The following overview was produced by the USAID-funded Izdihar Private Sector Growth and Employment Generation Project.

Introduction

Between 1980 and 2003 per capita GDP in Iraq fell from USD 3600 to around USD 700; however since 2003, Iraq has charted a new course for economic growth.  The GDP per capita had already risen to an estimated USD 1050 in 2005. Iraq is now on the path to establishing laws and regulations intended to attract foreign investment and rebuild the economy.

Substantial progress has already been made to remove some of the obstacles to open up the market and to develop an investor-friendly business environment. Efforts are underway to control inflation and the value of the currency has been stabilized.  Iraq is in the process of adopting an open trade and investment regime with a focus on strengthening the private sector.

The government has made rejoining the international community a key part of its economic development strategy, and investment will play a key role. Iraq's National Development Strategy for 2005-2007 articulates this new direction. Several goals outlined in this strategy include ensuring private sector growth through creation of a favorable legal environment, fostering a transition to a modern free market economy, and integrating Iraq into the global economy.

Openness to Foreign Investment

Several laws that went into effect under the Coalition Provisional Authority (CPA) changed Iraq's legal regime with respect to attracting foreign investment, giving foreign investors national treatment with regard to their investments, unless proscribed otherwise, although ownership in the natural resources sector involving primary extraction and initial processing was not permitted.

Iraq now has a new Investment Law passed on October 22^nd 2006.

The Iraqi investment law at a glance

The Iraqi investment law approved by the Iraqi parliament in its session on 10 October 2006 has come into effect. It regulates the national and foreign investment process in Iraq.

Privileges and Guarantees Offered to Investors:

1. Taking out capital brought into Iraq with its revenues in hard currency

2. Dealing with the Iraqi securities market

3. Leasing land needed for the project or using it on condition that the term does not exceed a period of 50 years that can be renewed

4. Insuring the investment project at any national or foreign insurance company

5. Opening accounts in Iraqi Dinar or foreign currency or both at Iraqi banks or at banks outside Iraq

6. Obtaining residency and facilitating investors’ entry to Iraq and leaving Iraq

7. Non-confiscation or nationalization of the investment project

8. Non-Iraqi workers have the right to transfer their salaries and indemnities outside Iraq

Exemption from fees and taxes for ten years beginning with the date of starting the project. This period is renewable. Also, furniture and assets needed for expanding and modernizing the project are exempt.

Investor Commitments:

1. Informing the commission of the date of starting work on the project

2. Maintaining accurate book-keeping checked by an authorized lawyer

3. Presenting economic and technical feasibility studies with all the maps related to the project

4. Keeping a record of imported materials, protecting the environment, and commitment to qualitative control systems

5. Complying with Iraqi laws and the action plan methodology presented by investors

Areas of investment

The law opened most areas of investment to Iraqi and foreign investors.  Exceptions are the extraction and production of oil and gas and other natural resources at the primary stage, and the banking and financial sectors.  A separate hydrocarbon law is contemplated, and financial services fall under their own legislation and regulations.

Land cannot be owned except for housing projects. It can be owned by Iraqis as separate units; otherwise, it is given for a period of fifty years, which is renewable.

Investment Commissions in Iraq

The law stipulates the formation of two kinds of investment commissions in Iraq:

The National Commission for Investment responsible for the formulation of the national policy for investment, the development of plans and controls, and monitors the application of controls.  It is responsible for federal investment projects. The director will have the rank of Minister and the appointment requires confirmation by the parliament. The board will include three representatives from the private sector chosen by the prime minister.

Because the federal structure in Iraq has been approved through the law on the formation of regions, the investment law has also provided for the establishment of commissions at the regional and governorate level.  The regional and governorate commissions will have the power to grant investment licenses, encourage investment, and open local branches in areas under their jurisdiction in consultation with the national commission.  The local investment plans are not to contradict the federal investment plans.

Evaluation

The new investment law will surely make a big qualitative change in the Iraqi economy by means of incoming capital and foreign expertise.  By clarifying the investment situation for investors it will help pave the way toward renewing the infrastructure of the Iraqi economy and providing capital for reconstruction and development. 

Some 93-95% of the Iraqi federal budget is derived from the proceeds of crude oil, and the state supports large programs for food rations, subsidizing fuel prices, and the social welfare system. Iraq understands that national needs cannot be met by raw petroleum revenues alone. Thus Iraq like the rest of the world must resort to investment.

The damage to the Iraqi economic infrastructure since 1980 has been significant, and Iraq has a rapidly growing population.  There are many potentially profitable areas for investment, including financial services, housing, agriculture, and cement among others.

That the investment law establishes the basic rules for the investor with guarantees and protection is an important step.  Many parts of the country have a secure environment for investment. The growth and development of these governorates will proceed, and we hope that the improved security we all hope for will allow investment throughout Iraq.

Currency Conversions and Transfer Policies

Iraq ranks favorably in comparison to its neighbors with regard to minimal capital requirements. Article 28 of Company Law No. 21 specifies minimum capital requirements for various types of companies: Joint Stock Company - (US $1,362); Limited Company - (US $680); other types of companies (US $340). Iraq ranks favorably compared to regional competitors, such as Egypt, Jordan, Kuwait, Saudi Arabia, Syria, and the UAE. Foreign banks with a majority of foreign capital must obtain special permission from the Central Bank of Iraq to operate. Branches of foreign banks must maintain an unspecified positive balance of assets over liabilities and have $25 million in capital ($5 million for Iraqi banks).

The currency of Iraq is the Dinar (ID– also referred to as the New Iraqi Dinar). The exchange system is free, with no restrictions on the purchase or sale of foreign currencies. The ID is fully convertible.  In addition, there is free movement of capital without restrictions on capital inflows and outflows.

The exchange rate is generally determined on the basis of supply and demand conditions in the foreign exchange market. Banks may engage in spot transactions in any currency, but are not allowed to engage in forward transactions in Iraqi Dinar for speculative purposes. The Central Bank of Iraq (CBI) can intervene, when necessary, in order to maintain stability in the foreign exchange market. In addition, there are no taxes or subsidies on purchases or sales of foreign exchange.

The Government of Iraq's monetary policy since 2003 has focused on maintaining price stability and a stable exchange rate. In addition, the Central Bank of Iraq conducts daily foreign exchange auctions to limit the impact on base money growth of the sale of the government's oil export earnings.

Transparency of the Regulatory System

Potential investors in Iraq face certain complexities under various laws, regulations and administrative procedures. However, the government intends to begin a program to reduce such difficulties, and the new investment law is the first step in that direction.  In addition, we intend to improve and simplify various procedures for obtaining project and investment licenses, and expect the new Investment Commission to lead the way.  The relationship between regional laws such as the recently passed Kurdistan Investment Law and the federal law will also be clarified shortly.

There are still large areas of the Iraqi economy that are centralized and over time many of these functions will pass to the private sector.  Already under the previous regime there were many joint ventures between the state and private sector.  In addition there is a Commission on Public Integrity (CPI) tasked with investigating allegations of graft and misconduct within government.  It has the authority to refer cases to the judiciary, acts as an enforcement arm of Iraq's anti-corruption laws and performs its duties in conjunction with the Board of Supreme Audit (BSA) and the ministry Inspectors General (IGs).

Bilateral Investment Agreements and Regional Cooperation

Iraq is signatory to thirty-two bilateral, and nine multilateral agreements within the Arab League, with respect to Investment Promotion and Protection (IPPA). There are also existing bilateral agreements with India, Iran, Japan, Jordan, Kuwait, Mauritania, Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam and Yemen amongst others.  In addition, Iraq has bilateral free trade area (FTA) agreements with UAE, Oman, Qatar, Algeria, Egypt, Jordan, Lebanon, Syria, Tunisia, Yemen, and Sudan.  On July 11, 2005, Iraq and the U.S. signed a Trade and Investment Framework Agreement (TIFA) as a first step toward creating liberalized trade and increasing investment flows between the U.S. and Iraq.

Foreign Trade Zones and Ports

The Free Zone Authority Law No. 3/1998 (FZL) permits investment in Free Zones through industrial, commercial, and service projects. This law operates under the Instructions for Free Zone Management and the Regulation of Investors' Business No. 4/1999. Under the Free Zone Authority Law, goods imported and exported from the FZ are exempt from all taxes and duties, unless imported into Iraq. However, this exemption does not apply to the Reconstruction Levy (CPA Order No. 54). Capital, profits, and investment income from projects in the FZ are exempt from all taxes and fees throughout the life of the project, including in the foundation and construction phases. The application process for an investor involves submitting an application and a fees of US$100 to the Free Zone Authority. The investor must sign a lease within 30 days of lease approval.

Activities permitted in Free Zones include: (a) industrial activities (both production and consumer), assembly, installation, sorting and refilling processes; (b) storage, re-export and trading operations; (c) service and storage projects and transport of all kinds; (d) banking, insurance and reinsurance activities; and (e) supplementary and auxiliary professional and service activities. Prohibited activities include actions disallowed by other laws in force, such as weapons manufacture, environmentally-polluting industries and those banned by the place of origin.

Current FZ locations include: (a) Basra/Khor al- Zubair Free Zone: This one million square mile zone is located 40 miles southwest of Basra on the Arabian Gulf at the Khor al-Zubair seaport and has been in operation since June 2004; (b) Ninewa/Falafel Free Zone: this 400,000 square mile zone is located in the north, near roads and railways that reach Turkey, Syria, Jordan and the Basra ports; (c) Sulaymaniyah Free Zone: this zone is located in northern Iraq; (d) al- Quaymen Free Zone; this zone has two phases located near the Iraqi-Syrian border. It is close to roads and railways that reach Turkey, Basra, and Jordan. The zone's first phase is limited to commercial and service activities.

We hope that the information in brief given above will help you understand the present investment climate in Iraq and assist you toward taking the initial steps with respect to your potential plans regarding investment in Iraq. 

Produced by

IZDIHAR: Iraq Private Sector Growth and Employment Generation

A Project Funded by the
US Agency for International Development
Contract: 267-C-00-04-00435-00

For general commercial assistance on this or other topics in this series of short alert reports, please contact our Baghdad, Erbil or Amman office.