Foreign direct investment (FDI) in Iraq

FDI in Figures

Global foreign direct investment (FDI) flows in 2021 were USD 1.58 trillion, up 64 per cent from the exceptionally low level in 2020. The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages. However, the global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. Investor uncertainty has put significant downward pressure on global FDI in 2022, and new investment project numbers, including greenfield announcements, international project finance (IPF) deals, and cross-border mergers and acquisitions, all shifted in reverse after the first quarter of 2022 to start declining. Cross-border M&A sales were 6% lower and IPF values more than 30% lower in 2022. The outlook for global FDI in 2023 appears weak, with a significant number of economies around the world expected to enter a recession. Negative or slow growth in many economies, further deteriorating financing conditions, investor uncertainty in the face of multiple crises and, especially in developing countries, increasing risks associated with debt levels will put significant downward pressure on FDI (UNCTAD Global Investment Trends Monitor, January 2023). The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates, and fears of a coming recession.

According to UNCTAD's 2022 World Investment Report, FDI inflows stood at USD -2.61 billion in 2021, compared to USD -2.85 billion in 2020, slightly up but still negative as a result of the global economic crisis triggered by the Covid-19 pandemic. The latest data available for FDI stock date from 2018, it fell to USD 10.1 billion, accounting for nearly 5.3% of GDP of the country. Since 2013 the FDI inflow has been negative, Iraq has had trouble attracting foreign capital because of its substantial security problems, fragile institutions and lack of governance. Nevertheless, hydrocarbons continue to draw in foreign companies, and the majority of FDI goes to the oil industry.  In addition to the oil industry, the production of cement and the construction & public works sector offer interesting opportunities for investment. The United States and the European Union are the leading investors in Iraq. In 2021, the electricity sector attracted some of the largest investment projects of the year, with GE and Siemens agreeing to upgrade Iraq's power stations and transmission grid.

Iraq has long term potential for foreign investments. In fact, the country has the fourth largest proven oil reserves in the world and needs major reconstruction efforts and infrastructure development. According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favourable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited. However, Iraq’s National Investment Law limits foreign direct and indirect ownership of natural resources, particularly the extraction and processing of any natural resources. Further restrictions apply to the ownership of banks and insurance companies. According to the National Investment Law, the Iraqi government reserves the right to screen foreign direct investment. Iraq is making slow progress enacting laws and developing institutions needed to implement economic policies. Furthermore, political reforms are still needed to assuage investors' concerns regarding the uncertain business climate. The Iraqi government is eager to attract additional foreign direct investment, but it faces several obstacles, including a weak political system and concerns about security and social stability. The security environment, including the threat of resurgent extremist groups, remains an investment impediment in many parts of the country.  Other lingering effects of the fight against ISIS include major disruptions of key domestic and international trade routes and the negative impacts on respective economic infrastructure (US Department of State, 2023). 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. Corruption, obsolete infrastructure, a lack of skilled labour and outdated commercial laws hinder investment and continue to constrain growth of private, non-oil sectors.

What to consider if you invest in Iraq

Strong Points

Iraq can be an interesting destination for FDI, as the country still needs investment in reconstruction and infrastructure development.
Among the country’s strong points:
- the national law on investments (NIL) comprises several exemptions for qualified investments, including a ten-year exemption from taxes and exemptions from import duties for the necessary equipment and materials
- in the coming years Iraq will have to implement several multi-billion dollar projects in numerous sectors, like security, energy, environment, construction, healthcare, tourism, agriculture, and infrastructure sectors
- investors can repatriate capital brought into Iraq, along with proceeds
- Iraq has the world’s fourth largest proven oil reserves
- a population of almost 40 million, with a young median age (less than 20 years).

Weak Points

The country has several factors hindering FDI, including:

- high dependence on the oil sector
- investors often find it hard to resolve commercial disputes and to receive timely payments
- the country’s regulatory environment remains opaque
- corruption, customs regulations, dysfunctional visa procedures, electricity shortages and lack of access to financing are all common complaints from foreign investors
- weak and limited banking sector
- corruption is widespread in government tenders and in the awarding of licenses or concessions
- violence and instability persist in many areas of the country.

Iraq ranked 168th out of 190 countries in the 2018 Doing Business report by the World Bank.

Government Measures to Motivate or Restrict FDI

The National Investment Law (NIL) was amended in December 2015 in order to improve the investment climate for FDI. The new provisions allow foreign investors to purchase land in Iraq for certain projects, and speed up the investment license process. Tax incentives include a ten-year exemption from taxes for qualified investments, along with exemptions from import duties.

The National Investment Commission (NIC) and the Provincial Investment Commissions (PICs) have been established to provide information, sign contracts, and facilitate registration for new foreign and domestic investors. The NIC can provide investors support in matters related to work permit applications, customs procedures and business registration.

On the other hand, as a result of popular protests, the Iraqi government has applied pressure on foreign companies to hire more of the local employees.