Conflict in Iraq may have put off foreign investors over the past five years, but improvements in security during the past 12 months have stabilised the economy, which, in turn, has meant that the demand for goods and services has risen rapidly. This heralds a turning point in Iraq’s economic development which offers encouragement for foreign investors considering a return to the country.

The current Iraqi administration has developed a reputation for being business-friendly, outlining a strategy for expanding the country’s private sector and attracting international inv­estors. Foreign investment into the country in 2008 was the highest recorded since 2003, evidence that companies are beginning to view Iraq as a viable investment location.

According to greenfield investment monitor fDi Intelligence, inward investment reached $20.17bn in 2008, creating 12,152 jobs, compared with $457.6m in 2007, when foreign firms created just 902 jobs.

Signed, sealed, delivered

At the Invest Iraq 2009 conference in London in April, Iraq’s deputy prime minister, Dr Barham Salih, expressed the importance of economic reconstruction to the lasting stability of the country. He said: “Jobs and services are the best counter-insurgency strategy – economic reconstruction based on private-sector initiatives.”

Iraq’s public sector provides 43% of the country’s jobs and nearly 60% of all full-time employment, so the government has some way to go in expanding the country’s private sector. Iraq’s government realises that economic regeneration cannot be achieved through public-

sector spending alone.

The Iraqi government is attracting foreign investment by overhauling the regulatory environment to make doing business easier, promoting private-sector engagement and through the equal treatment of foreign and domestic investors in all areas except land ownership. However, it is also in the process of amending this law in cases of strategic investments.

Oil dependence

Apart from security, other challenges include inflationary pressures and the state’s over-

dependence on oil revenue, which makes up more than 60% of GDP and 19% of budget revenues. The global financial crisis is intensifying the need to boost oil production and to diversify the economy generally.

UK business minister Peter Mandelson believes that the security situation has improved and a more stable business environment has already attracted UK companies to the country. “The sheer scale of the oil on which Iraq sits means it is paramount to unlock that wealth to drive economic growth and future prosperity,” he said at the Invest Iraq conference.

The importance of diversification

Economic diversification is also important because growth in 2009 is expected to be slower than in 2008 due to lower oil prices, and growth in the non-oil private sector is too low to fully compensate and will be constrained by global economic conditions.

Despite a fall in oil prices and the international economic crisis, the IMF estimates that the Iraqi economy will grow by more than 7% during 2009 and will continue to increase at this rate for the next five years.

So with improved security, an abundance of natural resources, a business-friendly administration and the abatement of conflict, Iraq may see much-needed inward investment start to flow through after the economic stagnation of the war years.