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IntroductionThe recently improved security environment in Iraq, and the corresponding decline in insurgent attacks, has helped to stimulate economic activity in the country. Long-term economic growth, however, depends on the government’s ability to pass major policy reforms and develop Iraq’s substantial oil reserves.

Despite interest in the region, foreign investment is still hampered by regulatory restrictions, corruption, insufficient funding and poor co-ordination between international agencies and local communities.

Iraq’s economy is dominated by oil, which provides more than 90% of government revenue and foreign exchange earnings. Recent contracts with major oil companies could greatly expand oil reserves; however, Iraq will first need to upgrade its refinery and export infrastructure if these deals are to achieve their full potential.

Doing business in Iraq carries significant challenges. However, Iraq is making tentative steps to build the institutions needed to implement economic policy, including engaging in discussions with the IMF and World Bank to develop new programmes to help strengthen Iraq’s financial institutions.

The Iraqi government is also pursuing a strategy to encourage foreign investment in Iraq’s economy. Measures include an amendment to the National Investment Law, multiple international trade and investment events and the potential for participation in joint ventures with state-owned enterprises.

Additionally, significant progress has been made to reduce Iraq’s outstanding debt with agreements reached with many sovereign and commercial creditors.

The country represents a unique business opportunity. It requires navigation of various obstacles and significant due diligence to understand the social, political and business environment. However, the economic returns could be significant for first movers and it is important for companies to develop and implement an Iraq-focused entry strategy.

Legal and regulatory requirements• Foreign investment in Iraq is governed by the National Investment Law. This

legislation encourages foreign investment through a series of liberal measures. These include amongst others:• Projects exempt from taxes and fees for a period of ten years.• Protection against seizure or nationalisation of projects.• The right to repatriate income.• The right to employ foreign (non-Iraqi) workers.

The focus of the investment law is to develop Iraq’s moribund infrastructure as well as revive state owned enterprises which operate across various sectors.

• Local partnerships are the recommended entry strategy for foreign investors. An Iraqi partner often has vital access to local market knowledge and can aid in navigating any legal and regulatory obstacles.

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Doing business in Iraq

treasurytoday Country Profile

Key factsGeography and society

• Population:29m

• Population growth rate:2.5%

• Official language:Arabic

• Capital city:Baghdad

• Time zone:UTC+3

• Land boundaries: Iran1,458km;Jordan

181km;Kuwait240km;SaudiArabia

814km;Syria605km;Turkey352km

Economy

• Currency:Iraqidinar(IQD)

• GDP per capita (PPP):$3,600

• CPI:6.8%

• Member of:IMF,OPEC,UN,UNCTAD

• Fiscal year:Calendaryear

• Financial capital:Baghdad

History and politics

• Government type:

Parliamentarydemocracy

Country credit rating

• N/A

Trading partners

• Top five import sources: Syria,Turkey,

US,Jordan,China

• Top five export destinations: US,India,

Italy,SouthKorea,Jordan

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• Local companies in Iraq may take the form of a joint stock company (JSC), a consolidated company, a limited liability company (LLC) or a sole project company. Full foreign ownership of these structures is permitted, and there are no restrictions on the nationality of the CEO.

• Foreign companies may open a branch or a representative office. A branch must have a foreign parent company, which must assume full liability for the branch. Representative offices may conduct market studies, promote services, advertise and negotiate with government ministries. They cannot engage in commercial activity.

• Some salient features of the Labour laws in Iraq:• Employment contracts must be in Arabic.• Employee benefits include one rest day per week as well as up to 20 days of paid annual leave and 30 days of paid sick leave per year.• There is no distinction between foreign and local employees in terms of their minimum rights.

• Anti-money laundering legislation was introduced in 2004 making it a crime to launder money, finance crime or terrorism and structure transactions with the intent of avoiding a reporting requirement.

Taxation frameworkCorporate tax is charged at a rate of 15%, except for oil and gas companies which are taxed at 35%. Capital gains are included in profits and are therefore also subject to corporate tax. Representative offices do not pay tax; this is due to the fact that they are not permitted to produce income. Withholding tax is payable on interest payments made to non-residents at 15%. A non-compulsory withholding tax rate of 15% is payable on dividends. Due to the constantly evolving nature of the legal environment in Iraq, it is advisable to consult a legal specialist for up-to-date tax and legal advice.

Treasury activities

Local banking sector• The Central Bank of Iraq (CBI) is the banking regulator and monetary authority in Iraq. Its primary objectives are to ensure

domestic price stability and to foster a stable and competitive financial system. The CBI carries out a range of functions in order to achieve these objectives, which include implementing monetary and exchange rate policy, managing the state gold reserves, issuing and managing the Iraqi currency, establishing and overseeing an efficient payment system and regulating the banking sector.

• The Banking Law was issued in September 2003 to bring Iraq’s legal framework for banking in line with international standards. The Central Bank of Iraq was established as Iraq’s independent central bank by the Central Bank of Iraq Law in March 2004.

• The banking landscape is dominated by the main public sector banks. Newer locally-owned private sector banks are making inroads, however they tend to be regionally focused. Foreign banks have limited operations in the region. Foreign companies operating in Iraq typically employ the services of the larger global banks offshore in order to manage their supply chain in Iraq.

Conversion and transfer policiesThere are no restrictions on transactions involving currency exchange, provided underlying transactions are supported by valid documentation. The purchase and sale of foreign exchange is not subject to any tax or other subsidies. Since 2003 monetary policy has focused on maintaining price stability primarily by preserving exchange rate predictability whilst appreciating the Iraqi dinar against the US dollar. Speculative forward transactions in Iraqi dinar by banks are prohibited.

PaymentsCash is the most commonly used form of payment in Iraq. Both USD and IQD are used as tender. Credit cards did not appear in the country until 2005, and they are not popular due to the lack of infrastructure in Iraq to support them, such as POS terminals and internet connectivity. Cheques account for 10-15% of payments across Iraq but are not preferred due to potential delays in clearing and settlement. The CBI has made efforts to streamline the process, however, with some success.

Clearing and settlementIraq’s RTGS (real-time gross settlement) system was launched in 2006 and is used primarily for high-value payments. 32 banks participate in the network. The RTGS ensures the final and irrevocable gross settlement of payment instructions initiated by participants continuously on a transaction-by-transaction basis.

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Other clearing systems in place include the Automatic Clearing House, Government Securities Registration System (GSRS) and the Cheques Enablement Project (CEP). The GSRS manages government securities issued by the CBI and the Ministry of Finance (MOF) and went live in 2008. The CEP is part of the ACH system and is an initiative that is underway to implement the electronic printing and reading of cheques. It should be noted that these systems are not actively used. Currently, the RTGS system is most popular with market participants.

Liquidity and investmentsInvestment options in Iraq are limited to term deposits. Multinationals operating in the country typically maintain bank accounts in Iraq for small-value and regulatory payments. Other payments into Iraq are then managed through offshore accounts. Under this setup, regular sweeps can be arranged to cover onshore liquidity shortfalls and surpluses. This arrangement is restricted to Iraqi banks with SWIFT connectivity.

A typical business transaction in Iraq: processes

1. Bidding for business in Iraq • Standby letters of credit (LCs), bid or performance bonds may be required for an initial bid (especially for

government orders). These are typically co-ordinated offshore by a global bank on a request from a client bidding for a project or contract.

• The bank issues a counter-guarantee favouring an Iraqi correspondent bank which subsequently issues the guarantee in favour of the relevant government ministry/beneficiary in Iraq.

2. Subsequent to a successful bid • Documentary LCs relating to the import of goods into Iraq will be issued by Iraqi banks. The LC is re-issued/

confirmed in favour of the beneficiary by selected foreign banks.

3. Daily banking requirements • Local bank accounts may be required for small value payments, selected regulatory transactions or for

employee accounts. It is suggested however that companies manage most payments (cash, wire transfers or cheques in IQD/USD) into Iraq through offshore accounts maintained with banks with a large correspondent network. This minimises cross-border risk and counterparty risk, and ensures enhanced security, as well as providing greater convenience.

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Case StudyFacilitating exports to Iraq for a large European electronics corporationThe client was required to supply medical equipment to the Ministry of Health (MOH) in Iraq for which the MOH had issued LCs through the dominant trade bank in Iraq. Tenor and payment terms for both the LCs were on a deferred basis up to six years. Both the LCs had been issued in standard formats, which restricted Citi to confirm, negotiate and discount the LCs. However Citi had been specifically requested by the client to structure them in a manner whereby they could obtain payment from Citi Dubai instead of waiting for the issuing bank authorisation to pay.

SolutionCiti had a series of discussions pre and post issuance of LCs with the client. Based on a greater understanding of their commercial agreements with the buyer, including delivery mechanism, supplier obligations in terms of warranties and run off schedules under the LC, Citi proposed a structure that enabled the beneficiary to negotiate documents upfront and, if required, discount deferred payment terms upfront.

The client agreed and requested Citi to provide a discounting facility. A similar structure was created for another large US-based electronics manufacturer involving a negotiation facility since this client’s internal policies would not allow discounting of export proceeds.

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Country Profile

Case StudyMulticurrency payments in Iraq for a large US-based oil field services companyThe client required the ability to make payments for payroll and vendors on the ground in Iraq (across the country). The company has offices located in two locations and makes payments in both IQD and USD. The antiquated banking infrastructure, risk (security, local banks, counterparty limits etc) and lack of online banking were all challenges that the client needed to address.

SolutionThe solution proposed by Citi enabled online access through CitiDirect (Citi’s award-winning banking platform) for all payments using a variety of payment instruments, including wire transfers, cash payments (vendor/payroll) and bankers’ drafts (regulatory payments, other clients/suppliers). Citi’s solution also allowed opening of employee bank accounts with a partner bank and access to cash at correspondent bank branches in nearly 200 locations across Iraq.

The ability to courier cheques to beneficiaries is also available. All major transactions involve a call-back to ensure the correct identification of beneficiaries

so as to minimise fraud and optimise security. The solution also allowed integration with the client’s shared service centre.

The ability to courier cheques to beneficiaries is also available. All major transactions involve a call-back to ensure the correct identification of beneficiaries so as to minimise fraud and optimise security. The solution also allowed integration with the client’s shared service centre.

Key websites

Central Bank of Iraq: www.cbi.iq

Ministry of Finance: www.mof.gov.iq

Ministry of Industry and Minerals: www.industry.gov.iq

National Investment Commission: www.investpromo.gov.iq

Citi’s capabilities in Iraq

Citi offers a variety of services encompassing trade, cash management, onshore banking and advisory services. Trade services include the issuance of guarantees through Iraqi banks and the confirmation of letters of credit (LCs) issued by public and private sector banks. Remittance offerings include cash delivery and payments across Iraq and cross-border payments (both inward and outward). In terms of onshore banking, Citi offers its clients assistance in account opening and other banking services through partner banks, countrywide payments in USD and IQD and cash and cheque collection services. Clients receive regular updates and are advised on how to better manage their supply chains in Iraq.

Citi’s Iraq Desk, which is based out of Citi Dubai, was established in 2003 to provide support to Iraqi firms and clients wishing to do business in Iraq. It currently has one of the largest correspondent banking networks in the country with nearly 200 branches across Iraq (including in the International Zone). This has been through alliances with the major public and private sector banks. Citi was joint book runner on Iraq’s first sovereign debt issue post 2003 (the Iraq 2028 bond), has structured an award-winning LC confirmation structure to facilitate private sector trade transactions and is one of the largest re-issuers of LCs issued by the main trade bank in Iraq.

Contacts:

Matthew R Davies Head – Client Sales Management, Middle East & Pakistan

Tel: +971 (4) 604 4378Email: matthew.r.davies@citi.com

Rohit Fernandes Corporate Client Sales Manager, UAE & Iraq

Tel: +971 (4) 604 4599Email: rohit.fernandes@citi.com

Surendra Bardia Head – Treasury & Trade Solutions, UAE & Iraq

Tel: +971 (4) 604 4414Email: surendra.bardia@citi.com