Bringing investment to Iraq

Donata Garrasi, ECAS Consulting, and Klaus Hachmeier, Iraq Co-ordinator for the OECD Global Relations Secretariat Middle East and Africa Division (Any views and opinions expressed in this publication are those of the authors and do not necessarily reflect the official view of the OECD or its member governments.)

Massive, popular protests for better public service in Baghdad and across Iraq this summer have prompted the government to announce and execute reforms, which, among other things, reduce the salaries and privileges of government officials and parliamentarians and take steps to fight corruption. Iraqis are sending a clear message: they have had enough, not only of the so called Islamic State and the on-going war against it, but also from years of perceived public mismanagement, corruption, and lacking basic service – for example, the electricity network is not robust enough to provide more than 6 to 8 hours of electricity to the average household. All of this when low oil prices are expected to tear a double-digit deficit into the national budget, forcing Iraq to tap international bond markets for the first time in many years.

But next to these momentous challenges, the Iraqi government continues its agenda for economic reforms. And it is right in doing so as Iraq needs new and greater investment to get on the right track. Economic revitalization, promoting Foreign Direct Investment (FDI), and regional cooperation and trade are key components of any strategy to reduce conflict and build peace, even more so in today’s turbulent Middle East. Creating jobs, raising revenues to pay for quality services, and re-establishing regional economic cooperation are as important as reaching a political settlement and re-establishing security. They all contribute to the same goal, which is to create the conditions for stability and peace.

Governments have no choice but to prioritise action in this area. According to the World Bank, FDI in 25 countries that were classified as conflict affected or fragile grew at a compound annual rate of 12% compared to 4.5% growth in the rest of the world’s FDI in the period of 2005-2012. The figures show that in such high-risk countries untapped resources, reconstruction needs and unmet consumer demand present opportunities for domestic and foreign investors.

Iraq proves the case: the country has witnessed FDI inflows of an impressive $4.8 billion in 2014, according to the 2015 UNCTAD world investment report, an amount similar to countries such as Egypt and Nigeria. While most investments were in the oil and gas sector, the numbers show that a country such as Iraq can attract higher amounts of foreign capital. And while investment volumes will certainly remain somewhat muted and “below potential” until the overall political situation is clearer and security improves, Iraq should use the time to improve investment conditions to better attract private investment and capital now and in the future.

But how is it possible to build investors’ confidence in a country whose territorial integrity and scope for action is under stress from violent extremist groups, separatist movements, factional strife, and foreign interference?

It may indeed sound like an impossible task. But the reality on the ground is also that some businesses are doing well, that the country will continue to receive large inflows of oil revenues, and that the population is young and relatively well-educated. More trust and opportunities can be built as sound reforms are undertaken. The “General Framework of the Government Programme 2014-2018” details the Iraq government’s economic reform agenda. It includes expanding the role of private sector, improving the investment climate, restructuring State Owned Enterprises (SOE), and providing industrial and trade infrastructure through free trade and industrial zones. In line with these commitments, the Government of Iraq has already launched its Private Sector Development Strategy, set up a committee tasked with reforming Iraq’s state-owned enterprises, and seeks to reform its investment law.

So, whilst most of international attention is on the shortcomings of the country and on the related global threats, notably terrorism, organisations like the OECD, working with the Swedish Development Cooperation Agency (SIDA), continue to support programmes aimed at improving the business and investment climate in Iraq. Easy to say, hard to do. What concretely can be done in such challenging contexts as in Iraq today?

The expected outcome of this collaboration is pretty straightforward, albeit ambitious: “ to improve the Government of Iraq’s ability to attract private investment – outside of hydrocarbons – that generate jobs.” How is this going to be done?

First, the Iraqi investment policy framework needs to be strengthened. Here, the OECD is helping to analyse the laws and regulations relevant to investment in Iraq and will formulate recommendations on how to improve the legal framework. This will hopefully contribute to a new investment law, expected to be approved before the end of 2015. The programme, which involves a range of actors, including from the private sector, has a flexible approach, which is key to be able to adjust to the shifting priorities of the Iraqi government.

Second, the government must improve its ability to attract and retain private investment through investment marketing and outreach to investors. Iraq’s National Investment Commission (NIC), the country’s investment promotion agency is the key player here. It needs to be strengthened and to become the central advocator for investment within the Iraqi government. The ambition is two-fold: building an investment proposition with economic indicators, and; better identify and address constraints to investment.

Another key objective to help attract investment is to define and formulate investment opportunities in state-owned enterprises, which investors traditionally find attractive. The development of special economic zones will also help. Iraq has different Economic Zones models, including free zones, which are already active, and has plans to develop industrial zones, investment zones, and economic cities. Such economic zones can be powerful tools to attract investment and create jobs, as they can offer the infrastructure and administrative services investors seek. The OECD and SIDA supported programme is contributing through policy advice on how to design, implement and manage new and existing economic zones – including on a new law on investment zones.

Last, and this absolutely crucial for Iraq and for the region, regional economic integration and trade must be at the forefront of the international response to instability in the region. As the Nobel laureate economist Douglass North has argued, long-term conflict resolution usually requires enduring economic relations, which are best cultivated through specialization and trade, and an open trade system which allows for integration into regional and global value chains. The dynamic is clear: By increasing the cost of violent conflict, dense economic networks and multiple exchange relationships provide powerful incentives for actors to prefer peaceful solutions.

This may sound overly ambitious, but economic cooperation in the Middle East has become a necessity, a key pillar for peace and stability. The well-recognized relationship between economic cooperation and political stability will be crucial for charting a way out of the current quagmire, as experts like Adeel Malik, from Oxford University, and the former finance minister of Jordan, Bassem Awadallah, eloquently explained in a recent commentary on how to escape the Middle East violence trap.

Sufficient attention and funding should be provided to innovative programmes that try to promote key reforms amidst conflict. And in this case, to the Iraq private sector strategy and to initiatives that aim to support such efforts.

Useful links

OECD work on investment and infrastructure financing in Iraq

Swedish Development Cooperation Agency’s work in Iraq

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2 comments to “Bringing investment to Iraq”

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  1. Claire Leigh - 29/09/2015 Reply

    Great article about an important topic. With the SDGs agreed in New York this week, we need to do a lot more thinking on how to provide ‘decent jobs’ for all, especially in fragile and conflict-affected states. It would have been great to hear more about 4 specific aspects:
    1- The idea of economic free zones is often floated for countries like Iraq, but how does this fit with the noted need for increased tax revenues to fund better public services. Doesn’t this just create a ‘race to the bottom’ for countries trying to attract foreign capital, setting up unrealistic expectations by foreign firms, and trapping the government into low levels of corporate taxation in the long run?
    2- What is the role of business insurance in a country like Iraq? It seems to be that innovative solutions to risk management are needed to provide business confidence.
    3- Doesn’t a focus on natural resource investment create risks associated with lack of diversification, and consequently leave states vulnerable to commodity shocks? The question for me is how can investors be attracted outside of these sectors, into labour-intensive industries that will provide a critical mass of local jobs?
    4- Finally, alongside FDI, the article could say more about methods to increase private domestic investment. For sure in Iraq there is a lot of money in the hands of local people, acquired legitimately or not. Preventing the expatriation of this money, and encouraging local investment in business and property would go someway to ensure that at least this money does some good.

  2. Christophe Bellinger - 03/10/2015 Reply

    Attracting investment into Iraq at this time is the availability of guarantees and political risk insurance to local and foreign investors and financial institutions. However, even MDBs and DFIs that offer these instruments may be reluctant to do so at this time. One consideration would be to establish a guarantee fund similar to those that have been established in other post conflict, conflict and fragile state countries. The guarantee fund could be funded from various sources. The funds would be used to back guarantees and political risk insurance either on a first loss basis, or the entire guarantee. The management of guarantee and political risk insurance could be outsourced or managed by the fund administrator from the interest in the fund. Christophe Bellinger (guarantee specialist and former staff at OPIC, AIG, MIGA, Asian Development Bank, and now a senior consultant at the African Development Bank-see Linked-in profile).

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