treasurytoday Country Profile Doing business in Iraq

treasurytoday Country Profile
Doing business
in Iraq
Introduction
The recently improved security environment in Iraq, and the corresponding decline in
insurgent attacks, has helped to stimulate economic activity in the country. Longterm economic growth, however, depends on the government’s ability to pass major
policy reforms and develop Iraq’s substantial oil reserves.
Key facts
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.
• Population growth rate: 2.5%
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.
Geography and society
• Population: 29m
• Official language: Arabic
• Capital city: Baghdad
• Time zone: UTC+3
• Land boundaries: Iran 1,458km; Jordan 181km; Kuwait 240km; Saudi Arabia 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.
814km; Syria 605km; Turkey 352km
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.
• GDP per capita (PPP): $3,600
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.
Economy
• Currency: Iraqi dinar (IQD)
• CPI: 6.8%
• Member of: IMF, OPEC, UN, UNCTAD
• Fiscal year: Calendar year
• Financial capital: Baghdad
History and politics
• Government type:
Parliamentary democracy
Country credit rating
• N/A
Trading partners
• Top five import sources: Syria, Turkey, US, Jordan, China
• Top five export destinations: US, India, Italy, South Korea, Jordan
• 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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• 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 framework
Corporate 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 policies
There 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.
Payments
Cash 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 settlement
Iraq’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 investments
Investment 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
•
•
2.
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.
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.
Case Study
Facilitating exports to Iraq for a large European electronics
corporation
The 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.
Solution
Citi 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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Case Study
Multicurrency payments in Iraq for a large US-based oil field
services company
The 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.
Solution
The 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 Industry and Minerals: www.industry.gov.iq
Ministry of Finance: www.mof.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:
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Matthew R Davies
Head – Client Sales Management,
Middle East & Pakistan
Rohit Fernandes
Corporate Client Sales Manager,
UAE & Iraq
Surendra Bardia
Head – Treasury & Trade Solutions,
UAE & Iraq
Tel: +971 (4) 604 4378
Email: [email protected]
Tel: +971 (4) 604 4599
Email: [email protected]
Tel: +971 (4) 604 4414
Email: [email protected]
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