Iraq takes steps to rise from the rubble

Over the past three years, the world has watched Iraqi forces and their allies fight house-to-house battles across Iraqi cities previously captured by militant group Islamic State. In July, Iraqi prime minister Haider Al Abadi hailed the victory of his government’s forces, declaring from Mosul “the failure and collapse of the terrorist state of falsehood”. Many are now saying Iraq’s future is brighter than it has been for more than a decade. But reconstruction, which will require monumental reform and commitment in itself, may prove to be an even longer battle.

“Iraq’s economy hasn’t had this much hope and potential since 2003, when it was literally starting from zero after decades of war and severe economic sanctions,” says Wasim Salih, director at non-profit think tank the Council on International Policy. “Trade is set to expand in Iraq due to an overall improved security situation. The almost daily explosions and attacks have decreased dramatically. As Islamic State is almost completely eliminated in Iraq, major reconstruction in all previously held cities is badly needed.”

A time for optimism?

Reconstruction efforts are the key focus of the government of Iraq, as more than 900,000 people return to their demolished neighbourhoods and a shaken population waits for life to return to normal. Among the most dramatic cases is Iraq’s third largest city of Mosul: mapping data from the UN reveals that 22% of the city’s commercial and industrial infrastructure has been destroyed, and members of the local governorate of Ninevah’s reconstruction committee reported that three-quarters of Mosul’s roads and 65% of its electrical network has been wiped out. Reports estimate that it will take at least 10 years to rid the city of its remaining improvised explosive devices and dangerous remnants of war.

“It might be  a bit over the top to say this is the most optimistic time since 2003, but it’s certainly a huge improvement on recent years with Islamic State diminished, oil prices recovering and much international support for a united and stable Iraq, as shown by Kurdish Regional Government events,” says Richard Cotton, commercial adviser at the Iraqi British Business Council, referring to the failed Kurdish bid for independence. Oil prices have topped $60 a barrel amid anticipated extension of OPEC production cuts.

The events of the past year have led to both a renewed confidence and a sense of urgency from the international community, which at long last sees a genuine chance to build a stable Iraq. Recent conferences hosted by the government of Iraq from London to Dubai gathered public officials and private investors to discuss opportunities in the country. In March, the UK announced $12bn in funding for private infrastructure investment into Iraq over the next 10 years through UK export finance. Already, the mechanism is supporting a $117m GE and Enka UK consortium to build two vital power plants. “Construction of the projects  presents huge opportunities for UK exporters,” the UK’s minister for international trade, Greg Hands, said of the agreement.

Caution remains

Nonetheless, seasoned veterans of Iraqi business have a more tempered outlook. William Wakeham, director at insurance firm Alfagates Brokers, who has spent 13 years working in Iraq, warns: “We have seen many false dawns where Iraq is concerned. Yes, relationships with the neighbours are better and Islamic State is on the wane. But taking the contrarian view, Iran’s influence is as high as ever, and will the Kurdish majority in the Kurdish Regional Government quietly accept a constitution that is redrafted [to mean that] Kurdish aspirations for independence are extinguished forever?

“Meanwhile, the bureaucracy in conducting business is as difficult as ever, and there is the possibility that Islamic State leadership has melted into the background in Mosul creating sleeper cells. [The Kurdish region] was the only region with a real appetite to work, and was relatively open to the rest of the world.”

The US State Department’s 2015 Investment Climate Statement on Iraq cites “difficulties with corruption, customs regulations, cumbersome visa procedures, unreliable dispute resolution mechanisms, electricity shortages, and lack of access to financing” as common complaints from companies.

“Security is increasingly less of an issue,” says Mr Cotton, “but governance, lack of project finance and the issues relating to state-owned enterprises [SOEs] remain obstacles.” The government of Iraq operates some 196 SOEs, a legacy of decades of statist economic planning.

Road to reform

Significant reassurance for the international community came from the IMF’s three-year Stand-By Arrangement (SBA) programme with Iraq, which requires the government of Iraq to meet certain fiscal reform standards to receive loan tranches totalling some $5.4bn. Iraq also successfully entered the international bond market in January 2017 with a $1bn bond offering guaranteed by the US government, called a USAID bond, at a coupon rate of just 2.149%.

“As a follow-up to the USAID bond, the [government of Iraq] committed to issue in parallel an unguaranteed bond, and in August 2017 the government issued the $1bn, Iraq 2023 6.75% coupon – pulling in an impressive orderbook, which was 6.6 times oversubscribed,” says Hussain Qaragholi, head of corporate banking coverage for Iraq, the northern Gulf and Levant at Deutsche Bank, which lead-managed both issuances. “Having established a benchmark with Iraq’s first independent Eurobond, the government of Iraq and the IMF will focus on financing the capital budget for infrastructure projects utilising export credit agencies and development finance institutions-backed structures. We believe that international investors may find plenty of opportunities to lend into those projects.”

The IMF finished its second review of the SBA in August, concluding: “Further fiscal consolidation measures are needed in 2017-18 to keep the programme on track.” Improvement mandates include increasing non-oil revenue, reducing government subsidies, reforming SOEs and repaying debts. “Measures to prevent money-laundering, counter the financing of terrorism, and strengthen the anti-corruption legislation also need to be implemented,” the review concluded.

Mr Wakeham says: “In the recent past, Iraq has seen foreign powers capitalising on, and profiteering from, its troubles. Mr Al Abadi’s government must walk a fine line between being open for business but not allowing foreign influence to dictate. The rebuilding of Mosul will be a good barometer, particularly as many logistics firms are currently stationed in [Kurdish capital] Erbil.”

Old neighbours, new friends

August saw announcements by both Jordan and Saudi Arabia to reopen borders with Iraq in a bid to boost trade and relations. For Saudi Arabia, this represents the first border opening since former president Saddam Hussain’s invasion of Kuwait in 1990. “This is in line with the government’s efforts to extend its hand for economic and friendly ties with our regional neighbours,” says Faisal Al Haimus, chairman of the Trade Bank of Iraq (TBI), the first Iraqi bank to receive ISO 9001 certification.

Saudi Arabia also announced a joint trade commission with Iraq, and the TBI plans to open bank branches in both Saudi Arabia and the United Arab Emirates. For these two Sunni Gulf nations, fostering closer ties to Iraq is a strategic move to counter Shia Iran’s growing regional influence. The opened borders “will also allow for a dramatic increase in religious tourism, which will spike much-needed economic activity”, says Mr Salih.

Several other projects are under way, including a $100m investment by UAE-based port operator ICTSI to double cargo container capacity at Umm Qasr port’s Basra Gateway Terminal from 600,000 TEU to 1.2 million TEU. “This is very important to note, as Iraq is all but landlocked and has limited access to tidewater,” says Mr Salih. “This 18-month project will allow Iraq’s import economy to diversify, instead of just relying on its neighbours.”

“The opening of the borders is just one example of business conditions improving,” says Mr Cotton. “The asset wealth of the country, its strategic location and importance as a stable country in the region, plus its population of 35 million people, who have known prosperity and know what a civilised country looks and feels like, are all major drivers for optimism going forward.

“Part of the cause of Islamic State was Shia government officials freezing out all Sunni interests, which prevail in Mosul. We hope lessons have been learned.”

Mr Wakeham concludes: “Whatever happens in the short term, the trend over the past 14 years has seen central Iraq gradually withdraw into itself. If Mr Al Abadi can reverse that trend, then he truly will have made a difference.”