Financial Crime World

Risk Assessment in Financial Institutions in Iraq: A Challenging Business Environment

Introduction

Financial institutions in Iraq face significant risks due to a challenging business environment characterized by political instability, economic uncertainty, and corruption.

The Iraqi Economy: Vulnerable to Fluctuations

The Iraqi economy is heavily dependent on oil exports, which account for 60% of GDP and 90% of state revenue. However, this dependence has led to an under-diversified economy, making it vulnerable to fluctuations in global oil prices.

Challenges Facing Financial Institutions

  • Widespread poverty and high unemployment rates
  • Limited access to education and healthcare services
  • Corruption, nepotism, and patronage are prevalent
  • Unpredictable legal system and lack of available financial information

Economic Indicators

  • Current account balance is largely determined by oil revenues
  • Budget deficit remains moderate, financed by drawing on foreign exchange reserves
  • Public debt has risen significantly, with its external portion accounting for nearly half of GDP

Political Situation: Unstable

  • Ongoing protests against unemployment, corruption, and violence by armed militias
  • Recent legislative elections saw a low turnout, with only 34% of voters participating
  • The resulting government is fragmented, making it challenging to implement reforms

Risks for Foreign Investors

  • Iraq’s business climate rating from Coface stands at E, indicating the highest possible risk
  • Widespread corruption and limited access to financial information make it difficult for foreign companies to operate effectively in the country
  • International projects, such as a USD 27 billion contract signed by the Total Group with Iraq, are driving investment and growth
  • Non-oil and public investment will lag behind

Conclusion

Financial institutions in Iraq must navigate a complex and challenging business environment. With significant risks and uncertainties facing the country, investors and policymakers must carefully consider the implications of these challenges for the future of the Iraqi economy.