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Iraq: Market Profile

Picture: Iraq factsheet
Picture: Iraq factsheet

1. Overview

Following the reclamation of Iraqi territory from Islamic State (IS) in December 2017, the Government of Iraq is putting in place a comprehensive reconstruction package linking immediate stabilisation to a long-term vision and initiating a recovery and reconstruction process. The country is prioritising investment expenditure for reconstruction in areas liberated from IS and for increasing electricity production. In 2017, the current account deficit was estimated to have returned to a surplus. The outlook for Iraq is favourable and overall GDP growth is projected to accelerate in 2019, sustained by higher oil production. In the following years, oil production is expected to increase only marginally, reducing overall growth until 2023, due to the limited capacity of the government to mobilise investment in the oil sector.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

November 2017
Government forces with Shi'a and Kurdish allies drove Islamic State out of all but a few remote areas.

May 2018
Parliamentary elections were held. The political bloc of Shi'a cleric Moqtada al-Sadr won most votes.

October 2018
Parliament elected Barham Salih as president. He appointed Shi'a former minister Adel Abdul Mahdi as prime minister, with the support of the Shi'a majority of MPs.

March 2019
The Pearl Petroleum consortium, led by the United Arab Emirates' Dana Gas, committed to invest AED2.6 billion in order to expand Kurdistan's Khor Mor gas complex under a 20-year sales deal with the Kurdistan Regional Government for Kurdistan Gas Project. Expansion works would include the construction of two production trains at Khor Mor and drilling wells to boost production capacity by 63%.

March 2019
China Petroleum Engineering and Construction Corporation signed a contract with Basra Gas Company (BGC) to build a natural gas liquids (NGL) plant in southern Iraq. The NGL facility will be built in the Ar Ratawi area in the province of Basra. The facility will boost BGC's current gas production capacity by 40%. The plant, scheduled to be completed at the end of 2020, will also reduce gas flaring and increase BGC's dry gas supply and NGL export capabilities.

Sources: BBC country profile – Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Iraq real GDP and inflation
Graph: Iraq real GDP and inflation
Graph: Iraq GDP by sector (2017)
Graph: Iraq GDP by sector (2017)
Graph: Iraq unemployment rate
Note: No data from IMF
Graph: Iraq unemployment rate
Note: No data from IMF
Graph: Iraq current account balance
Graph: Iraq current account balance

e = estimate, f = forecast
Sources: Fitch Solutions, IMF, World Bank
Date last reviewed: June 15, 2019

4. External Trade

4.1 Merchandise Trade

Graph: Iraq merchandise trade
Graph: Iraq merchandise trade

Sources: WTO, Fitch Solutions
Date last reviewed: June 15, 2019

Graph: Iraq major export commodities (2014)
Four categories are combined to form one 'other goods' category
Graph: Iraq major export commodities (2014)
Four categories are combined to form one 'other goods' category
Graph: Iraq major export markets (2014)

Area Nes = Area not elsewhere specified
Graph: Iraq major export markets (2014)

Area Nes = Area not elsewhere specified
Graph: Iraq major import commodities (2014)

Graph: Iraq major import commodities (2014)

Graph: Iraq major import markets (2014)

Area not elsewhere specified accounts for 12.3% of imports
Graph: Iraq major import markets (2014)

Area not elsewhere specified accounts for 12.3% of imports

Note: 2014 is latest direct data available
Sources: UNCTAD, Fitch Solutions
Date last reviewed: June 15, 2019

4.2 Trade in Services

Graph: Iraq trade in services
Note: 2016 is latest available data
Graph: Iraq trade in services
Note: 2016 is latest available data

Sources: WTO, Fitch Solutions
Date last reviewed: June 15, 2019

5. Trade Policies

  • Iraq's non-membership of the World Trade Organization means that it has few preferential trade arrangements in place, consequently, all imported goods are subject to the costly tariff regime regardless of their origin. Access to large markets is also somewhat restricted, though agreements exist with the European Union (EU) and some other Middle East and North Africa countries.
  • A flat 5% import tariff has been replaced since 2016 with a multiple tariff rate regime which ranges from 0-80% for agricultural goods and from 0-40% for non-agricultural goods. The opacity and convoluted nature of the trade regime also makes it difficult for firms to calculate tariffs and increases the risk of corruption and smuggling which damages the effective functioning of supply chains.
  • A sales tax of 300% is imposed on alcohol and tobacco (cigarettes), 15% on travel tickets, 15% on cars and 20% on mobile recharge cards and internet. This is in addition to services rendered by deluxe and first class restaurants and hotels, which are subject to a 10% sales tax. There is no tax provision in the Iraqi tax law addressing excise taxes. The customs duty rates are specified in the customs tariff and the agriculture agenda that are annexed to the Customs Duty Law.
  • Certificates of origin are required for all products, which must include approval by numerous agencies in Iraq and the origin country of the goods. This is particularly difficult for imports of complex manufactured products which comprise parts from multiple different countries.
  • The conflict in Syria and its spillover into Iraq has caused huge disruption to trade flows between Iraq and its neighbours, including Jordan, Syria and Lebanon. The damage to infrastructure and security risks caused by Islamic State will also continue to delay supply chains in the short-to-medium term, despite the group being driven out of the country in late 2017.

Sources: WTO – Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Multinational Trade Agreements

Active

  1. Greater Arab Free Trade Area (GAFTA): GAFTA saw tariffs between 17 Arab states rapidly decline from an average 15% in 2002 to 6% in 2009. However, the preferential rates available under GAFTA are not applied consistently by Iraqi customs, while trade between member states remains somewhat limited.

  2. European Union-Iraq Partnership and Co-operation Agreement: The EU offers a huge market for Iraqi goods and is a key source of imports. While not a full free trade agreement, it offers some preferential trade access and provides a basis for further liberalisation of trade measures.

  3. Global System of Trade Preferences among Developing Countries (GSTP): The partial scope agreement came into force in April 1989.

  4. Pan-Arab Free Trade Area (PAFTA): The free trade agreement came into force in January 1998.

Sources: WTO Regional Trade Agreements database, Fitch Solutions

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Iraq FDI stock
Graph: Iraq FDI stock
Graph: Iraq FDI flow
Graph: Iraq FDI flow

Source: UNCTAD, Fitch Solutions
Date last reviewed: June 15, 2019

7.2 Foreign Direct Investment Policy

  1. Iraq's attractiveness as an investment destination is dented by challenging operating conditions. Some barriers have emerged as a direct result of government policies; for example, foreign investment is barred or capped in a number of sectors, including utilities, transportation, agribusiness and mining.

  2. The government continues to operate restrictions on foreign investment in certain sectors, particularly those with strategic value to the Iraqi economy, such as oil and gas. Foreign ownership of hydrocarbons resources is not permitted. This means that international oil companies must take technical service agreements or production sharing agreements which are time limited.

  3. Non-resident persons or entities are not allowed to own land for industrial purposes without an Iraqi partner, except for the purpose of developing residential real estate projects.

  4. In accordance with the Iraqi Investment Law, approved industrial projects are given certain custom duty and tax incentives; however, oil and gas is not one of the sectors that is normally granted investment promotion exemptions incentives. The tax incentives may include corporate tax, individual tax and others; however, the tax incentives vary from one project to another.

  5. The Board of Investment Promotion has the authority to add any sector or specific project to the list of sectors or projects that benefit from the investment promotion law incentives.

  6. Income tax paid to a foreign country on income earned in that country may be credited against tax paid to Iraq.The amount of the credit may not exceed the amount of tax assessed in Iraq.

  7. All foreign-owned entities in Iraq must employ Iraqi nationals as 50% of their workforce, while foreign firms are also encouraged to partner with and procure from local industries.

  8. Government tender processes in Iraq are opaque and often plagued with corruption, creating difficulties for foreign businesses attempting to win government contracts. Government ministries are also required by law to give preference to state-owned enterprises (SOEs) when awarding contracts, even if their bids are more expensive than those offered by other firms.

  9. SOEs are present throughout the Iraqi economy, with over 190 currently operational in a diverse range of sectors. SOEs receive preferential treatment by law in a broad swathe of areas, including the awarding of government contracts, the allocation of financing and the availability of subsidies.

Sources: US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Khor al-Zubair in the south, Nineveh in the north, Fallujah in the centre and al-Qaem in the west- These zones allow exemption from all taxes including corporation tax and fees for goods imported and exported from the areas

- They also offer access to key transport routes, infrastructure and services, although the level of development and availability of facilities vary significantly

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2019

  • Value Added Tax: No unified regime – varies from 10%-300%
  • Corporate Income Tax: 15% (except for oil and gas entities)

Source: National Sources

8.1 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax15%
Corporate Income Tax For Foreign Oil And Gas Companies35%
Capital Gains TaxTaxed as corporate income: 15% standard rate, and 35% on profits of oil and gas companies
Withholding Tax- 15% on interest paid to non-residents and 15% on royalties paid to non-residents
- No withholding tax is applicable to dividends
Property Taxes10% on the annual revenue for all real estate
VAT/GST (Standard)A sales tax of 300% is applicable for alcohol and tobacco (cigarettes), 15% on travel tickets, 15% on cars, and 20% on mobile recharge cards and internet. Services rendered by deluxe and first class restaurants and hotels, which are subject to a 10% sales tax.
Stamp dutyRanges from 0.1%-3% on contract value (variable)

Sources: National sources, Fitch Solutions
Date last reviewed: June 15, 2019

9. Foreign Worker Requirements

9.1 Foreign Worker Permits

The employee must complete a blood test on entry to Iraq, and the employer must submit an application for a work permit to the relevant government authority with which they are normally affiliated – for example, with the Ministry of Oil. The lack of centralised or streamlined application procedures for work permits, which are normally processed through a labour or immigration ministry, means that the process is often slow and mired in bureaucratic inefficiency, with companies experiencing long delays when attempting to obtain residency permits.

9.2 Foreign Worker Restrictions

Although priority in employment is awarded to Iraqi nationals by law, in practice the shortage of high-skilled labour means that there are limited legal obstacles to bringing in foreign workers.

9.3 Security Considerations

Employers will be obligated to pay high insurance premiums for foreign staff and may be required to offer substantial hardship and danger pay premiums.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Caa1 (Stable)03/08/2017
Standard & Poor'sB- (Stable)03/09/2015
Fitch RatingsB- (Stable)30/07/2018

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201720182019
Ease of Doing Business Index
165/190168/190171/190
Ease of Paying Taxes Index
52/190129/190129/190
Logistics Performance Index
N/A147/160N/A
Corruption Perception Index
169/180168/190N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, IMD, Transparency International, Fitch Solution

10.3 Fitch Solutions Risk Indices


World Ranking
201720182019
Economic Risk Index RankN/A133/202144/202
Short-Term Economic Risk Score
50.855.255.4
Long-Term Economic Risk Score47.546.244.8
Political Risk Index RankN/A188/202187/202
Short-Term Political Risk Score31.735.435.4
Long-Term Political Risk Score36.736.736.7
Operational Risk Index RankN/A189/201188/201
Operational Risk Score30.127.227.1

Source: Fitch Solutions
Date last reviewed: June 15, 2019

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Potential foreign investors now view Iraq with more interest following the removal of IS. Iraq's economy is dominated by the oil sector, which provides over 90% of government revenue and 80% of foreign exchange earnings. Iraq's recent contracts with major oil companies have the potential to greatly expand oil revenues, but Iraq will need to upgrade its refineries and export infrastructure to enable these deals to reach their potential. Higher oil prices should buttress the economy in the near term, although further protests could dent activity. A drawn-out government formation process, endemic corruption and political instability also pose downside risks. Government spending is forecast to increase by USD96.4 billion in 2019 in order to maintain support of various factions and the population in general who are frustrated with the services provided. Furthermore, potential oil-price shocks could prevent the country from receiving large hydrocarbon revenues that compensate for the absence of economic diversification.

OPERATIONAL RISK
Iraq will likely experience a modest recovery in economic growth over the next five years. The operating environment is increasingly reflecting a brightening outlook for the non-oil economy, benefitting from confidence gains associated with higher oil prices and efforts to rebuild the country's damaged infrastructure network. That said, the country still faces significant infrastructure gaps, legal risks and security challenges that raise the cost of doing business in the country and will likely take years to resolve.

Source: Fitch Solutions
Date last reviewed: June 15, 2019

10.5 Fitch Solutions Political and Economic Risk Indices 

Graph: Iraq short term political risk index
Graph: Iraq short term political risk index
Graph: Iraq long term political risk index
Graph: Iraq long term political risk index
Graph: Iraq short term economic risk index
Graph: Iraq short term economic risk index
Graph: Iraq long term economic risk index
Graph: Iraq long term economic risk index

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: June 15, 2019

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Iraq Score27.143.724.828.611.3
MENA Average48.352.3
48.048.744.1
MENA Position (out of 18)1715
1616
18
Global Average49.750.3
49.849.049.8
Global Position (out of 201)188138189.0175
198

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Iraq vs global and regional averages
Graph: Iraq vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Security Risk Index
UAE73.6
71.2
79.168.7
75.3
Qatar66.2
65.0
61.8
71.6
66.5
Oman66.2
62.261.964.5
76.0
Bahrain66.063.169.571.5
60.1
Saudi Arabia62.667.262.162.758.6
Jordan59.156.960.759.060.0
Kuwait55.554.251.252.564.1
Morocco
54.143.263.854.854.6
Egypt
49.349.945.756.445.3
Tunisia
47.142.256.247.342.8
Lebanon44.753.051.941.432.4
Iran43.049.536.750.835.1
Algeria
42.046.131.142.947.9
Palestine34.848.837.432.021.2
Libya
28.0
47.222.129.313.4
Syria27.345.523.727.012.7
Iraq27.143.724.828.611.3
Yemen22.432.724.915.8
16.1
Regional Averages
48.3
52.3
48.0
48.7
44.1
Emerging Markets Averages46.0
48.1
46.5
44.7
44.8
Global Markets Averages49.7
50.3
49.8
49.0
49.8

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: June 15, 2019

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Iraq

Graph: Major export commodities to Iraq (2018)
Graph: Major export commodities to Iraq (2018)
Graph: Major import commodities from Iraq (2018)
Graph: Major import commodities from Iraq (2018)

Note: Graph shows the main Hong Kong exports to/imports from Iraq (by consignment)

Graph: Merchandise exports to Iraq
Graph: Merchandise exports to Iraq
Graph: Merchandise imports from Iraq
Graph: Merchandise imports from Iraq

Note: Graph shows Hong Kong exports to/imports from Iraq (by consignment)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Exchange Rate HK$/US$, average
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: June 15, 2019


2017
Growth rate (%)
Number of Middle East residents visiting Hong Kong1460.7

Source: Hong Kong Tourism Board


2017Growth rate (%)
Number of Middle East residents visiting Hong Kong129,816-0.2

Sources: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: June 15, 2019

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Iraq companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Visa Requirements for Hong Kong Residents

Hong Kong residents require an Iraqi tourist visa. The tourist visa allows the holder to enter Iraq once during the three months from the date of grant and stay in it for a period of one month, for the purpose of visiting tourist and relic sites.

The following conditions must be met:

  • The passport has validity for a period of minimum six months.
  • Filling in a visa application form with two photographs.
  • Ability to cover the cost of living during the period of his stay in Iraq for holders of ordinary passports.
  • There is no objection to prevent a person from entering the territory of Iraq in regards to the public health, security, morals, or the national economy.
  • Provide a convincing reason for visit.
  • The requester is not accused or convicted of a crime outside Iraq may be extradited for.
  • There is no order of deporting him from Iraq.
  • Full address of where the person will stay in Iraq.

Visa is not required for holders of a signed and stamped letter issued by the Ministry of Interior of Iraq, provided arriving at Baghdad, Basra or Najaf.

Visa is not required for holders of a signed and stamped letter issued by the Ministry of Interior of the Kurdistan Regional Government, provided arriving at Erbil and Sulaymaniyah.

Source: VisaHQ
Date last reviewed: June 15, 2019

 

Content provided by Picture: Fitch Solutions – BMI Research
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