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
|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|