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Iraq: Market Profile

Picture: Iraq factsheet
Picture: Iraq factsheet

 1. Overview

Following the liberation of all Iraqi territory from ISIS 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 ISIS and for increasing electricity production. In 2017, the current account deficit was estimated to have returned to a surplus. Iraq's recent contracts with major oil companies have the potential to greatly expand oil revenues, but Iraq will need to upgrade its refinery and export infrastructure to enable these deals to reach their potential. That said, higher oil prices should buttress the economy in the quarters ahead.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

November 2016
Parliament recognised the Shi'a Popular Mobilisation Units (PMU) as part of the armed forces with full legal status.

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

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

Source: BBC country profile - Timeline

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
Graph: Iraq unemployment rate
Graph: Iraq current account balance
Graph: Iraq current account balance

e = estimate, f = forecast
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: August 21, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Iraq merchandise trade
Graph: Iraq merchandise trade

Source: WTO
Date last reviewed: August 21, 2018

Graph: Iraq major export commodities (2014)
Graph: Iraq major export commodities (2014)
Graph: Iraq major export markets (2014)
Graph: Iraq major export markets (2014)
Graph: Iraq major import commodities (2014)
Graph: Iraq major import commodities (2014)
Graph: Iraq major import markets (2014)
Graph: Iraq major import markets (2014)

Area Nes = Area not elsewhere specified
Sources: Trade Map, Fitch Solutions
Date last reviewed: September 20, 2018

4.2 Trade in Services

Graph: Iraq trade in services
Graph: Iraq trade in services

Source: WTO
Date last reviewed: August 21, 2018

5. Trade Policies

  • Iraq's non-membership of the WTO means that it has few preferential trade arrangements in place and 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 do exist with the EU and some other MENA 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 are comprised of parts from multiple different countries.

  • The conflict in Syria and its spill-over 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-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

  • Greater Arab Free Trade Area (GAFTA): The 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.

  • EU-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, the Partnership and Cooperation Agreement offers some preferential trade access and provides a basis for further liberalisation of trade measures.

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

  • 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
Date last reviewed: August 21, 2018

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 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 varies significantly.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

  • Value Added Tax: No unified regime - varies from 10%-300%
  • Corporate Income Tax: 15% on profits and 35% on profits of oil and gas companies

Source: PwC 2018

8.1 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax15% on profits and 35% on profits of oil and gas companies
Capital Gains Tax15% standard rate, and 35% on profits of oil and gas companies
Withholding Tax15% on interest paid to non-residents and 15% on royalties paid to non-residents
Property TaxesA basic tax of 10% is assessed on the annual revenue for all real estate and is collected from the real estate owner or the long-term lessee (five years)
Social security contributions (all employers)Employers are divided into a number of categories, which is the driver for determining the contribution percentage. Employers that are categorised as prime contribute at the upper rate (25% from the employer and 5% from the employee), whereas other categories contribute at the lower rate (12% from the employer and 5% from the employee).
VAT/GST (standard)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.
Stamp dutyRanges from 0.1% - 3% on contract value (variable)

Sources: PwC Tax Summaries 2018, Fitch Solutions
Date last reviewed: September 20, 2018

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 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 Situation

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

9.4 Religious/Cultural Barriers

Iraq is a majority Muslim country with stricter laws on personal freedoms than workers from Western countries will be accustomed to.

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
201620172018
Ease of Doing Business Index
166/189165/190168/190
Ease of Paying Taxes Index
59/18952/190129/190
Logistics Performance Index
149/160N/A147/160
Corruption Perception Index
166/176169/180N/A
IMD World CompetitivenessN/AN/AN/A

Source: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index Rank135/202
Short-Term Economic Risk Score45.250.855
Long-Term Economic Risk Score44.447.546.2
Political Risk Index Rank188/202
Short-Term Political Risk Score31.731.735.4
Long-Term Political Risk Score36.336.736.7
Operational Risk Index Rank189/201
Operational Risk Score33.230.127.2

Source: Fitch Solutions
Date last reviewed: August 21, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK

Potential foreign investors now view Iraq with much more interest. 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 refinery and export infrastructure to enable these deals to reach their potential. Higher oil prices should buttress the economy in 2018, although further protests could dent activity. A drawn-out government formation process, endemic corruption and political instability also pose downside risks. 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: September 24, 2018

10.5 Fitch Solutions Political & 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: August 21, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Iraq Score27.243.725.228.811.3
MENA Average47.549.348.148.444.1
MENA Position (out of 18)1714
1716
18
MENA Average47.549.348.148.444.1
MENA Position (out of 18)1714
1716
18
Global Average49.749.850.049.349.9
Global Position (out of 201)189143188176
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 Secruity Risk Index
UAE73.8
67.8
79.672.5
75.3
Qatar65.3
63.9
63.1
67.8
66.5
Bahrain64.5
 58.4 68.571.1
 60.1
Oman 63.3 51.0 59.8 66.4 76.0
Saudi Arabia 61.7 63.0 61.8 63.2 58.6
Jordan 58.4 54.9 59.1 59.7 60.0
Kuwait 54.8 52.3 51.7 51.1 64.1
Morocco
 52.9 39.8 62.0 55.2 54.6
Egypt
 47.8 46.0 46.4 53.5 45.3
Tunisia
 46.1 42.3 52.4 46.9 42.8
Iran
 43.3 48.7 38.3 51.2 35.1
Lebanon 42.7 47.9 50.0 40.6 32.4
Algeria
 40.9 44.0 31.7 39.8 47.9
West Bank and Gaza 33.7 46.4 36.8 30.221.2
Libya
 28.3 44.4 26.0 29.313.4
Syria 28.0 42.9 30.0 26.412.7
Iraq
 27.2 43.7 25.2 28.8 11.3
Yemen 21.7 30.6 23.017.3
16.1
Regional Averages
47.5
49.3
48.1
48.4
44.1
Emerging Markets Averages46.8
48.0
47.5
45.8
46.0
Global Markets Averages49.7
49.8
50.0
49.3
49.9

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: August 15, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Iraq

Graph: Major export commodities to Iraq (2017)
Graph: Major export commodities to Iraq (2017)
Graph: Major import commodities from Iraq (2017)
Graph: Major import commodities from Iraq (2017)
Graph: Merchandise exports to Iraq
Graph: Merchandise exports to Iraq
Graph: Merchandise imports from Iraq
Graph: Merchandise imports from Iraq

Official Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Source: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: September 12, 2018


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

Source: Hong Kong Tourism Board


2017Growth rate (%)
Number of MENA residents visiting Hong Kong129,816-2.5

Sources: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: September 12, 2018

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 prevent him from entering the territory of the Republic of Iraq regarding 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 the Republic of Iraq and to achieve this must check the records for the barred from entering Iraq in accordance with the attached form.
  • Full address in the place, where he will stay in the Republic of Iraq.

Source: https://iraq.visahq.hk
Date last reviewed: September 12, 2018

Content provided by Picture: Fitch Solutions – BMI Research
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