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.
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 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.
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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