Cautious optimism

Iraq is in transition. With the territorial defeat of ISIS having been completed in late 2017, the reconstruction and political renewal of the country is in full swing. In February, the Kuwait International Conference for Reconstruction of Iraq mobilized almost $30 billion of international support. On Thursday, the Iraqi government held a major oil and gas bidding round aimed at further revitalizing the sector, particularly in areas previously controlled by Islamist insurgents. Moreover, on May 12, Iraq is scheduled to hold its next parliamentary elections, which will act as a stress test for a democracy trying to recover from the ISIS surge. Notwithstanding the positive developments in recent months, Iraq faces a long and stony road ahead in terms of rebuilding and recovery.

On April 26, the Atlantic Council organized a panel addressing the country’s multiple challenges and opportunities, including the role the energy sector can play in enabling recovery. The discussion featured Iraqi Ambassador to the US Fareed Yasseen, Hafez Ghanem, Vice President for Middle East and North Africa at the World Bank, Majid Jafar, CEO of Crescent Petroleum, Ben Van Heuvelen, Editor in Chief of the Iraq Oil Report, and Ellen Scholl, Director of the Global Energy Center at the Atlantic Council, as the moderator. Atlantic Council’s President and CEO Frederick Kempe gave an introductory statement.

The Kuwait Conference was a major success for Iraq. Yasseen stresses its huge symbolic value, both due to its location and turnout. The Kuwaiti leadership showed enormous goodwill to host the event, which has opened a new chapter in relations between the Gulf country and Iraq. Participation exceeded all expectations. Instead of an estimated 500 participants, more than 2000 people showed up. Hafez Ghanem likewise emphasizes that the massive participation, especially of private sector actors, was a huge accomplishment. This demonstrates that there is trust in Iraq.

Hope is justified. Yasseen points out that there is true willingness on the side of Iraqi decision makers to move forward, despite its problems. Iraq has a plan and commitment to implement reforms. The upcoming elections—which are much less sectarian and polarized than previous political contests—will not derail this process; rather, everyone in Iraq is committed to reforming the country. Jafar confirms the ambassador’s assessment. Considering where Iraq used to stand two years ago, we have already seen much progress. The outlook for the country is positive.

Iraq has to pursue wide-scale reforms. Ghanem argues that the country has to adopt a two-fold economic transformation. First, it has to reduce its dependency on oil, both in terms of revenues and mentality. Iraq needs to drop it rentier state attitude and move toward a more productive economy. Second, the country has to scale down its overblown public sector and become more private-sector friendly. Reconstruction will only be successful if this step is made, as most of the $80 billion needed has to come from private investors. Jafar also calls for a downsizing of the public sector. He stresses that the climate for investment has to be improved substantially. Most investors are not deterred by security concerns or political instability, but complain about administrative banalities such as problems with visas, complex administrative processes, and the complex customs system. Corruption compounds theses issues.

Ben van Heuvelen calls for caution. Despite positive signs, Iraq’s situation remains tense. The bidding round on Thursday was a success, but problems stand out. In particular, experienced global oil companies shied away from the auction. Firms that have already had real exposure to the costs of doing business in Iraq are still skeptical. Moreover, the country’s overall security situation continues to be problematic. ISIS has been defeated, but the Islamist insurgency is still ongoing. Iraqi security forces do not posses the capabilities required to establish a deterrent presence throughout all the liberated areas. Although there is no major ISIS threat to the oil sector, instability puts a drain on the budget and inhibits investment. For example, planned pipeline projects to Turkey and Jordan cannot be implemented in the current security climate.

Iraqis and international investors have regained confidence in the country. There is legitimate reason to assume that Iraq will recover from the ISIS nightmare and move towards stability. However, this process will be tedious and arduous, and setbacks will certainly occur.