There is no doubt about it. Iraq remains one of the most difficult places on earth to do business in. There are fundamental problems in terms of security, bureaucracy, corruption, and a general lack of dynamism in the economy. The World Bank Group ranks Iraq as number 164 in its “Doing Business” report, making it the lowest ranked country in the entire Middle East. And as American troops left the country in December 2011, concerns have increased about the risk that it will fall back into sectarian violence.
However, looking over the past years, there are signs that overall violence is down. And although progress is slow, average living conditions across the country are improving, with better access to basic needs such as electricity and potable water.
“Despite its turbulent history, Iraq has succeeded in building a material foundation for a future economy. The currency has been quite stable against the dollar, and the inflation rate is less than 6 per cent,” said Hussain al-Shahristani, the country’s Deputy Prime Minister for Energy, at a conference on business opportunities in Iraq organised by the Middle East Association in London in November 2011.
Dr al-Shahristani also underlined that Iraq is now facing the most ambitious reconstruction program in its history. But in order for the country to capitalise on the opportunities that exist, it needs help from the outside. Lack of financing and resources are key issues, and without foreign investments much of the potential will be lost.
A key incentive to engage with Iraq has been its ability to withstand the global recession. According to Robin Ord-Smith, Director at UK Trade and Investment in Iraq and the next British Ambassador to Tajikistan, “9 per cent GDP growth makes Iraq one of the most interesting emerging markets today”. Lord Howell of Guildford, Minister of State Foreign and Commonwealth Office, argued along a similar line, saying that “Iraq’s growth figures makes for an impressive performance at a time when most of the global economy is seeking to recover”.
Iraqi Kurdistan continues to show a higher level of development than the rest of the country. The region has for years been something of a safe haven, attracting both foreign investors and tourists seeking an unusual experience. And while oil remains pivotal, recent investments have been made in irrigation systems and agriculture as well as in the growing food processing industry. The regional government has formulated a diversification plan with particular focus on agriculture, industry, tourism, banking and health care. However, much expertise is needed in all of these areas.
On a national level, the oil industry represents 80 per cent of government revenue and more than 90 per cent of its foreign exchange earnings. Diversification should be an important part of the political agenda, although more than anything, Iraq needs to deal with the basics. Overall infrastructure is very poor, and with US troops gone many worry about potential attacks on energy resources, which puts pressure on the government to invest in infrastructure around industrial areas and oil and gas fields.
Another issue that needs to be dealt with is the antiquated telecommunication networks. Internet access is unreliable and restricted to certain areas. Michael Shipster, International Director of Rolls-Royce, points out three other common problems that companies face when doing business in Iraq; difficulties in getting decisions from government ministries, slow bureaucratic processes when striking deals and shortage of available finances. Issues with payments is another challenge for many foreign companies.
Despite the obstacles, foreign investors seem to garner serious interest in Iraq’s untapped opportunities. The country attracted 7 per cent of Foreign Direct Investments (FDI) that came into the Middle East in 2010, up from 2 per cent in 2009, making it the third largest recipient of FDI after Lebanon and Saudi Arabia. The oil sector obviously accounts for the lion’s share of investments, even though there has been no new exploration since 1990.
Blessed with massive reserves, Iraq’s dependence on oil is set to continue. Official estimates point at some 145 billion barrels. However, according to Hussain al-Shahristani, those numbers ought to be significantly higher, probably somewhere around 200 billion barrels. Foreign oil giants such as BP and Shell, both with existing operations in the country, are eager to sign new multi-billion contracts. But in order for the deals to reach their full potential, the Iraqi government must invest in upgrading infrastructure, pipelines and oil processing.
The general impression from the conference in London is that foreign companies have learned to deal with the security situation, which consequently is not necessarily the biggest problem today. More concern rather stems from the fact that the business environment needs to be significantly improved, and a lot of what should be done lies in the hands of the Iraqi government and local councils. So as long as the political leadership can take the right steps, foreign companies and investors should be able to increase their presence and investments in Iraq, not least in other sectors than oil.