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23 June, 2021updated 29 Oct 2021 12:40

The final frontier: Iraq’s opportunities for intrepid investors

Iraq has been blighted by conflict over the past few decades, and remains a turbulent environment. However, myriad opportunities exist for risk tolerant investors.

By Sebastian Shehadi

iraq-mosul-fdi

Iraqi cities such as Mosul require huge reconstruction efforts, offering opportunities for foreign investors. (Photo by Ahmad Al-Rubaye/AFP via Getty Images)

As Covid-19 continues to ravage Iraq, the country’s already war-torn economy is struggling, to say the least. Although the Islamic State was formally defeated in 2017, following three years of chaos, it and other paramilitary groups continue to pose security challenges across the country.

This situation is part of a wider backdrop of strife. The past four decades have seen Iraq crippled by wars, interspersed by bouts of stability. The flow of foreign direct investment (FDI) to the country is a perfect reflection of this instability, as the table below shows. 

For example, in the years after the 2003 US invasion of Iraq, investment plummeted. Five years on, however, it began to shoot back up. Supported by a strong oil price and relative peace, 2010–13 was a particularly positive chapter: the stock market experienced significant inflows, while FDI hit record highs. It finally seemed as if Iraq might be going in the right direction. 

Then came the Islamic State, commencing with the dramatic invasion of Mosul in 2014. To make matters worse, that same summer saw global oil prices begin to plunge. Iraq, home to some of the world's largest known oil reserves, was once again mired in a perfect storm. Black gold accounts for an eye-watering 65% of the country's GDP.

Unsurprisingly, FDI to the country sank with the rise of Islamic State. In fact, headline FDI flows turned negative, where they remained for years. However, investment looked like it might start to rebound from 2019 onwards, as relative stability was restored to many parts of Iraq. Covid, however, had other ideas. 

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Opportunities to rebuild Iraq

Iraq’s infrastructure was grossly insufficient even before the advent of Islamic State. Today, much of it is in tatters, especially in the west of the country. The World Bank estimates the needs of reconstruction at $88bn – a conservative figure by many accounts. 

Amid Iraq’s economic meltdown, agri-food can play a pivotal role in turning the economy around and putting it back on a sustainable growth track. World Bank and the International Fund for Agricultural Development consultant

Attracting FDI is key to the reconstruction of the country, particularly given the lack of local finance. However, the country’s investment climate is attractive only to investors with the highest tolerance of risk, a tough offer outside the country’s lucrative oil industry, which has not struggled to attract huge investments. For example, in 2019, Russia’s state-owned oil company Gazprom Neft expanded its oil production in Iraq. 

Outside the world of extractives, the World Bank has taken the initiative to rebuild the country, with $355m being committed to Iraq’s Transport Corridors Project. Meanwhile, another $210m has gone to Baghdad Water and Sewerage Improvement, $200m for the Basra Electricity Dissemination and Development Project, and other sums to a host of other projects.  

A year after the defeat of Islamic State, Iraq’s National Investment Commission (NIC) released a list of 157 major to medium-sized projects seeking foreign investment. This handbook remains relevant, since little private investment has been secured since then. The pace of reconstruction is severely lagging. In its 2021 investor’s guide, NIC starkly stated that all of the country’s infrastructure has “been subject to devastation”.

Most of the aforementioned 157 projects are located in the relatively peaceful south-east or north-east of Iraq, where Islamic State has been more concertedly driven out, and the majority of these are within the chemicals, petrochemicals, fertilisers and refinery sector. 

However, reconstruction of west Iraq is also a key part of NIC’s list, with projects such as the rehabilitation and development of Mosul International Airport (roughly 40% of which is damaged) and the reconstruction of railways, highways and ports across the country. Investment for a Baghdad subway and metro was also listed. NIC has also highlighted opportunities in Iraq’s four special economic zones in Baghdad, Nineveh, Dewaniya and Huteen – the focus being on manufacturing, agriculture or new technologies. 

Upgrading cities or building them from scratch

Earlier in 2021, Iraq announced plans to build 12 new residential cities aimed at tackling the national housing crisis caused by war damage and rapid population growth. 

The new projects resemble the new Bismaya City, which is being constructed near Baghdad by the South Korean Hanwha Engineering and Construction Company. Located south-east of the capital, it is made up of some 100,000 houses and is set to accommodate approximately 600,000 people. 

Iraq is also looking to start work on an elevated metro system for Baghdad in the second quarter of 2022. The project has been awarded to France’s transport giant Alstom, and it cleared the last remaining hurdles in early 2021. Around the same time, a French company also won the contract to rebuild Mosul Airport, while in 2020 Iraq’s electricity sector agreed contacts with GE and Siemens to upgrade Iraq's power stations and transmission grid.

Meanwhile, opportunities exist for Baghdad Airport, which has plans to grow. John Menzies, a London-listed airport service company, expanded into Iraq in 2020 – a very positive signal for foreign investors. Similarly, while the Iraq Stock Exchange has suffered numerous setbacks since 2013, the first half of 2021 saw the market begin a significant recovery for the first time. 

The US Department of State summerises Iraq’s offering in its 2019 Investment Climate report: “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 defence articles.

“A December 2018 trade mission by 57 US companies to Baghdad represented many of these sectors, but the obstacles to doing business in Iraq are substantial and few of these companies realised any significant progress since their visit to Iraq.” 

 

Bold investors will see the long-term opportunity in Iraq

Corruption, institutional weakness, ongoing security concerns and cumbersome bureaucracy are just some of the major barriers to investing in Iraq. This is a war-torn country whose peace remains a fragile one – a shocking two million people remain displaced from the IS conflict. 

However, investors with an appetite for frontier markets will spot the opportunity to get involved in Iraq’s rebirth. Reconstruction and oil aside, it is one of the Middle East’s most populous countries, so the potential of its domestic market is something to behold. 

This is why Iraq's agri-food sector is one of the few segments of the economy that the private sector has been historically willing to invest in, despite years of national instability.

“Amid Iraq’s economic meltdown, agri-food can play a pivotal role in turning the economy around and putting it back on a sustainable growth track,” writes one consultant at the World Bank and the International Fund for Agricultural Development in Iraq. “Agri-food is a low-hanging fruit: it can attract much-needed private sector investment at a time of government cash crunch and create jobs quickly, as the country struggles with youth dissatisfaction, a high unemployment rate, almost daily protests, and the return of insurgency.”

Beyond the domestic market, Iraq could become a global player in strategic commodities such as wheat, barley, dates and high-value crops. The World Bank estimates that Iraq’s agri-food sector could create 23,382 small enterprises in a high-growth environment, adding more than 120,000 new jobs by 2030. Agriculture accounts for about 7% of Iraq’s GDP and employs one-fifth of the workforce.

In short, agri-food is a fertile spot for investment in Iraq’s non-oil landscape, a space that is likely to heat up once Covid-19 is controlled. For now, however, Iraq’s reconstruction is the priority for most investors, as shown by the spree of contracts awarded to foreign companies over the past two years – a very encouraging sign indeed. 

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