The results of the Kuwait International Conference for the Reconstruction of Iraq last month were modest, while the conference targeted to raise $100 billion, it barely raised $30 billion. This modest achievement cannot be underestimated, and we can build on it. But the most important question is, can international investors be persuaded to return to Iraq?
In Iraq, post-conflict recovery will depend upon rebuilding key infrastructure, institutions, and individuals’ trust. Fundamental to all of these is significant and sustained investment in the country. Historically, foreign investment in Iraq has failed to deliver successful results. To a large extent, this is due to a series of recurrent challenges that have appeared time and again as stumbling blocks to investment projects in the country.
Now more than ever, following the February conference and the pledge of US $30 billion to the country, is it necessary to assess the mistakes of the past and the mistakes of the present that have prevented getting a larger sum, and to make sure that they are avoided in the future.
One of the most fundamental obstructions to successful foreign investment in Iraq is the unrelenting grasp that the state continues to run a large part of country’s economy. It is a difficulty that has been recognized by the United Nations and the Iraqi government itself. The extent of the problem is vast, affecting the entire gamut of industries in the country. For example, the three state-owned insurance companies dominate their sector, while it is estimated that the country’s 18 private insurance companies account for as little as 11% of business. Between 2011 and 2017, the State Company for Land Transportation doubled its profits at the expense of private enterprise.
Therefore, the government should re-evaluate its experience in managing the economic file and open the way for the private sector to contribute to the reconstruction of the country by marketing attractive investment opportunities, providing adequate explanations to investors about the extent of protecting their rights and cooperating with private sector institutions to bring professional practice and pioneering ideas to all. Economic sectors that the government is unable to manage and develop.
Most significant and most well-known is the state’s dominance of the petroleum industry, which accounts for 99% of government revenue, with only a handful of private companies playing a role. Until the public sector relinquishes a considerable degree of control over commerce in Iraq, local SMEs will struggle, and foreign investment will continue to face this troublesome obstacle to success.
Parallel to the towering presence of the state runs an undercurrent of persistent corruption that is widely accepted. According to current and former Iraqi officials, though it may be a legacy of the authoritarian era, corruption in all areas of the country is a significant and enduring problem.
In Transparency International’s 2017 Corruptions Perceptions Index, Iraq ranked 169 out of 180 countries. The extent of corruption is a clear hindrance to investment in Iraq, but it is not insurmountable; the growing strength of the anti-corruption Commission of Integrity (CoI) is a positive indication of its diminishing influence on the post-conflict state. In 2015, the CoI recovered assets worth 37 billion dinars (approx. $30 million). In the last two years, that figure has grown by more than three times to 132 billion dinars ($110 million) in 2017. Iraq’s corruption crackdown has begun emphatically and encouragingly. It is worth mentioning here, that I, through meetings with officials of the economic and banking sector in Iraq, have found that there is a real and serious intention to fight and reduce corruption, and this is encouraging and welcomed.
One adverse effect of corruption in the military and security services, according to TI in 2015, was the ‘major security challenge’ posed by ISIS. Of course, security concerns have beleaguered aid and investment initiatives in Iraq throughout its recent history. According to the final report in 2013 from the Office of the US Special Inspector General for Iraq Reconstruction, attacks on construction sites and western contractors ‘caused high rates of worker absenteeism, disrupted logistics, delayed countless projects, escalated security and project costs, and forced projects to shut down.’
Similarly, many UN agencies have reported security-related difficulties. These security risks have naturally impacted negatively on the investment environment in the country. In 2013, official trading volume in Iraq peaked at 2,840 billion dinars (approx. $2 billion). The worsening security situation in 2014 saw a drop in this figure by 68% to 901 billion dinars (just over $750 million). Clearly, there is now potential for huge and rapid growth in Iraq and this growth will only continue with the increased economic and social stability that investment will bring.
As a result of the existing obstacles to growth in the country, Iraqi banks are typically extremely risk-averse and rarely lend money to local businesses. The result of this is that the Iraqi private sector, especially its small and medium-sized private businesses, rely heavily upon foreign funding in order to expand. However, this lack of independence from foreign funds of course acts as a deterrent to foreign investment in the first place.
Radical reform of the country’s banking system is needed. The first step in this direction should be increased support for private sector growth with the ultimate aim of restoring foreign investor confidence in the country’s financial environment. Today, work must be done to consider the establishment of a debt market in Iraq to be managed and sponsored by the government in cooperation with international bodies with expertise in this area, the development of the debt market in Iraq gives broad financing options for companies wishing to contribute to reconstruction projects and gives strength and durability to the Iraqi economy.
These obstacles to foreign investment have been persistent throughout Iraq’s years of conflict and turbulent social and economic conditions. The signs of a gradual return to stability in the country are laying the foundation for a more prosperous future, and a healthier prospect for investors.
It is essential today that stakeholders both inside and outside Iraq work towards the effective partnering of international investment with local stakeholders, focussing on private sector businesses. This alone can be the self-sufficient engine of sustainable and diversified economic growth and job creation in the country. As this high-growth potential country emerges from years of conflict, the time to invest in Iraq’s future – for both the Iraqi and the foreign investors – is now.