While BMI Research expects improved growth outside the oil sector, the firm also expects it to “remain modest over the coming years, therefore limiting specific opportunities for investors.” Iraq’s private sector ranks near the bottom on measurements of transparency and corruption.
“Iraq will also be prone to ethnic and religious tensions, as highlighted by the recent referendum,” Auberty told CNBC, an independence vote overwhelmingly approved by Kurds but opposed by Iraq’s central government. “This, coupled with social instability means that we could see episodes of violence re-emerging across the country,” Auberty added.
Still, Iraq’s investment profile has improved over the past year, amid rising oil prices and the financial lifeline from the IMF. The country is OPEC’s second-largest producer, pumping more than 4 million barrels per day.
Separately, global ratings agency Fitch Ratings upgraded the country’s outlook from negative to stable in March, enabling the government to tap international debt markets in August.
According to BMI, companies that are benefiting from support from their governments are the most likely to get involved in the rebuilding of Iraq. The United Kingdom, for example, has offered loans worth at least 10 billion British pounds ($13 billion) for the reconstruction process, with British construction companies set to benefit from these contracts.
Garbis Iradian, chief Mideast/North Africa economist of the Institute of International Finance, said the tension between the central government and the Kurds’ regional leadership in northern Iraq is unlikely to escalate or lead to a war.
Both parties, pressured by the U.S. and the EU, may eventually strike a deal on “limited independence,” he said. This should keep regional tensions high, with Iraqi Prime Minister Haider al-Abadi authorized by parliament to send government troops to the flashpoint city of Kirkuk.
“Even if the Iraqi government gets bogged down in conflict with Kurds, the negative economic implications, particularly on investment, will be more than offset by the rout of ISIS,” Iradian said.
“The impulse from the “end of war with ISIS” or their defeat, will attract significant foreign investment to the energy sector in Iraq. Most sectors of the Iraqi economy are expected to benefit, including the energy, mining and the financial sector,” the economist added.
