As Iraq's economy tries to rebound, bureaucracy brings it down

Years of declining violence have improved Iraq's economic prospects, and the market is once again ripe for investment. In 2012, the nation’s per capita GDP climbed to $6,300, up from just $1,300 in 2004.

In other words, a growing number of Iraqis have money to spend, but few places to spend it.

But bureaucratic hurdles that hold up ambitious projects and a return of violence – July had the highest number of fatalities since 2008 – threaten to derail the fledgling investment climate. 

Abu Laith Al-Saadi was among a group of investors who sought to take advantage of Iraq’s steadily improving economic situation. Four years ago, the group decided to build a western style mall in Baghdad. Shopping malls are wildly popular in the Middle East. But they largely disappeared from Iraq during decades of war and sanctions. 

On a Friday night stroll through the recently opened Mansour Mall, Iraqis pack every level of the shopping center, which is filled with high-end shops and boasts a movie theater that screens the latest Hollywood hits. There is a massive play area for children with carnival rides and games.

Iraq's market is so starved for attractions like the Mansour Mall that such a venture can generate a much bigger profit margin than a similar project would yield in a more stable place like Dubai, says Saadi. The Baghdad mall enjoys a roughly 50 percent profit margin. He estimates a similar project in the United Arab Emirates would only generate 7 percent profit margins.

Carried largely by the country’s oil wealth, the Iraqi economy has grown in recent years. In 2012, the economy grew by 8.4 percent, and it’s expected to grow by 9 percent this year. As violence declined after 2008 and remained low until the beginning of this year, Iraqi investors tried to seize the opportunity to develop commercial projects unrelated to the oil sector.

Despite the success of his investment, Saadi says that he's concerned for the project's future as Iraq's security deteriorates. Already the mall is protected by scores of security guards armed with AK-47 assault rifles who check all cars for bombs before they can park in the official lot. He and his partners are considering opening another mall, but with instability returning to levels unseen since 2008, they are hesitating.

“You can’t make such a big investment in a bad environment. If the situation in 2009 was like it is today, we wouldn’t have even considered such a big project, but we started and when we opened the mall the situation deteriorated again. What can we do?” Saadi asks.

The near daily explosions in Baghdad are also a challenge for Iraqi investor Fadhel Kassim, who is building a small amusement park in the capital city, but he says Iraq’s government bureaucracy poses an almost equally big challenge.

Like many investors, Mr. Kassim said they were willing to wade through Iraq’s antiquated bureaucracy. But now a return to violence has made an already unfriendly business environment worse, and investors say they’re beginning to hesitate on new projects. With the world's fifth largest proven crude oil reserves, growth seems assured. Still, it remains unclear how much the country can develop other sectors, especially as security conditions worsen.

“The government departments inherited all the procedures and mentalities from Saddam Hussein. It is a real problem facing the investment activity,” says Ali Fikiki, an Iraqi economist who runs a consulting firm. “It is retarding our progress very badly.”

Mr. Kassim began planning the project in 2009, but bureaucratic hurdles held it up for three years. Among other challenges, he spent more than a year in a legal battle trying to use land one government office gave him for his project, but another disputed that he couldn't use.  

“The people responsible for Iraq’s investment laws are uneducated,” says Kassim. “The situation is terrible. If the situation stays like this, Iraq will not be rebuilt quickly.  It will be built very slowly.”