2009 Index of Economic Freedom

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The level of economic freedom in Iraq is not scored in the 2009 Index because sufficient reliable data are not available for the country. The Iraqi economy has slowly recovered from the hostilities that began in 2003. However, the country is still unstable and faces continuing tension among different ethnic and religious factions. Iraq was last graded in the 2002 Index, when it received an overall score of 15.6.

The Iraqi economy should benefit from many excellent reforms and institutions that have been put in place since 2003, including tax reforms, simple and low tariffs, new investment laws, and a significantly liberalized and modernized banking system; but these reforms and institutions cannot be fully effective as long as they remain on a fragile foundation of weak physical security and persistent corruption.

Background Back to the top

The dictatorship of Saddam Hussein was ousted by a U.S.-led coalition in 2003, and an elected government led by Prime Minister Nuri al-Maliki took office in May 2006. Iraq's oil industry provides more than 90 percent of hard-currency earnings but has been hurt by pipeline sabotage, electricity outages, and years of neglect and postponed maintenance. Economic recovery, though helped by high oil prices and economic aid from the United States and other foreign donors, is hampered by a low-intensity insurgency and continued instability. Improved security conditions and the gradual restoration of Iraqi oil exports in 2007 and early 2008 have increased the prospects for steady economic growth.

Business Freedom Not Graded Back to the top

Despite some progress in establishing an investment-friendly business environment, significant problems remain to be addressed as Iraq tries to deal with challenges to its security and stability.

Trade Freedom Not Graded Back to the top

Iraq is in the process of rebuilding its economy. According to the U.S. Department of Commerce, Iraq applied a flat tariff rate of 5 percent in 2004. Non-tariff barriers include inadequate infrastructure and trade capacity, significant delays in trade through customs, security concerns, and some import and export bans.

Fiscal Freedom Not Graded Back to the top

The suspension of individual and corporate income taxes was lifted in 2004. Currently, both individual and corporate income tax rates are capped at 15 percent. Tax revenue as a percentage of GDP is negligible. Despite slow progress, some structural reforms, including steps to modernize government financial management, have been made. Most direct subsidies on fuel were eliminated in 2007. Maintaining fiscal sustainability remains one of the policy priorities. Further modernization of the tax system and introduction of a sales tax as a precursor to a value-added tax (VAT) are under consideration.

Government Size Not Graded Back to the top

Total government expenditures in Iraq, including consumption and transfer payments, are very high. It is estimated that government spending equals about 70 percent of GDP. The oil sector accounts for over 95 percent of exports and government revenue.

Monetary FreedomNot Graded Back to the top

Inflation in Iraq is very high, averaging 36.3 percent between 2005 and 2007. Such unstable prices are harmful to savings and therefore to investment. This very high inflation was due mainly to shortages of key commodities (particularly fuel) that were caused in part by the ongoing insurgency. The government maintains a large public sector, provides a number of subsidies, and imposes a number of price controls.

Investment FreedomNot Graded Back to the top

An October 2006 investment law opens Iraq to foreign capital in principle, but its implementation has been delayed. Inadequate regulatory capacity, security concerns, and corruption are hindrances to investment. In practice, there are no restrictions on current and capital transactions involving currency exchange as long as underlying transactions are supported by valid documentation. The National Investment Law contains provisions that, once implemented, would allow investors to bank and transfer capital inside or outside of Iraq. The National Investment Law does not allow foreigners to own land, but foreign investors are permitted renewable leases on land for up to 50 years.

Financial FreedomNot Graded Back to the top

The Coalition Provisional Authority and the new Iraqi government have introduced many changes into Iraq's financial system. A March 2004 banking law significantly liberalized and modernized the banking system, allowing credit to be allocated on market terms and making the central bank independent. The two largest state-owned banks (Al-Rafidain and Al-Rasheed) account for over 90 percent of banking-sector assets. In addition, there are four specialized state-owned banks serving the agricultural, industrial, real estate, and social sectors. Three foreign banks have been granted licenses, two from the United Kingdom (HSBC and Standard Chartered) and one from Kuwait (NBK). Both the insurance sector and the new stock exchange are very small.

Property RightsNot Graded Back to the top

There is very little protection of property in Iraq. Ongoing wartime conditions and a high degree of personal insecurity have discouraged investment. The absence of an enforceable legal system means that foreigners are further disadvantaged in terms of dispute resolution, although this affects local investors to a large degree as well. U.S. forces, working with Iraqi military and police units, have improved conditions but still face daunting challenges. The government's ability to enforce intellectual property rights laws is weakened by the security environment.

Freedom From CorruptionNot Graded Back to the top

Corruption is perceived as rampant. Iraq ranks 178th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Under the regime of Saddam Hussein, corruption was a fact of life for every Iraqi and touched on every economic transaction. This legacy of corruption remains a significant obstacle to Iraq's development.

Labor FreedomNot Graded Back to the top

Iraq's formal labor market is not yet fully developed. Most jobs in the private sector are informal. It is estimated that unemployment or underemployment affects about half of the population.