VZCZCXRO7124
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0148/01 0210732
ZNR UUUUU ZZH
R 210732Z JAN 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 5284
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDC/USDOC WASHDC
RUCPCIM/CIM NTDB WASHINGTON DC
RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 04 BAGHDAD 000148 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND NEA/I-ECON 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC IZ
SUBJECT: IRAQ -- 2008 INVESTMENT CLIMATE STATEMENT 
 
REF: (A) 07 STATE 158802; (B) 07 STATE 163400 
 
¶1. The following is Post's submission for Iraq's 2008 Investment 
Climate Statement. 
BEGIN TEXT 
2008 INVESTMENT CLIMATE STATEMENT - IRAQ 
Iraq's first post-conflict permanent government passed a National 
Investment Law in October 2006, which was expected to open up its 
economy to foreign investment.  While the law is designed to give 
Iraq a more investor-friendly business environment, much work 
remains.  Implementation of the law will be a challenge for Iraq in 
¶2008.  The Government of Iraq (GOI) continues to pursue some of the 
economic reforms necessary to lead the country in a new direction, 
including pension reform and reductions of the refined oil price 
subsidy.  Iraq's commitment to rejoin the international community 
can also be seen in its steady progress towards World Trade 
Organization (WTO) accession. 
OPENNESS TO FOREIGN INVESTMENT 
The Government of Iraq's (GOI's) Council of Representatives (CoR) 
passed a National Investment Law in October, and the law was 
published in the Official Gazette as Law No.  13 of 2006 on January 
17, 2007.  (Note: This law revokes CPA Order 39 on foreign 
investment; it does not cover the oil and financial services 
sectors.)  The National Investment Commission (NIC) has not yet been 
formed, nor has the CoR confirmed a Chairman of the commission. 
Implementing regulations remain to be approved, and Provincial 
Investment Commissions (PICs) have yet to be established in each of 
the governorates.  While the most recently nominated NIC Chairman is 
seen as having a great deal of regional experience in attracting 
foreign investment, he has not yet been confirmed by the appropriate 
Iraqi authorities as at this writing.  A copy of the National 
Investment Law can be obtained from the U.S. Department of Commerce 
Iraq Task Force website - http://www.export.gov/iraq/.  Once it is 
implemented, the new law's provisions would provide an open 
investment regime for foreign investors. 
Regulation of investment is not an exclusive federal power, so the 
Kurdish Regional Government (KRG) and the national government both 
have the right to regulate investment.  The KRG passed a Kurdish 
investment law on July 3, 2006.  The most significant difference 
between the KRG investment law and the national law is that the 
regional law allows foreigners to own land.  Under the Iraqi 
Constitution, when there is a contradiction between regional and 
national legislation, the regional law could become the only 
applicable law in the Kurdish region.  How this rule of federalism 
will work in practice is still unknown. 
CURRENCY CONVERSION AND TRANSFER POLICIES 
The currency of Iraq is the Dinar (IQD - sometimes referred to as 
the New Iraqi Dinar).  The Iraqi authorities confirm that in 
practice there are no restrictions on current and capital 
transactions involving currency exchange as long as underlying 
transactions are supported by valid documentation.  However, it is 
unclear whether currency convertibility is entirely free from 
exchange restrictions.  The National Investment Law contains 
provisions that, once implemented, would allow investors to bank and 
transfer capital inside or outside of Iraq. 
The Government of Iraq's monetary policy since 2003 has focused on 
maintaining price stability and exchange rate predictability.  Banks 
may engage in spot transactions in any currency, but are not allowed 
to engage in forward transactions in Iraqi Dinar for speculative 
purposes.  The Central Bank of Iraq (CBI) can intervene, when 
necessary, in order to maintain stability in the foreign exchange 
market.  There are no taxes or subsidies on purchases or sales of 
foreign exchange.  Improved security has allowed for an increased 
supply of goods and services, which has reduced inflationary 
pressures as compared to 2006.  The Central Bank has implemented 
effective monetary and exchange rate policies that continue to help 
temper inflation. 
EXPROPRIATION AND COMPENSATION 
Iraqi law affords foreign investors some protection from 
expropriation.  Article 23 (Second) of the Iraqi Constitution 
prohibits expropriation in Iraq, unless it is "for the purpose of 
public benefit in return for just compensation."  The constitutional 
provision further stipulates that this standard shall be regulated 
by law.  Although this standard may offer some protection to foreign 
investments, the provision is skeletal, and a law has yet to be 
considered.  Article 12 (Third) of the National Investment Law also 
guarantees "non-seizure or nationalization of the investment project 
covered by the provisions of this law in whole or in part, except 
for a project on which a final judicial judgment was issued," but 
the absence of implementing regulation makes the application of the 
law uncertain in practice.  As a result, whether foreign investors 
will enjoy protection from expropriation that meets international 
standards will likely depend on domestic implementing legislation 
and/or future bilateral treaty obligations with the investor states 
in this area.  The United States does not have a Bilateral 
Investment Treaty (BIT) with Iraq. 
DISPUTE SETTLEMENT 
 
BAGHDAD 00000148  002 OF 004 
 
 
While the law of domestic arbitration is fairly well developed in 
Iraq, international arbitration is not sufficiently supported by 
Iraqi law.  Iraq is a signatory to the League of Arab States 
Convention on Commercial Arbitration (1987) and the Riyadh 
Convention on Judicial Cooperation (1983), but it has not signed or 
adopted the two most important legal instruments for international 
commercial arbitration: The United Nations New York Convention on 
Recognition and Enforcement of Foreign Arbitral Awards (1958 -- 
commonly called the New York Convention) and the attendant rules and 
procedures established by the UN Commission on International Trade 
Law (UNCITRAL). 
Although dispute resolution is laid out in Article 27 of the 
National Investment Law, which details the rights of Iraqis and 
foreigners with respect to Iraqi law, the absence of implementing 
regulation makes uncertain application of the law in practice. 
Domestic arbitration is provided for in Articles 251-276 of the 
Iraqi Civil Procedure Code, which require arbitration agreements to 
be in writing.  Panels of arbitrators are available through the 
Iraqi Union of Engineers, the Iraqi Federation of Industries, and 
private arbitrators. 
PERFORMANCE REQUIREMENTS AND INCENTIVES 
The National Investment Law allows in theory both domestic and 
foreign investors to qualify for incentives equally.  It also allows 
for investors to take out capital brought into Iraq and its proceeds 
in accordance with the law.  Foreign investors are able to trade in 
shares and securities listed on the Iraqi Stock Exchange.  The law 
also allows in principle investors who have obtained an investment 
license to enjoy exemptions from taxes and fees for a period of ten 
years.  Hotels, tourist institutions, hospitals, health 
institutions, rehabilitation centers and scientific organizations 
also are granted additional exemptions from duties and taxes on 
their imports of furniture and other furnishings.  The exemption 
theoretically increases to fifteen years if Iraqi investors own more 
than fifty percent of the project; however, the absence of 
implementing regulation makes uncertain the application of the law 
in practice. 
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
The National Investment Law does not allow foreigners to own land. 
Foreign investors are permitted to rent or lease land for up to 
fifty years (renewable).  Foreign investors are also able to own 
investment portfolios in shares and securities. 
PROTECTION OF PROPERTY RIGHTS 
The GOI is in the process of developing a new intellectual property 
rights (IPR) law in line with the WTO Agreement on Trade Related 
Aspects of Intellectual Property Rights (TRIPS), but the exact 
structure of this and related legislation is still being determined. 
 IPR protection functions are spread across several ministries.  The 
patent registry and industrial design registry remain a part of the 
Central Organization on Standards and Quality Control (COSQC), an 
agency of the Ministry of Planning and Development Cooperation. 
Copyrights are under the Ministry of Culture, and trademarks under 
the Ministry of Industry and Minerals.  The GOI's ability to enforce 
intellectual property rights laws, however, is weak because of the 
current security environment. 
Iraq is also a signatory to several international intellectual 
property conventions, and to regional or bilateral arrangements 
which include: 
-- Paris Convention for the Protection of Industrial Property (1967 
Act) ratified by Law No.  212 of 1975. 
-- World Intellectual Property Organizations (WIPO) Convention; 
ratified by Law No. 212 of 1975.  Iraq became a member of the WIPO 
in January 1976. 
-- Arab Agreement for the Protection of Copyrights; ratified by Law 
No.  41 of 1985. 
-- Arab Intellectual Property Rights Treaty (Law No. 41 of 1985). 
TRANSPARENCY OF THE REGULATORY SYSTEM 
The absence of implementing regulation for the National Investment 
Law makes uncertain the application of the law in practice.  Once 
fully implemented, the law would establish a legal framework for 
investment.  Potential investors would nonetheless still face 
significant hurdles in understanding the basic steps for starting 
and operating a business in Iraq given the complexity of Iraq's 
existing laws, regulations, and administrative procedures.  Iraqi 
government is still in the process of establishing its National and 
Regional Investment Commissions as required under the National 
Investment Law, a year after the law was officially published. 
The absence of other laws in areas of interest to foreign investors 
also creates ambiguity.  Competition and consumer protection laws 
that are critical for leveling the business playing field in the 
market are needed.  A competition law could help cut down on unfair 
business practices such as price-fixing by competitors, bid rigging, 
and abuse of dominant position in the market.  A consumer protection 
law that establishes definitions of unfair business practices would 
be useful.  While the Iraqis do not currently have a building code, 
the GOI is currently evaluating this area. 
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
The Central Bank of Iraq (CBI) is responsible for conducting 
 
BAGHDAD 00000148  003 OF 004 
 
 
monetary policy in Iraq.  The CBI was re-organized by CPA Order No. 
56 as a legal public entity that has financial and administrative 
independence.  The Iraqi banking system includes seven state-owned 
banks, the two largest being Rafidain and Rasheed, which account for 
about 96 percent of banking sector assets.  There are also 32 
private banks and six Islamic banks licensed by the CBI (see CBI's 
website - www.cbiraq.org).  Eleven foreign banks have either been 
licensed or have strategic investments in Iraqi banks. 
However, the vast majority of banking operations are confined to 
basic consumer transactions leaving the provision of credit to 
individuals in private transactions.  Channeling financial transfers 
from the government to provincial authorities or individuals rather 
than business loans is the major activity of the private banks; 
Iraq's economy remains primarily cash-based.  In terms of true 
financial intermediation, Iraq is seriously "under banked". 
The Trade Bank of Iraq (TBI) was established as an independent 
government entity under CPA Order No. 20 in 2003.  The TBI's main 
purpose is to provide financial and related services to facilitate 
import trade.  The payments system began limited operation in August 
¶2006. 
The letter of the National Investment Law allows for foreign 
investors to exchange shares and securities listed in the Iraqi 
Stock Exchange (ISX).  It also allows foreign investors to form 
investment portfolios.  Trading transactions and buy and sell orders 
are presently written by hand on grease boards in trading sessions. 
This system does not always allow for full transparency in terms of 
timing of market participants or knowledge of who has placed the 
bid.  The  automation of the ISX, expected by the end of first 
quarter, will provide much greater transparency as well as pave the 
way for foreign investment on the exchange in terms of 
dematerialized shares, easing the logistical burden of physical 
certificates.  In addition, a new permanent securities law is 
drafted as well as rules and regulations for the Iraq Securities 
Commission (ISC) and is expected to be introduced into Parliament in 
early 2008.  The status of the ISC is, however, in flux until a new 
law is enacted. 
POLITICAL VIOLENCE 
Security continues to be the number one concern of the Iraqi 
Government and interested businesses.  The security situation in 
Iraq remains serious.  Theft and violent crime persist in Iraq.  The 
threat of attacks against U.S. citizens and facilities remains high. 
 In addition, roads and other public areas continue to be dangerous 
for Iraqi or foreign travelers.  Law enforcement is limited, 
although new Iraqi police units continue to be trained and deployed. 
 Attacks against military and civilian targets throughout Iraq 
continue, including in the International (or "Green") Zone. 
Targets include trucking and military convoys, hotels, restaurants, 
police stations, security checkpoints, foreign diplomatic missions, 
international organizations and other locations with expatriate 
personnel.  In addition, there have been planned and random 
killings, as well as extortions and kidnappings.  U.S. citizens have 
been kidnapped, and several were subsequently murdered by terrorists 
in Iraq.  U.S. citizens and other foreigners, as well as Iraqi 
officials and citizens continue to be targeted by insurgent groups 
and opportunistic criminals for kidnapping and murder.  The U.S. 
Department of State issues up-to-date travel warnings for countries 
throughout the world, and U.S. companies and visitors are advised to 
carefully assess the situation in Iraq. 
State Department's Iraq Travel Warning 
(http://travel.state.gov/travel/iraq_warning. html) and Consular 
Information Sheet (http://travel.state.gov/travel/iraq.html) contain 
the essential security and safety information on travel to Iraq. 
CORRUPTION 
Corruption in all areas remains a significant problem.  Under 
Saddam's regime, corruption was a fact of life for every Iraqi and 
touched upon every economic transaction.  The former regime's 
control of the economy left a legacy of heavy state procurement and 
subsidies distorting market prices. 
The Commission on Public Integrity (CPI) is an independent, 
autonomous Iraqi governmental agency, established by CPA Order No. 
55, responsible for anti-corruption, law enforcement and crime 
prevention, as well as public education on these topics.  CPI 
investigates nationwide allegations of corruption within the 
government and refers cases to the Iraqi judiciary.  It performs its 
duties in conjunction with the Board of Supreme Audit (BSA) and the 
Inspector General (IG) from each ministry.  There is a need to 
impose and enforce credible penalties for government corruption, 
specifically adherence to laws related to government contracts, 
procurement and allegations of bribery.  The number of corruption 
cases brought to a successful conclusion remains quite small, and 
the statutory and regulatory provisions intended to control 
corruption will require substantial revision to be effective. 
BILATERAL INVESTMENT AGREEMENTS AND REGIONAL COOPERATION 
Iraq is a signatory to thirty-two bilateral, and nine multilateral 
agreements within the Arab League arrangements on Investments 
Promotion and Protection (IPPA).  Some of the bilateral agreements 
with other countries include Afghanistan, Bangladesh, India, Iran, 
 
BAGHDAD 00000148  004.2 OF 004 
 
 
Japan, Jordan, Kuwait, Mauritania, Republic of Korea, Sri Lanka, 
Syria, Tunisia, Turkey, the United Kingdom, Vietnam and Yemen. 
These agreements include general provisions on promoting and 
protecting investments, including clauses on profit repatriation, 
access to arbitration and dispute settlements, fair expropriation 
rules and compensation for losses. 
In addition, Iraq has bilateral free trade area (FTA) agreements 
with the following eleven countries: Algeria, Egypt, Jordan, 
Lebanon, Oman, Qatar, Sudan, Syria, Tunisia, Yemen, and the United 
Arab Emirates.  Iraq is also a signatory to several multilateral 
agreements, including the "Taysir" agreement with Arab countries 
dated February 27, 1982, and ratified in January 11, 1982. 
On July 11, 2005, Iraq and the U.S. signed a Trade and Investment 
Framework Agreement (TIFA) as a first step toward creating 
liberalized trade and increasing investment flows between the U.S. 
and Iraq.  The Iraqi Parliament has yet to ratify this agreement. 
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
The Overseas Private Investment Corporation (OPIC) finances a 
variety of investment projects with substantial U.S. participation 
in Iraq.  Some of OPIC's basic programs include structured finance 
projects, political risk insurance, investment funds and financing 
for small and medium-sized enterprises.  In addition, OPIC and the 
Government of Iraq have executed an Investment Incentive Agreement 
(IIA).  The Iraqi Parliament has yet to ratify this agreement. 
LABOR 
Iraqi labor law remains weak in promoting a flexible, 
business-friendly employment environment.  The existing Saddam-era 
law includes non-supportive benefit clauses, working conditions for 
foreign expatriate workers, and rules governing working hours. 
Iraq is a party to both International Labor Organization (ILO) 
Conventions related to youth employment, including child labor 
abuse.  The Ministry of Labor and Social Affairs (MOLSA) also sets a 
minimum monthly wage for unskilled workers.  In addition, according 
to Iraqi law, all employers must provide some level of transport, 
accommodation, and food allowances for each employee.  The law does 
not fix allowance amounts. 
The National Investment Law states that priority in employment and 
recruitment shall be given to Iraqis.  In addition, foreign 
investors are expected to help train Iraqi employees as well as to 
raise their efficiency, skill, and capabilities.  There are existing 
labor-related requirements for foreign companies employing Iraqi or 
foreign workers. 
FOREIGN TRADE ZONES AND PORTS 
The Free Zone Authority Law No. 3/1998 (FZL) permitted investment in 
Free Zones (FZ) through industrial, commercial, and service 
projects.  This law operates under the Instructions for Free Zone 
Management and the Regulation of Investors' Business No.  4/1999 and 
is implemented by the Free Zones Commission in the Ministry of 
Finance. 
In theory, capital, profits, and investment income from projects in 
an FZ are exempt from all taxes and fees throughout the life of the 
project, including in the foundation and construction phases. 
However, according to Free Zones Commission officials, goods 
imported through FZs are still subject to Iraq's 5 percent tariff 
when they leave the zone (expect for re-export). 
Activities permitted in Free Zones include: (a) industrial 
activities such as, assembly, installation, sorting, and refilling 
processes; (b) storage, re-export and trading operations; (c) 
service and storage projects and transport of all kinds; (d) 
banking, insurance and reinsurance activities; and (e) supplementary 
and auxiliary professional and service activities.  Prohibited 
activities include actions disallowed by other laws in force, such 
as weapons manufacture, environmentally-polluting industries and 
those banned because of place of origin. 
There are currently four geographic areas designated as Free Zones. 
The Basrah/Khor al-Zubair Free Zone is and is located 40 miles 
southwest of Basrah on the Arab Gulf at the Khor al-Zubair seaport. 
This area has been operational since June 2004.  The Ninewa/Falafel 
Free Zone is located in the north, near roads and railways that 
reach Turkey, Syria, Jordan and the Basrah ports.  The Sulaymaniyah 
Free Zone is located in northern Iraq in the Kurdish area.  The 
al-Qa'im Free Zone is on the Iraqi-Syrian border.  It is close to 
roads and railways that reach Turkey, Basrah, and Jordan.  However, 
none of these areas are operating as significant loci for investment 
or trade, and only the Ninewa/Falafel zone has businesses operating 
in it. 
FOREIGN DIRECT INVESTMENT STATISTICS 
According to the IMF, total foreign direct investment flows into 
Iraq were $300 million in 2006, estimated as 0.7 percent of GDP. 
Although data for 2007 is unavailable, final results will be 
strongly influenced by the GOI's awarding of three mobile 
telecommunications licenses in August 2007, priced at $1.25 bn each 
for a total of $3.75 bn. 
END TEXT 
 
CROCKER