, due to significant political resistance, the government postponed plans to privatize its largest and most inefficient SOEs, namely PIA, PSM, and several power generation and distribution companies.

Eight SOEs from the banking, energy, mining, and hospitality sectors are scheduled to be privatized by the end of 2019.  Foreign investors can participate after following guidelines established by the Privatization Commission.

The Privatization Commission (PC) claims the privatization process to be a transparent, easy to understand, and non-discriminatory 17 step process, available on its website: http://privatisation.gov.pk/?page_id=88 

8. Responsible Business Conduct

There is no unified set of standards defining responsible business conduct in Pakistan.  Though large companies, especially multi-national corporations, have an awareness of responsible business conduct standards, there is a lack of wider awareness.  The Pakistani government has not established standards or strategic documents specifically defining responsible business conduct standards and goals.  The Ministry of Human Rights published its most recent “Action Plan for Human Rights” in May 2017.  Although it does not specifically address responsible business conduct or business and human rights, one of its six thematic areas of focus is implementation of international and UN treaties.  Pakistan is signatory to nearly all International Labor Organization (ILO) conventions.

In late 2016 and early 2017, a series of explosions and a fire, occurred at the Gadani shipbreaking yards in Balochistan.  The incidents underscored the lack of safety and environmental standards in the industry.  The Prime Minister’s office launched a probe into the 2016 explosion and concluded that negligence by ship owners and government officials caused the incident.  The government suspended officials found guilty of negligence, and announced that families of the incident’s victims would receive compensation.  A subsequent January 2017 fire prompted officials to halt the scrapping of oil and liquid petroleum gas tankers at the shipyard.

International organization, civil society, NGO, and labor union contacts all note that there is a lack of adequate implementation and enforcement of labor laws.  Some NGOs, worker organizations, and business associations are working to promote responsible business conduct, but not on a wide scale.

Pakistan does not have domestic measures requiring supply chain due diligence for companies sourcing minerals originating from conflict-affected areas and does not participate in the Extractive Industries Transparency Initiative and/or the Voluntary Principles on Security and Human Rights.

9. Corruption

Pakistan was ranked 117 out of 180 countries on Transparency International’s 2018 Corruption Perceptions Index.  Following the institution of the 18th Amendment, corruption at the provincial level has increased, according to Transparency International.  The organization noted that corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotion, and relatively low salaries.

Bribes are criminal acts punishable by law but exist at all levels of government.  Although high courts are widely viewed as more credible, lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political figures.  Political involvement in judicial appointments increases the government’s influence over the court system.

NAB, Pakistan’s anti-corruption organization, suffers from insufficient funding and staffing.  Like NAB, the CCP’s mandate also includes anti-corruption authorities, but its effectiveness is also hindered by resource constraints.

Resources to Report Corruption

Justice (R) Javed Iqbal
Chairman
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
+92-51-111-622-622
chairman@nab.gov.pk

Sohail Muzaffar
Chairman
Transparency International
5-C, 2nd Floor, Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
+92-21-35390408-9
pakistan@gmail.com

10. Political and Security Environment

Despite improvements to the security situation in recent years, the presence of foreign and domestic terrorist groups within Pakistan continues to pose a significant danger to U.S. interests and citizens.  Terrorists may attack with little or no warning, targeting transportation hubs, markets, shopping malls, military installations, airports, universities, tourist locations, schools, hospitals, places of worship, and government facilities.  The embassies of many countries, including the United States, United Kingdom, Canada, Australia, and New Zealand, have issued travel advisories regarding travel to Pakistan, and many multinational companies operating in Pakistan employ private security and risk management firms to mitigate the significant threats to their business operations.  Even with improvements in the security situation, terrorist attacks remain frequent in Pakistan.  Despite high levels of violence in Karachi, carried out by criminal gangs with alleged political affiliations, targeted killings have largely declined since Pakistan’s paramilitary Rangers began an intensive campaign of operations in 2013 to counter violent crime.

The BOI, in collaboration with Provincial Investment Promotion Agencies, has coordinated airport-to-airport security and secure lodging for foreign investors.  To inquire about this service, investors can contact the BOI for additional information.

The embassy is not aware of any damage to projects and/or installations.  Abductions/kidnappings of foreigners for ransom remains a concern.

While security challenges exist in Pakistan, the country has not grown increasingly politicized or insecure in the past year.

11. Labor Policies and Practices

Pakistan has a complex system of labor laws.  Due to the 18th Amendment to the Constitution, the provinces manage jurisdiction over labor matters.  Each province is in the process of developing its own labor law regime, and the provinces are at different stages of labor law development.

In the Islamabad Capital Territory and provinces of Khyber Pakhtunkhwa and Sindh, the minimum wage for unskilled workers is PKR 15,000 per month (USD 106).  In Punjab, it is PKR 16,500 per month (USD 118), while in Baluchistan PKR 14,000 per month (USD 100).  Legal protections for laborers are also uneven across provinces, and implementation of labor laws is weak nationwide.  Lahore inspectorates have inadequate resources, which lead to inadequate frequency and quality of labor inspections.  On January 23, 2019, the Punjab Provincial Assembly passed the Punjab Domestic Workers Act 2019.  The law prohibits the employment of children under age 15 as domestic workers, and stipulates that children between 15 and 18 may only perform part-time, non-hazardous household work.  The law also mandates a series of protections and benefits, including limits to the number of hours worked weekly, and paid sick and holiday leave.  On January 25, 2017, the Sindh Provincial Assembly passed the Sindh Prohibition of Employment of Children Act, 2017.  The Senate passed the Domestic Workers (Employment Rights) Act in March 2016 (http://www.senate.gov.pk/uploads/documents/1390294147_766.pdf ), but the bill has not progressed in the National Assembly.  An amendment to the federal Employment of Children Act, 1991, which would raise the minimum age of employment to sixteen, has been pending in the National Assembly since January 2016.

According to Pakistan’s most recent labor force survey (conducted 2017-2018), the civilian workforce consists of approximately 65.5 million workers.  Women are extremely under-represented in the labor force.  The survey estimated overall labor participation at approximately 45 percent, with male participation at 68 percent and female participation at 20 percent.  The largest percentage of the labor force works in the agricultural sector (38.5 percent), followed by the services (38 percent), and industry/manufacturing (16 percent) sectors.  The official unemployment rate continued to hover at around 6 percent, but the figure is likely significantly higher for youth.  In 2018, the UN Population Fund estimated that 29 percent of Pakistan’s population was between the ages of 10 and 24 and according to 2017-18 labor force survey estimates unemployment for 15 to 24 year old was 10.5 percent.

Pakistan is a labor exporter, particularly to Gulf Cooperation Council (GCC) countries.  According to Pakistan’s Bureau of Emigration and Overseas Employment’s 2018 “Export of Manpower Analysis,” the bureau had registered more than 10.5 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries.  Pakistanis working overseas sent more than USD 19 billion in remittances each year between 2015 and 2018.

Pakistani government contacts say their workforce is insufficiently skilled.  Federal and provincial government initiatives such as the National Vocational and Technical Training Commission and the Punjab government’s Technical Education and Vocational Training Authority aim to increase the employability of the Pakistani workforce.  However, the ILO’s 2016-2020 Pakistan Decent Work Country Programme notes that “Neither a comprehensive national policy nor coherent provincial policies for skills and entrepreneurship development are being applied.”

The ILO’s 2016-2020 Pakistan Decent Work Country Program notes that “a small fraction of vulnerable workers are covered by social security in one form or another, while access to comprehensive social protection systems is also limited.”  The ILO’s 2014 Decent Work Country Profile states that in 2013, only 9.4 percent of the economically active population – excluding public sector employees – were contributing to formal social security systems such as old age, survivors’, and disability pensions.

Freedom of association is guaranteed under article 17 of Pakistan’s constitution.  However, the ILO indicates that the Pakistani state and employers have used “disabling legislation and repressive tactics” to make union formation and collective bargaining “extremely difficult.”  The Pakistan Institute of Labour Education and Research in its 2015 “Status of Labour Rights in Pakistan” noted that according to non-official data, there were 949 registered trade unions with a total membership of 1,865,141 – approximately four percent of the total estimated labor force.  Provincial labor departments are responsible for managing trade union and industrial labor disputes.  Each province has its own industrial relations legislation, and each has labor courts to adjudicate disputes.  Public sector workers, such as teachers and public health workers, have spearheaded recent strikes.

The ILO’s 2016-2020 Pakistan Decent Work Country Programme states that “exploitative labour practices in the form of child and bonded labour remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labour, worst forms of child labour, or forced labour.”  The report also identifies weak compliance with, and enforcement of, labor laws and regulations as contributing to poor working conditions – including unhealthy and unsafe workplaces –and the erosion of worker rights.

The Balochistan government, in collaboration with ILO, supported tripartite consultations regarding the Balochistan Prohibition of Employment of Children Bill.  The draft legislation prohibits employment of children in 39 worst forms of labor or hazardous labor, including domestic labor.  Negotiations were ongoing as of March 2018, and NGO and international organization contacts said they expected the Provincial Assembly to enact the law in 2018.

Pakistan is a Generalized System of Preferences beneficiary, which requires labor standards to be upheld.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) maintains an active portfolio of projects worth USD 352.7 million in Pakistan, including new investments in microfinance and hospital care in rural Pakistan.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $299,099 2017 $304,952 https://data.worldbank.org/country/pakistan 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $136 2017 $518 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Host country’s FDI in the United States ($M USD, stock positions) 2018 $27 2017 $224 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP 2018 1.3% 2017 14.1% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx 

* Source for Host Country Data: All host country statistical data used from State Bank of Pakistan which publishes data on a monthly basis.


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $42,447 100% Total Outward $1,928 100%
United Kingdom $12,378 29.2% United Arab Emirates $487 25.3%
Switzerland $6,221 14.7% Bangladesh $211 10.9%
Netherlands $3,891 9.2% United Kingdom $184 9.5%
China,P.R. Mainland $2,972 7% Bahrain $145 7.5%
Japan $2,065 4.9% Kenya $80 4.1%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $462.5 100% All Countries $151.8 100% All Countries $310.7 100%
Saudi Arabia $126.6 27.4% Saudi Arabia $121.2 79.8% UAE $107.9 34.7%
UAE $108.5 23.5% United Kingdom $10.1 6.6% USA $71.2 22.9%
USA $78.1 16.9% British Virgin Islands $9.6 6.3% Indonesia $39.4 12.7%
Indonesia $39.4 8.5% USA $6.9 4.5% Oman $26.6 8.6%
Oman $26.6 5.8% Luxemburg $1.03 0.68% Qatar $14.8 4.8%

14. Contact for More Information

Christopher Elms
Economic Officer
U.S. Embassy Islamabad
Diplomatic Enclave, Ramna 5
Islamabad, Pakistan
Phone: (+92) 051-201-4000
Email: ElmsC@state.gov

Ukraine

Executive Summary

Ukraine is striving to build a more modern and dynamic economy while struggling to overcome decades of corruption and government mismanagement.  Hard-won reforms have brought macro-economic stability and some improvements in the business environment. In the past year however, partly due to the 2019 presidential and parliamentary election cycle, there has been a decrease in the pace of reforms.  It remains to be seen whether the pace will pick up after the October 2019 parliamentary election, though the main political parties profess a commitment to reforms.

Ukraine has significant investment potential given its large consumer market, highly educated and cost-competitive work force, and abundant natural resources.  The Ukrainian government actively seeks foreign investment and established investment promotion agencies that have facilitated foreign investments. Ukraine’s Association Agreement with the EU gives Ukraine preferential market access and is accelerating Ukraine’s economic integration with the EU.  Ukraine’s economy demonstrated real GDP growth of 3.3 percent in 2018, and the IMF forecasts growth of 2.7 percent in 2019. 

U.S. companies have found success in Ukraine, particularly in the agriculture, consumer goods, and technology sectors.  Ukraine is an agricultural powerhouse, and is the world’s third-largest grain exporter. Ukraine’s IT service and software R&D sectors show great potential due to the country’s large, skilled workforce.  An array of local IT outsourcing companies serve clients worldwide. 

Foreign direct investment (FDI) generally remains low with net inflow in 2018 equal to only two percent of GDP.  The most significant constraints on FDI remain the business climate and corruption. Foreign investors cite corruption in the judiciary, poor infrastructure, powerful vested interests, and weak protection of property rights as some of the major challenges to doing business.  Labor migration abroad, particularly to the EU, is reducing Ukraine’s labor force. 

The Ukrainian government recognizes these problems and has implemented reforms to improve the business environment.  Notably in June 2018, Ukraine adopted legislation to create the High Anti-Corruption Court of Ukraine, which should be fully established and operational in 2019.  Overall, however, the pace of reforms has slowed and a culture of impunity among elites continues. The government has targeted civil society activists and independent journalists for their work in reforming Ukraine.  Ukraine has agreed to continue anti-corruption reforms as a key part of its IMF program, which is vital for Ukraine to meet its financial needs and maintain its hard-fought macro-economic stability.   

The conflict with Russia also continues to impede greater investment in Ukraine.  In the non-government controlled areas in the Donbas region of Ukraine, the conflict with Russia-led forces has wrought significant damage to freight rail, mines, and industrial facilities.  Investors should note that the situation in both Crimea (unlawfully occupied by Russia since the spring of 2014) and in occupied areas of Donbas remains dire. U.S. sanctions prohibit U.S. companies from participating in most transactions in Crimea.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 120 of 176  https://www.transparency.org/news/feature/corruption_perceptions_index_2017 
World Bank’s Doing Business  2018 71 of 190 http://doingbusiness.org/rankings 
Global Innovation Index 2018 43 of 128 http://globalinnovationindex.org/content/page/data-analysis 
U.S. FDI in partner country ($M, stock positions) 2017 $398 https://www.bea.gov/international/factsheet/factsheet.cfm?Area=344 
World Bank GNI per capita 2017 $3,079 http://www.data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment 

The government of Ukraine actively seeks FDI.  In 2014, the president established the National Investment Council as a consultative and advisory body under the President, and in 2016 the Ukrainian government established the Ukraine investment promotion office (UkraineInvest.com), a state agency with a mandate to attract and support FDI.  Ukraine also established a Business Ombudsman in 2015 to provide a forum for domestic or foreign businesses to file complaints about unjust treatment by state or municipal authorities, state-owned or controlled companies, or their officials. Ukrainian legislation provides for national treatment of foreign investors, in line with its World Trade Organization (WTO) commitments. 

Limits on Foreign Control and Right to Private Ownership and Establishment 

The regulatory framework for the establishment and operation of business in Ukraine by foreign investors is generally similar to that for domestic investors.  Registering a foreign investment is governed by “The Law on Foreign Investments” (2013). Before registering their business, non-Ukrainian citizens must register with the Office of Immigration in the Ministry of Foreign Affairs and receive a taxpayer identification number through the State Fiscal Service.  However, the accreditation process for representative offices of foreign companies and their branches is significantly slower than the simplified registration process for Ukrainian businesses. Accreditation for representative offices is issued by the Ministry of Economic Development and Trade, and it typically costs USD 2,500 and takes 60 days.  In comparison, registering a Joint-Stock company or a Limited Liability company takes approximately six days.

Foreign and domestic private entities can engage in all forms of remunerative activity, with some exceptions:  foreign companies are restricted from owning agricultural land, producing bio-ethanol, manufacturing carrier rockets, and some publishing activities.  In addition, Ukrainian law authorizes the government to set limits on foreign participation in state-owned enterprises, although the definition of “foreign participation” is vague, and the law is rarely used in practice.  Certain critical infrastructure, especially in the energy sector, is precluded by law from private ownership and therefore not available to foreign investors. This includes the gas transmission system, electricity grids, and various manufacturing operations. 

Ukraine currently reviews merger and acquisition investments on competition grounds, but is considering a mechanism for investment review on national security grounds.   According to Ukraine’s investment promotion office, UkraineInvest, foreign direct investments are reviewed on an ad hoc basis by the Cabinet of Ministers if concerns arise, but there is currently no formal process in place. 

Other Investment Policy Reviews 

The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) conducted formal investment and trade reviews in 2016, and can be found at OECD: http://www.oecd.org/investment/oecd-investment-policy-reviews-ukraine-2016-9789264257368-en.htm   WTO: https://www.wto.org/english/tratop_e/tpr_e/tp434_e.htm  .  The OECD further reported on SOE reforms in the hydrocarbons sector in 2019: http://www.oecd.org/countries/ukraine/soe-review-ukraine-hydrocarbons.htm   and analyzed Ukraine’s efforts at decentralization in 2018: https://www.oecd.org/countries/ukraine/maintaining-the-momentum-of-decentralisation-in-ukraine-9789264301436-en.htm  

Business Facilitation

The Ukrainian government has taken major steps forward to facilitate the ease of doing business, particularly in improving the protection of minority investors, simplifying procedures for small claims and pre-trial conferences for contract enforcement, and eliminating certain verification requirements that have hindered trading across borders.  As a result, Ukraine moved up five spots in the World Bank’s 2019 Doing Business Ranking, from 76th place in 2018 to 71st. The previous year, Ukraine had climbed four positions in the ranking. In March 2019, the government abolished 149 outdated regulations and requirements in order to simplify doing business in Ukraine.

Private entrepreneurs and legal entities can register online at https://poslugy.gov.ua/   and https://online.minjust.gov.ua/dokumenty/choise/  .  Companies can submit documents online for the Registrar to share with the State Committee of Statistics of Ukraine, the State Pension Fund, State Fiscal Service, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance.  Usually it takes up to six days to register a business.

Outward Investment

As of December 31, 2018 Ukraine’s investments in foreign countries totaled approximately USD 6.3 billion, according to data provided by the State Statistics Service of Ukraine.  Individuals are limited to investing a maximum of EUR 50,000 (USD 56,000) abroad per year and any investment exceeding this cap requires a license from the National Bank of Ukraine.  Legal entities and private entrepreneurs registered in Ukraine have a cap of EUR 2 million (USD 2.24 million) per year.

2. Bilateral Investment Agreements and Taxation Treaties

Ukraine has signed more than 70 bilateral investment treaties (BITs).  The BIT between the United States and Ukraine has been in force since 1996.  A full list of Ukraine’s BITs can be found at https://feao.org.ua/news/ukraines-bilateral-treaties-investments/?lang=en  .  Ukraine has over 60 bilateral taxation treaties, including with the United States.  A list of Ukraine’s bilateral taxation treaties can be found at http://sfs.gov.ua/en/sts-activity/international-tax-relations/international-treaties–conventions–on-taxation/  .  Ukraine also has a number of free trade agreements (FTAs), and information on these treaties is available at http://mfa.gov.ua/en/about-ukraine/economic-cooperation/trade-agreements. (However, some of this information is outdated).  Ukraine signed a FTA with Thailand September 2018 and with Israel January 2019.  Ukraine is currently negotiating a FTA with Turkey.

In February 2017, Ukraine signed an agreement with the United States to apply the provisions of the U.S. Foreign Account Tax Compliance Act (FATCA).  The legislation needed to ratify FATCA, as well as two other necessary laws to enforce it, are pending in the Parliament.

3. Legal Regime

Transparency of the Regulatory System

Ukraine is struggling to build a transparent and consistent regulatory environment.  The current regulatory regime is characterized by outdated, contradictory, and burdensome regulations, a high degree of arbitrariness and favoritism in decisions by government officials, weak protection of property rights and minority shareholders’ interests, and irregular payments and other bribes.  The country, however, is generally moving in the right direction towards clearer rules and fair competition. Ukraine’s efforts to implement its EU Association Agreement, including the Deep and Comprehensive Free Trade Area (DCFTA), should help boost overall transparency and legal certainty as Ukraine strives to meet EU standards.  Continued deregulation is also one of Ukraine’s key commitments under its IMF program.

Information on existing and draft legislation is available on the Verkhovna Rada (parliament) and Cabinet of Ministers websites.  Proposed legislation may be published on the corresponding Ministry website for public commentary, but often draft legislative initiatives are not publicly available or they reappear in dramatically different form.

The formulation of regulations falls solely under the purview of the government.  In Ukraine there are no regulatory processes managed by non-governmental organizations or private sector associations.  The relevant ministry or regulatory agency is required by law to publish draft text of proposed regulations on its website for review and comment for at least one month but not more than three months.  Along with the draft text, the governmental body must include a data-based assessment justifying the need for the regulation and analyzing potential impact. The ministry or agency receives comments via its website, at public meetings, and through targeted outreach to stakeholders.  At the end of the consultation period, the relevant ministry or regulator must publish the results on its website. 

In a sign of increased openness, the government in the past few years has consulted with NGOs and business associations such as the American Chamber of Commerce and the European Business Association when drafting business- or finance-related regulations and legislation.  These organizations have provided feedback and proposed amendments during the review and approval process.

Public finances and debt obligations are mostly transparent.  Budget documents and information on debt obligations are widely and easily accessible to the general public, including online.  Budget documents provide a mostly full picture of the government’s planned expenditures and revenue streams. Information on debt obligations is publicly available, and is published as part of the budget document on the Parliament’s website.  Information on the status of sovereign and guaranteed debt is published and updated on a monthly basis on the Finance Ministry’s website. Ukraine’s finances related to state-owned enterprises, its three social insurance funds, and natural resource extraction are not yet fully transparent, however.

International Regulatory Considerations

Ukraine is not a member of the EU, but it is working to harmonize many of its standards to meet EU requirements and facilitate access to EU markets.  As Ukraine drafts laws, it often incorporates or references EU norms and standards. Ukraine is a member of the WTO and a signatory to the WTO Trade Facilitation Agreement.  The Ministry of Economic Development and Trade (MEDT) is responsible for notifying all draft technical regulations to the WTO Committee on Technical Barriers to Trade. MEDT typically submits draft text to the WTO for comment, but there have been instances where the draft text was submitted, relatively late in the legislative process, after it had already passed the first reading in the Parliament. 

Legal System and Judicial Independence

The legal system in Ukraine is based on a civil system of codified laws passed by the parliamentary body, the Verkhovna Rada.  In the event of a commercial dispute, a foreign investor may seek recourse through a number of institutions. Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided for by international treaties (such as the case of independent arbitration through the investor-State dispute settlement provisions of the U.S.-Ukraine BIT). 

Courts of general jurisdiction are organized by territory and specialty and include:  local courts; appellate courts; specialized high courts for civil and criminal cases; and the Supreme Court.  Local courts are either courts of general jurisdiction or specialized courts (i.e. commercial and administrative courts).  Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in legal disputes connected with state government and municipalities, with the exception of military disputes.

The judicial system is independent of the executive branch.  However, extensive corruption in the court system provides an opening for outside influence.  Among the major problems of the Ukrainian judicial system are its overall lack of capacity and the existence of executive and prosecutorial influence on judges.  Ukraine is ranked 117 out of 140 countries with regard to judicial independence by the Global Competitiveness Index   report 2017-2018 (up twelve spots since the 2016-2017 report).

In general, regulations are appealable, but determining whether a regulation is appealable in the national court system depends on the nature and origin of the regulation.

Laws and Regulations on Foreign Direct Investment 

The Law of Ukraine on Investment Activity (1991) established the general principles for investment and was subsequently followed by additional legislative acts, most recently the Law of Ukraine #2058-YIII of May 2017 “On Amendments to Some Laws to Remove Obstacles for Attracting Foreign Investments.”  The website of Ukraine’s Investment Promotion Office (https://ukraineinvest.com/  ) provides relevant laws, rules, procedures, and reporting requirements for potential investors.  Potential investors can also receive specific investment support by emailing howcanwehelp@ukraineinvest.com.

Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and persistent issues with corruption, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.

Competition and Anti-Trust Laws 

The Antimonopoly Committee of Ukraine (AMCU) is the Ukrainian state authority for protection of economic competition.  AMCU’s functions include investigating and prosecuting anticompetitive conduct, granting permissions for mergers and acquisitions, considering applications regarding violations of public procurement as an appeal body, monitoring the state aid system, competition advocacy within the government, and formulating competition policy. 

Expropriation and Compensation 

Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfil investment obligations during privatization procedures.  Additionally, the Law on Legal Regime of Martial Law and the Law on Confiscation of Property During Legal Regime of Martial Law allow for voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law” in place due to military operations in eastern Ukraine. 

Dispute Settlement

ICSID Convention and New York Convention

Ukraine is a Party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  On October 20, 2015, the Government of Ukraine submitted a formal UN communication, noting that Ukraine’s ability to implement its obligations under the New York Convention in the occupied territories of Crimea, Donetsk, and Luhansk is limited and not guaranteed until Ukraine regains effective control from the Russian Federation.  The full text of the communication is available at: C.N.597.2015.TREATIES-XXII.1 of 20 October 2015 .

The procedure for recognition and enforcement of foreign arbitral awards in Ukraine is regulated by the following legislative acts:

  • The Law on International Commercial Arbitration (ICAL, 1994).  ICAL is almost a literal translation of the UNCITRAL Model Law.
  • The Code of Civil Procedure of Ukraine (CPC, 2004).  Pursuant to Article 390 of the CPC, Ukrainian courts shall enforce foreign court decisions provided that:  recognition and enforcement are stipulated under an international treaty ratified by the Verkhovna Rada; or on the basis of the reciprocity principle under an ad hoc agreement with a foreign country, whose court decision shall be enforced in Ukraine.

Investor-State Dispute Settlement

While U.S. investors have faced many challenges with the Government of Ukraine over the years that have devolved into disputes, international arbitration under provisions of the Bilateral Investment Treaty between the United States and Ukraine have been rare, with two known arbitral proceedings since 2016.  The Embassy only tracks disputes at the request of U.S. businesses or individuals involved in the case, and cannot provide a comprehensive number for all investment disputes involving U.S. or other foreign investors in Ukraine. Such disputes are a significant problem, however, both in fact and in terms of public perception.  As of early 2019, the Embassy was tracking approximately 20 active disputes, some very protracted. Going back 10 years, the Embassy has tracked almost 100 disputes involving a U.S. business or individual. The majority of disputes are related to customs and tax (particularly VAT) issues, or corporate raids.

ICAL limits the jurisdiction of international arbitration tribunals to civil law disputes arising from international economic operations (provided that the commercial enterprise of at least one party exists outside of Ukraine), disputes between international organizations and enterprises with foreign investments in Ukraine, and intracompany disputes of these enterprises.  ICAL does not address foreign arbitral awards issued against the government.

Extrajudicial action against foreign investors in the form of official acts of government (e.g. unwarranted inspections, investigations, fines) and illegitimate acts by private parties (e.g. corporate raiding) occur in Ukraine.  The current Ukrainian government has made it a stated priority to improve the business environment and attract more foreign investment, but progress has been slow.

International Commercial Arbitration and Foreign Courts

The Law on Arbitration Courts (2004) stipulates that parties can now refer most of their commercial or civil-law disputes to courts of arbitration, which are non-state bodies.  Article 51 stipulates that awards of the aforementioned courts of arbitration are final, and Article 57 stipulates that they can be subject to mandatory enforcement via a competent state court.  The Embassy, however, is not aware to what extent arbitration is used by the business community.

Ukraine’s International Commercial Arbitration Court (ICAC) and Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are both annexed to the ICAL, which itself is a near-direct translation of the UNCITRAL model law.  ICAL distributes the functions of arbitration assistance and supervision between the district courts and the President of the Chamber of Commerce and Industry of Ukraine for both ad hoc and institutional arbitrations. Local courts are obliged to recognize and enforce foreign arbitral awards under ICAL and the CPC, per Ukraine’s obligations under the ICSID and the New York Convention of 1958.  However, the reliability, consistency, and timeliness of implementation are unknown. 

The Embassy is not aware of any investment disputes that have involved state-owned enterprises.

Bankruptcy Regulations

In a turning point for Ukrainian bankruptcy law reform, in October 2018 the Ukrainian parliament adopted the Code of Bankruptcy Proceedings to replace the existing bankruptcy law that had been in force since 1992.  The President signed the bill into law in April 2019. The new Bankruptcy Code enters into force six months after the legislation is published (provisions on electronic auctions will enter into force three month after publication).

The new Bankruptcy Code improves creditors’ rights by allowing them to select the bankruptcy administrator, decide the starting price of debtor assets at auction, and participate in other matters regarding asset sales.  The Law on Bankruptcy (1992) does not require approval by creditors for selection or appointment of an insolvency representative, nor does it require approval by creditors for sale of substantial assets of the debtor. The Bankruptcy Code also improves the procedures for selling debtor’s assets by introducing online electronic auctions.  Currently, assets are often sold offline in a non-transparent way. In addition, the new Bankruptcy Code does not require prior collection through courts or enforcement services for insolvency proceedings to begin. For creditors this might significantly ease the debt collection process and reduce legal costs and court fees. 

Bankruptcy is not criminalized in Ukraine.  The Criminal Code of Ukraine, however, criminalizes 1) intentionally making an entity bankrupt; 2) distorting certain financial data in order to conceal insolvency of a financial institution.

In the 2019 World Bank’s Doing Business Report Ukraine ranked 145 (improved from 149th in 2018) in the “resolving insolvency” subcategory.  Ukraine’s low ranking is driven by a low recovery rate and the high costs associated with recovering funds from the insolvent firm by creditors.

Parliament passed legislation in February 2018 to create a national credit registry administered by the National Bank of Ukraine.  This EU-mandated legislation seeks to reduce lending risks through the publication of credit histories, including bankruptcies.

4. Industrial Policies

Investment Incentives 

Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company’s charter fund.  Some restrictions do apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property. Ukraine also offers relatively generous depreciation rates for most fixed assets, including property, plant, and equipment for both foreign and domestic investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

Ukraine does not maintain special or free economic zones (SEZs-FEZs).

Performance and Data Localization Requirements 

Ukraine has no forced localization policies or requirements for foreign IT providers to turn over any source code or provide backdoors into hardware or software applications.  Overall, Ukraine’s IT infrastructure and Internet Service Providers are largely unregulated. However, Ukraine implemented sanctions in 2017 that ban internet service providers from providing access to the Russian social networks VKontakte and Odnoklassniki as well as all services from Yandex and Mail.Ru.

Under Article II, clause 6 of the Bilateral Investment Treaty between the United States and Ukraine, neither Party shall impose performance requirements as a condition of establishment, expansion, or maintenance of investments, which require or enforce commitments to export goods produced, or which specify that goods or services must be purchased locally, or which impose any other similar requirements.

There are no legal measures preventing or impeding companies from transmitting business-related data outside of Ukraine.  In terms of data storage and protection requirements, the EU–Ukraine Association Agreement requires Ukraine to revise legislation to bring it in compliance with the EU’s General Data Protection Regulation (GDPR).  Ukraine’s adoption of regulations harmonized with the EU’s GDPR is still in progress.

An employer is free to employ a foreign national as long as the employer has obtained a work permit for this person.  The law of Ukraine “On Employment of the Population” sets forth the procedure for issuing work permits to foreigners. Authorities issue work permits on a case-by-case basis, for a particular applicant and a particular  position in a company. A work permit is normally issued for the period of employment indicated in the employment contract, but not for more than one year. A work permit can be renewed for the same term, for an unlimited number of times and free of charge.

A foreign citizen with a valid work permit who spends more than 90 days within a 180-day period in Ukraine, can obtain a temporary residence certificate.  As of June 1, 2018, temporary residence certificates are now contactless electronic cards with biometric data. The new permits are generally issued for the term of an individual’s work permit.  There are also no age or nationality restrictions on who can be a manager or company director in the private sector.

Citizens of EU countries, the United States, Canada, Japan and some other countries do not require a visa to enter Ukraine for a stay of up to 90 days within a 180-day period.  Individuals who are planning to get a temporary residence permit in Ukraine due to work must obtain a long-term type D visa. The list of countries and respective visa requirements are available on the website of the Ministry of Foreign Affairs of Ukraine (http://mfa.gov.ua/en  ).  There are no reports from foreign investors and their employees of excessively onerous visa requirements inhibiting their mobility.  However, Russian citizens have reported difficulties and heightened scrutiny when arranging travel to Ukraine. Additionally, people who previously traveled to Russian-occupied Crimea since 2014 have been reported being denied entry to Ukraine.

5. Protection of Property Rights

Real Property

Ukraine’s regulatory framework generally protects property interests, as well as mortgages and liens.  The record system is generally reliable and maintained by the Ministry of Justice. Nonetheless, judicial reform is needed to improve efficient enforcement of property rights.  Foreign nationals are able to lease land, but there is a moratorium on the sale of agricultural land to foreigners.

Ukrainian media estimates that five percent of land in Ukraine does not have clear title.  The government in 2017 ordered the transfer of the State Land Cadaster to blockchain technology in order to allow for reliable data synchronization, which would prevent data manipulation and improve control over the system, but the status of this initiative is unclear.  Pilot projects to transfer the State Land Cadaster and the legal registry to blockchain began in late 2018. Unoccupied property can become communal property only by court decision following a request from the local body authorized to manage real estate property. The request can only be made a year after the property was registered as unoccupied.  

Intellectual Property Rights

Ukraine has a long history of inadequate enforcement and protection of intellectual property rights (IPR).  Ukraine has been listed on the Priority Watch List of the U.S Trade Representative’s Special 301 Report since 2015 due to the widespread use of unlicensed (pirated) software, the transshipment and sale of counterfeit goods, rampant Internet piracy, and an overabundance of rogue of collective management organizations (CMOs).  Moreover, in 2017, the United States announced the partial suspension of Ukraine’s benefits under the Generalized System of Preferences (GSP) for failure to meet the GSP eligibility criterion related to the adequate and effective protection of IPR. Ukraine is also listed in the USTR’s Notorious Markets List. 

Over the past year, Ukraine has passed significant legislation and developed laudable plans to improve the protection of IPR, but the implementation of this legislation and these plans to date has been slow and ineffective.  Despite the passage of new legislation and early steps to implement it, in operation Ukraine’s system of CMOs remains non-transparent and corrupt.  Rights holders report it is still difficult to combat online copyright infringement despite Ukraine improving its anti-piracy legislative framework in 2017.  Furthermore, the presence of counterfeit goods in Ukraine continues to be high due to limited action by law enforcement, and there is widespread use of unlicensed software. 

Due to Ukraine’s weak protection of IPR, online markets that facilitate the sale and distribution of counterfeit goods continue to operate in Ukraine.  Industry reports that a high volume of allegedly counterfeit goods is readily available on these marketplaces, and that the process to remove the listings of these items is cumbersome and ineffective. 

Sales of counterfeit goods in physical marketplaces continue to be widespread as well.  One of the largest counterfeit markets in Europe, with around 6,000 merchants, is the 7th Kilometer Market in Odesa.  Law enforcement authorities do not perform raids or seizures at this market, according to stakeholders and local media.  The Troyeshchyna and Petrivka markets in Kyiv, Khmelnytskiy market as well as the Barabasova market in Kharkiv also sell a high volume of counterfeit goods.

Most counterfeit goods are not produced in Ukraine but are instead imported.  Vendors reportedly source the counterfeit items from Turkey and China. In 2018, Customs reported that they inspected 7,260 shipments due to the suspicion of IP rights’ violations and reported 12 cases of illegal trade of counterfeit goods valued at USD 61,000. This is approximately 30 percent less than in 2017, when Customs authorities opened 14 criminal cases for illegal importation and exportation of counterfeit goods valued at over USD 400,000.  The EU is working with Ukraine on draft law no. 4614 to improve the detection and prevention of “goods infringing intellectual property rights moving through the border” as part of Ukraine’s obligations under the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

6. Financial Sector

Capital Markets and Portfolio Investment

The Ukrainian government encourages foreign portfolio investment in Ukraine.  Ukraine’s capital market consists of two separate sectors: stock market and commodity market.  The stock market includes ten stock exchanges and a settlement center. No clearing services are offered at present. 

Government bonds constitute 95 percent of the trades; a few corporate securities are listed, and the volume of their trades is insignificant.  The capital market for portfolio investment is small and lacks liquidity. The local institutional investment sector, including private pension investment, is weak.  The commodity market in Ukraine is underdeveloped and unregulated. It includes hundreds of commodity exchanges and other participants, not licensed or subject to any supervision. 

The regulator, the National Securities and Stock Market Commission, lacks financial and operational independence and, therefore, Ukraine is not a signatory of the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (of the International Organization of Securities Commissions. The necessary legislation to strengthen the independence of the Securities Commission was submitted to the Parliament but has not been passed yet.

A foreign investor may open an account in a bank operating in Ukraine and transfer in funds for further investment, or invest directly to an account of a Ukrainian resident company.  In 2017, the National Bank of Ukraine began allowing foreign investors to use escrow accounts to make investments in Ukraine. Only Ukrainian-licensed securities traders may handle securities transactions (subject to certain exceptions).

Credit is largely allocated on market terms and foreign investors are able to get credit on the local market, utilizing a variety of credit instruments, though interest rates remain high.  The credit market environment has long lacked transparency; enforcement of key laws and regulations has been weak; and investors, both domestic and foreign, continue to face significant uncertainty.

Money and Banking System

Ukraine’s banking sector has seen remarkable progress following the 2014-2015 crisis thanks to reforms resulting in the closure of over 90 banks for insolvency or for money laundering activities.  The banking sector reported a record high net profit of UAH 21.7 billion (USD 775 million) in 2018 with the number of unprofitable banks falling from 18 in 2017 to 13 in 2018. Foreign banks’ profits amounted to UAH 15 billion (USD 555 million) in 2018.  Non-performing loans, however, remain one of the biggest unresolved issues of the banking sector accounting for 52.8 percent of loans as of the end of 2018.

There are approximately 77 banks operating in Ukraine, but the top 20 banks accounted for 91 percent of net assets in 2018.  The market share of state-owned banks (Privatbank, Ukreximbank, Ukrgasbank, and Oshchadbank) accounted for 54.7 percent of net assets in 2018.  The banking sector’s net assets amounted to USD 50 billion at end of 2018.

Ukraine’s central bank, the National Bank of Ukraine (NBU), regulates banks operating in Ukraine.  The NBU Governor Smolii outlined a plan to increase the penetration of financial services in Ukraine at a 2018 Financial Inclusion Forum.  The plan included developing new technologies to increase accessibility in rural areas of the country, promoting financial literacy, and protecting customer rights to instill confidence in the system.  Approximately 63 percent of Ukraine’s adults have at least one bank account, according to World Bank estimates.

Foreign-licensed banks may carry out all activities conducted by domestic banks, and there is no ceiling on participation in the banking system, including operating via subsidiaries.  A foreign company can open a bank account in Ukraine for the purposes of investment operations; otherwise, it needs to register a representative office in Ukraine. A nonresident private person can open a bank account in Ukraine.

Foreign Exchange and Remittances

The National Bank in 2018 continued to liberalize currency controls and restrictions on repatriating funds, which had been put in place to stabilize the Ukrainian foreign exchange market during the 2014 economic crisis.  There is a five million euro monthly limit per company for repatriation of non-listed equities and corporate bonds (for foreign currency purchasing and transferring abroad). For all other types of investments repatriation – listed equities, government bonds, funds from reducing share in capital, company liquidation, etc. – there are no restrictions.  There is a monthly limit of seven million euros for the repatriation of dividends. The NBU has indicated it intends to raise the monthly limit to ten million euros.

Companies that receive payment in foreign currency are required to exchange 30 percent of the payment they receive into local Ukrainian currency.  This requirement was decreased from 50 percent as of March 1, 2019.

In June 2018 Ukraine’s Parliament passed the Law “On Currency and Currency Transactions,” which liberalized the currency control framework.  The currency law introduces the “everything is allowed, unless expressly forbidden” principle versus the former “everything is forbidden, unless expressly allowed” principle for cross-border currency transactions.  Consequently, the law prompted a shift from the previous, heavily bureaucratic currency regulation to one more flexible and with fewer restrictions on currency operations. Government authorities should interpret any ambiguous provisions in the Currency Law and the NBU Regulations in favor of companies or individuals that perform currency transactions.

The NBU has had a floating exchange rate policy for the last four years, though the NBU carries out currency interventions to meet two objectives:  reducing excessive currency fluctuations and replenishment of international reserves.

Sovereign Wealth Funds

Ukraine does not maintain or operate a sovereign wealth fund.

7. State-Owned Enterprises

The Government of Ukraine operates 1,600 state-owned enterprises (SOEs) out of 3,358 registered SOEs, with an economic output of approximately ten percent of GDP.  While the government lists 3,358 enterprises, more than 1,700 of them no longer operate as profitable businesses. SOEs in Ukraine are defined as companies which the state owns at least 50 percent +1 share.  SOEs are active in areas such as energy, machine-building, and infrastructure. There is no common public list of all SOEs in Ukraine and each ministry publishes a list of SOEs under its respective management.  The Ministry of Economic Development and Trade periodically updates information on annual financial reports of significant SOEs (100 of the largest SOEs), which it publishes on the ministry website. http://www.me.gov.ua/Documents/List?lang=uk-UA&id=40a27e1b-8234-43d3-a37f-c4c752729fca&tag=FinansovaZvitnistPidprimstv     

The corporate governance law, which entered into force in 2016, requires SOEs to publicize annual financial reports and disclosures on official websites, including information on financial indicators, company officials, transactions, etc.  Ukrainian law also stipulates that SOEs publish their annual financial statements and audits. In 2018, the government of Ukraine stepped up its corporate governance reform efforts, and created supervisory boards in strategic SOEs. Strategic SOEs, including Ukrzaliznytsia, Ukrenergorynok, Ukrposhta, and Ukrenergo, have selected independent and government board members.  These reforms have been an important step in improving the management, efficiency, and responsiveness of the companies.

Most SOEs rely on government subsidies to function and cannot directly compete with private firms.  Several SOEs capable of making a profit have already been privatized, and the result has been that mostly inefficient firms have remained in government hands.  The Government of Ukraine heavily subsidizes its state-owned enterprises (especially in the coal mining, rail transportation, gas, and communal heating sectors) and has supported debts of many SOEs with sovereign loan guarantees.  SOE access to extensions of tax payment deadlines remains nontransparent, especially where SOEs are directed to sell their products at below-market prices.

SOE senior managers traditionally report directly to the relevant Ministry.  Ukrainian law specifies that ministries are not permitted to interfere with the daily economic activities of an SOE, but numerous anecdotal reports indicate that ministries and vested interests ignore this restriction.  The Cabinet of Ministers has the power to decide on the creation, reorganization, and liquidation of SOEs, and to adopt and enforce SOE charters. It can delegate this authority to relevant ministries supervising the SOE.  The Cabinet of Ministers may also delegate to ministries the permission to create joint ventures with state property and prepare proposals to divide state property between the national and municipal levels. 

Privatization Program 

In March 2018, the government began implementing a new law on the privatization of state property aimed at attracting more investors.  The legislation allows investors to settle disputes under international law, makes it obligatory to employ international advisers for the sale of larger firms, and bans Russian and off-shore companies from participating in the privatization process.  Despite the launch of the new law, the government did not complete a single large-scale privatization in 2018.

On May 3, 2018, the government approved a list of companies designated for sale.  The list contained 26 SOEs, including several regional energy providers, or oblenergos, the Odesa Portside Plant (OPP), and electricity generator Centrenergo.  With the exception of Centrenergo, sales of the remaining SOEs were targeted to proceed under terms of the new law signed in 2018.  Of the 26 companies designated for privatization, the government initiated advisor tenders for six companies in 2018.  Five of these tenders were challenged by competitors believed to be acting on behalf of vested interests.  As of 2019, the five advisor appointments remained stalled.  A lackluster interest and poorly-prepared bidders led to the government’s decision to cancel the sale in late 2018 of the sixth company, Centerenergo, despite a promising start to the process. In 2018, Ukraine’s central budget received only UAH 0.3 billion (USD 11 million) from privatization, comprising only 1.4 percent of the original plan.

The GOU approved a revised list of 21 SOEs designated for privatization on January 16, 2019.  The 2019 list excluded most utility companies due to a government decision to transfer the utilities to a communal ownership structure.  The government also approved a list of smaller-scale SOEs to put up for sale in 2019.  

The State Property Fund (SPC) oversees privatizations in Ukraine.  The rules on privatization apply to foreign and domestic investors and, theoretically, a relatively level playing field exists.  Observers have cited, however, numerous instances in past privatizations where vested interests influenced the process to fit a pre-selected bidder.  Despite these concerns, the government has stated that there would be no revisions of past privatizations. Still, some court cases have surfaced wherein private companies are challenging earlier privatizations.

8. Responsible Business Conduct

There is limited but growing awareness in Ukraine of internationally accepted standards for responsible business conduct, including corporate social responsibility.  Primary drivers for the introduction of these standards have been Ukraine’s vibrant civil society, international companies and investors, and efforts by business associations such as the American Chamber of Commerce and the European Business Association.  The Government of Ukraine has put in place corporate governance standards to protect shareholders; however, these are voluntary.

In 2017, Ukraine became the 47th country to adhere to the OECD Guidelines for Multinational Enterprises  , which provides recommendations on a due diligence approach to responsible business conduct.  Ukraine established its National Contact Point to promote these guidelines for Multinational Enterprises under the Ministry of Economic Development and Trade (http://ncp.gov.ua/?lang=en  ).  There are also independent NGOs, such Center for the Development of Corporate Social Responsibility, as well as investment funds, worker organizations/unions, and business associations promoting or monitoring responsible business conduct.  There are no reported restrictions on their activities aimed at promoting responsible business conduct.

Ukraine has been a member of the Extractive Industries Transparency Initiative (EITI) since 2013.  Participation by companies in Ukraine is still voluntary.

9. Corruption

Ukraine has numerous laws to combat corruption by public officials, and following the Revolution of Dignity in 2014 the government launched new anti-corruption institutions, including the National Anti-Corruption Bureau (NABU) to investigate corruption by public officials, the Special Anti-Corruption Prosecutor’s Office (SAP), and the National Agency for Prevention of Corruption (NAPC).  In addition, a law mandated that public officials declare their assets on a publicly viewable online system. These new institutions, however, have had an uneven track record. After the successful 2016 launch of the asset declaration system for public officials, the NAPC failed to fulfill its mandate to verify officials’ declarations and to fairly manage political party finance reporting.  NABU and SAP have taken 107 corruption cases to court since 2015, including indictments of high-level officials, but have failed to obtain a single conviction as cases became mired in court proceedings. On June 7, 2018 the Parliament approved long-awaited legislation to establish an Anti-Corruption Court, and the process establishing the court is underway.

Foreign businesses, including U.S. companies, continue to identify corruption in many sectors as a significant obstacle to FDI.  Reform of public procurement has been a success story, with the introduction of the online ProZorro system providing transparency for most procurement, except in the defense sector, which remains non-transparent and allegedly a continuing source of corruption.  The energy sector has seen some improvements, including reforms at the large oil and gas SOE Naftogaz, but participants in the sector continue to complain of significant and sometimes insurmountable corruption. Government interference in the corporate governance of Naftogaz is a persistent concern.  There are allegations of corruption at specific SOEs in a variety of sectors, as well as allegations that external corrupt forces interfere regularly in SOE operations.

There are a number of NGOs actively involved in investigating corruption and advocating for anti-corruption measures.  In 2017, the Parliament passed a law with broad requirements for non-governmental individuals engaged in anti-corruption activities to file public asset declarations.  The declaration requirements for anti-corruption activists went into effect in early 2018, despite calls from the international community for the Parliament to scrap the requirement.

Resources to Report Corruption

NABU, established in October 2014, is the appropriate resource for the reporting of high-level corruption.

Government of Ukraine contact for combating corruption:

Mr. Artem Sytnyk, Director
National Anti-Corruption Bureau
3, Vasyl Surikov St, Kyiv, Ukraine 03035
Hot-line:  0-800-503-200
Email: info@nabu.gov.ua
Corruption Reporting eForm:  http://nabu.gov.ua/povidomlennya-pro-kryminalne-pravoporushennya  

Contact at Transparency International:

Mr. Andriy Borovyk
Executive Director
Transparency International Ukraine
2A provulok Kostia Hordiienka, 1st floor, Kyiv, Ukraine 01024
+38(044) 360-52-42
Email: office@ti-ukraine.org

10. Political and Security Environment

The military conflict continues in parts of Donetsk and Luhansk oblasts between Ukrainian government troops and forces that Russia leads, arms, and funds.  Residents of Russia-controlled areas are subject to political violence at the hands of Russia’s proxy authorities.  Civilian casualties occur regularly due to landmines and shelling, as fighting occurs in and around major population centers.  Infrastructure for water, gas, and electricity are also frequently damaged by fighting.  Ukraine lacks control of over 500 km of its border in Donetsk and Luhansk, allowing Russia to freely supply its proxies with equipment, weapons, and soldiers.  Russia continues its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol.

There were several protests and demonstrations during 2018 against the government, mainly evoking populist messaging against economic conditions in the country and perceptions of the government failing to fight corruption.  These protests, however, have generally been peaceful with few instances of violence.  The 2019 presidential election cycle meant increased competition among political parties, decreasing the pace of work in parliament.

11. Labor Policies and Practices

Ukraine has a well-educated and skilled labor force of about 26 million people with a nearly 100 percent literacy rate.  Ukraine’s population was 42.2 million people in December 2017. Ukraine’s official unemployment rate was 9.1 percent in 2018 although unemployment in some regions, particularly in western Ukraine, remained significantly higher.  According to the Ministry of Social Policy of Ukraine, there were about 1.7 million unemployed workers in 2018. However, only 21 percent were officially registered with the State Employment Service. Wages in Ukraine remain low by Western standards.  In January 2019, the minimum monthly wage increased to 4173 UAH (USD 155) from 3723 UAH (USD 138) in January 2018. The real average monthly wage increased by 14.2 percent year-on-year to 9218 UAH (USD 341). The highest wages are traditionally in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers. 

Ukrainian law allows workers to organize, and unions are prevalent in most industries.  The law provides most workers with the right to form and join independent unions and to bargain collectively without previous authorization.  By law, trade unions are equal, and a union’s establishment does not require government permission. Within classic sectors of the economy, sector-specific collective bargaining agreements involve representative employers’ associations (e.g., chemical employers), sector trade unions, and some participation of the government through the Ministry of Social Policy.  Such agreements can also take place at the regional level. However, the independence of unions from government or employer control has been disputed by certain labor groups. Independent trade unions allege that the country’s largest trade union confederation, the Federation of Trade Unions of Ukraine (FPU), enjoyed a preferential relationship with employers and members of some political parties.  Unions not affiliated with the FPU have been denied a share of disputed trade union assets inherited by the FPU from Soviet-era unions. There have also been cases of workers who renounced membership in an FPU-affiliated union and who joined a new union, facing loss of pay, undesirable work assignments, and dismissal.

The law provides for the right to strike “to defend one’s economic and social interests,” as long as strikes do not jeopardize national security, public health, or the rights and liberties of others; the government generally respects this right.  It does not extend the right to strike to personnel of the Prosecutor General’s Office, the judiciary, armed forces, security services, law enforcement agencies, the transportation sector, or public servants. Workers who strike in prohibited sectors may receive prison terms of up to three years. 

During 2018, the State Labor Service was responsible for enforcing labor laws.  Inspectors were limited in number and funding. Although the Government of Ukraine renewed planned and unplanned labor inspections, the number of completed inspections continued to fall, and experts assessed the number to be inadequate relative to the size of the Ukrainian economy.  A new law established the National Mediation and Reconciliation Service (NMRS) to mediate labor disputes. According to official Ukrainian statistics, during 2017 the NMRS resolved 312 labor disputes, which involved 1.5 million employees and 6,835 economic entities.

12. OPIC and Other Investment Insurance Programs

The United States has offered Overseas Private Investment Corporation (OPIC) political risk insurance and financing in Ukraine since 1992.  OPIC has an active pipeline of projects in Ukraine, across various sectors. There are currently 20 OPIC projects in Ukraine with a value USD 983 million.  Ukraine is also a member of the World Bank-based Multilateral Investment Guarantee Agency (MIGA). 

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $133,700 2017 $112,154 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $517 2017 $398 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $0.6 N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 23.6% 2017 53.1% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* State Statistics Service of Ukraine


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $31,606 100% Total Outward $6,322 100%
Cyprus $8,933 28.3% Cyprus $5,933 93.8%
Netherlands $6,395 20.2% Russia $150 2.4%
United Kingdom $1,944 6.2% British Virgin Islands $61 1.0%
Germany $1,683 5.3% Latvia $61 1.0%
Switzerland $1,516 4.8% Hungary $18 0.3%
“0” reflects amounts rounded to +/- USD 500,000.

Source: State Statistics Service of Ukraine


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $107 100% All Countries 3 100% All Countries 104 100%
Cyprus $66 62% Latvia 1 33% Cyprus $66 62%
United Kingdom $29 27% Other 2 67% United Kingdom $29 27%
United States $9 8% United States $9 8%

14. Contact for More Information

Laura Valeria Solano
Economic Officer
U.S. Embassy Kyiv, Ukraine
Email: SolanoLV@state.gov