Iraq locked into vicious cycle on investment, says OECD

Iraq will lose out on investment that could create jobs and spur economic growth unless it pulls itself out of a “vicious cycle”, says the OECD.

Iraq will lose out on investment that could create jobs and spur economic growth unless it pulls itself out of a “vicious cycle”, says an Organisation for Economic Cooperation and Development official.

The private sector regards Iraq as high risk, so it limits itself to projects with the potential of high returns. That means the manufacturing projects that can create jobs and sustainable economic growth are less likely to come to the country, said Anders Jönsson, a policy analyst at the OECD

“There appears to be something of a vicious cycle in Iraq today,” Mr Jönsson said at the Iraq Finance forum in Dubai yesterday. “What Iraq needs to do is to lower this bar and to lower the risks so more projects get done.”

The high bar today is stifling projects from public-private partnerships to even simple landfills, he said. Investors’ perceptions are grounded in regulatory, security and political risk, as well as more mundane infrastructure shortfalls such as a lack of round-the-clock electricity.

“It is a major problem,” he said. “It ensures that a lot of investments in manufacturing are not going to take place.”

Baghdad’s perception that private investors are only in it for big profits has fuelled distrust that Mr Jönsson called a vicious cycle.

“There’s a wariness in the administration about the private sector,” he said. “A lot of the projects in Iraq are seeking impossible returns. Because there are these cases of very high returns to the private sector, that feeds the wariness.”

Until Iraq can fix its risk perception, it will limit itself to investors from sectors that have experience coping with contractual and security risks, such as oil and gas, or those that are undeterred by the risk because of high demand, such as finance and telecommunications.

“You’re going to see a lot of investors trying to just target the Iraqi consumer,” he said.

Baghdad can start to lower perceived risk by clarifying laws governing public-private partnerships and expropriation. The constitution states that expropriation can be done only with due compensation – but does not specify what due compensation means.

“These are the kind of risks that may not be risks at all, but they may be perceived as risks today,” Mr Jönsson said. “These are easy to remove simply by clarity and precedent.”