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26 April, 2021updated 12 Oct 2021 05:15

The state of play: FDI in Iraq

Iraq is seeking foreign direct investment to support its daunting reconstruction challenges but remains a country that is overly reliant on oil and risky for investors.

By Jon Whiteaker

Mosul-Iraq-rubble

Iraqi cities such as Mosul have been badly damaged by years of conflict and urgently require FDI to fund their reconstruction. (Photo by Zaid Al-Obeidi/AFP via Getty Images)

It was only in December 2017 that the government of Iraq declared victory over Islamic State, an insurgency that had held control over and inflicted ruin on large parts of its country. Today, Iraq still faces monumental reconstruction challenges.

In its 2021 investor’s guide, Iraq’s National Investment Commission (NIC) bluntly states that all of the country’s infrastructure has “been subject to devastation”.

Attracting foreign direct investment (FDI) is crucial to efforts to rebuild the country, particularly given the lack of local finance, but the country’s investment climate is attractive only to institutions with the highest tolerance of risk.

Iraq has three free zones, in Nineveh, Khor Al-Zubair and Al-Qaim, which provide investors with tax incentives, and active bilateral investment treaties in place with Kuwait, Armenia, Japan and France that aim to attract foreign businesses.

However, Iraq is placed 172nd out of 190 countries in the World Bank’s latest Doing Business ranking. As the US State Department summarises, Iraq continues to face “an uneven security environment, an economy primarily dependent on oil revenues, and deep institutional corruption”.

The slow reconstruction of Iraq

While on an upward trajectory, FDI inflows to Iraq remained negative in 2019, down $3bn, while outflows accounted for just 0.1% of GDP, according to the UN Conference on Trade and Development World Investment Report.

The oil sector dominates the Iraqi economy and drove pre-conflict FDI inflows to the country, which reached approximately $1.4bn in 2010. Russia’s state-owned oil company Gazprom Neft’s expansion in 2019 of its oil production in the autonomous Kurdistan region of Iraq demonstrated the ongoing attractiveness of the country’s sizable hydrocarbon resources to certain investors.

However, any recovery achieved by 2019 was rocked by the Covid-19 pandemic, which caused oil prices and global FDI volumes to plummet.

With oil prices starting to recover in early 2021 to pre-Covid levels, it is hoped that a stability in price could encourage greater investment into this sector, despite the challenge the energy transition poses for oil-producing states.

Iraq’s need for FDI

Iraq oil reserves, the fifth-largest in the world, may still be the biggest draw for foreign investors, but the whole of Iraq’s economy needs investment.

The World Bank estimated in 2018 that the cost of reconstruction and recovery in Iraq would total $88.2bn, with housing requiring the most investment ($16bn). The NIC listed 115 housing and infrastructure projects seeking investment in a 2021 report that highlights hundreds of proposed projects across all sections of the economy.

Despite having proven natural gas reserves of 132.9 trillion cubic feet, the 12th highest in the world, Iraq is importing gas due to the deficiencies of its gas infrastructure and its reliance on gas as a fuel for power stations.

The NIC report names five existing gas-fired power stations that need investment for rehabilitation or upgrading, while six smaller solar power projects with a combined capacity of 375MW are also listed. The NIC says that the devastation inflicted upon Iraq’s electricity infrastructure is the most significant for the country, given how all other areas of the economy rely on adequate power supply.

Meeting Iraq’s investment needs will be challenging and take time. The World Bank cautions that infrastructure investments tend to peak six years after the end of a conflict.

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