To tackle the future, the Iraqi Development Fund needs to break with the past

In an interview with Al Majalla, the fund's director says he is working to increase private sector investment while trying to lay the groundwork for a more educated population

Hussein Faleh / AFP

A currency exchange agent counts Iraqi Dinars at his company in Iraq's southern city of Basra, on December 12, 2023.

To tackle the future, the Iraqi Development Fund needs to break with the past

Shelly Kittleson

last update on 25 Nov 2024

Baghdad: The head of Iraq’s Development Fund waxed lyrical about the long-lost but once ubiquitous scent of apricot trees in a much-cleaner capital while bemoaning the country’s loss of expertise and regional standing. Iraq used to “supply the Middle East with higher education”, lamented director Mohammed al-Najjar in an interview with Al Majalla in Baghdad in early November, while now “we are a net importer” of knowledge and skills.

At the Zaqoura Palace, where the prime minister’s offices are located, al-Najjar outlined ideas for environmental projects he has not yet found the funds for, including one that “no one except the scientists and I” understand the value of, since “we are stuck back in 1980” with “no expertise when it comes to environment management”—while discussing more solid plans currently moving forward to get private investors to build schools that the government will then rent back from them.

He said the Iraq Development Fund “is a newly established fund in 2023. The budget law created clause 45, which talks about building” such a fund, which counts among its objectives filling gaps left by other ministries. He said it has variegated aims coalescing around sustainability, creating local know-how, and engaging the private sector in what many experts warn is essentially an outdated socialist system creaking under burdens it can no longer sustain.

Whether or not his environmental plans will come to fruition, he and others close to the prime minister seem likely to increase private sector investment while trying to lay the groundwork for a more educated population.

“Without the right people, you can’t build the right country,” al-Najjar stressed, “and to get the right people, you need to start an initial debate about the education process and the kind of education we have.”

The Iraqi government, he noted, “is still operating on a very planned economy sort of mentality. And one of the key objectives of our fund is to involve the private sector in changing the Iraqi economy. How? We initiate projects and invite them to invest (in them). They invest and operate it, and we take a percentage of that or buy back from them the services resulting from this investment.”

Much will depend, however, on finding ways to convince a population that “cannot even visualise”, as al-Najjar put it, any system other than one with more than just a few vestiges of socialism and that has scant trust in institutions and banks.

Getty — Stacks of Iraqi dinars are seen at currency exchange shop in Baghdad on February 14, 2023.

$80bn just sitting around

“The Iraqi population has “something like $80bn at home”, al-Najjar claimed, “not in the economy, not in any bank. It’s simply just sitting there doing nothing. This is an astronomical number,” the advisor to the prime minister for investment affairs added.

He noted that among the reasons such large sums are essentially hidden are a lack of investment outlets and a lack of trust in banks after “44 years of turbulence.” Iraqis, he noted, always want their money physically near them as they “don’t know when they will have to grab it and run.”

After 2003, he added, “the banking system became very corrupt. They don’t trust the banks. A lot of banks went bankrupt. Their fortunes were wiped out.”

Al-Najjar added that there are also “limited opportunities for a small amount to be invested. For example, we don’t have an active stock exchange, we don’t have active secondary markets’” and “so if you have $5,000-$10,000, simply there is nothing for you to do” with it in terms of investment. Thus, he said, one of the Development Fund's main objectives is to mobilise these “private funds available outside the system.”

“Why is there so much money? Some of it is completely legitimate. People have simply saved it. " Regarding the rest, he said simply, “I don’t want to go into that. There are a lot of holes in the previous budget. But we are targeting the legitimate money, and that by itself is a huge amount.”

“Another objective of the fund is to reactivate small and medium-sized enterprises (SMEs). Iraq was—in the ‘70s and ‘80s—all about SMEs. Their contribution to the GDP was enormous. After 2003, al-Najjar said that their role diminished” significantly due to the focus on mega-projects.

Iraq used to supply the Middle East with higher education. Now, we are a net importer of knowledge and skills.

Mohammed al-Najjar, Iraq Development Fund Director

Public vs private sector

Chief Strategist of AFC Iraq Fund Ahmed Tabaqchali noted in response to questions from Al Majalla that "the public sector, with all its ills, has very attractive characteristics for individuals. It comes with secure employment, it comes with benefits, it comes with pensions."

However, he added, "the government cannot absorb this bulging bracket of youth coming in every year," and employment laws need to change to make the private sector more easily accessible. "Our laws are still socialist," Tabachali stressed, and "this needs to change for (the sake of) both the employer and the employee".

Tabaqchali noted that a pension law passed last year is a "step in the right direction" but that it needs to be implemented and that this "might have implications for the government in terms of fiscal liabilities".

"The structural impediments" to greater investment and employment in the private sector, noted Tabaqchali, who has decades of experience in capital markets and is a nonresident senior fellow with the Atlantic Council's Middle East Programmes, "primarily are the rules and regulations governing how businesses work— i.e., all the way from registering a business", which is "very complex, very cumbersome, it's very bureaucratic, it's very expensive", to actually engaging in business.

"Plus, we don't have bankruptcy laws. In a way, this makes it almost impossible for a company to go bankrupt," he said. "The private sector is based on people doing business that fails and goes bankrupt. They start again without any liability so long as they follow the rules, regulations, and laws. So that needs to be adjusted."

"Other structural issues are the state's dominance in certain industries," he added, and "on traded goods," for example, "we have massive structural impediments. One of them is the value of the currency. It is probably cheaper for a business to set up in Iran or Turkey and export to Iraq. And, finally, I would say," he noted pointedly, "corruption is a big issue."

EPA — Iraqi school students walk past graffiti-painted walls at the palace of former Iraqi president Saddam Hussein, Babylon, 85 kilometers south of Baghdad, Iraq, 15 March 2023.

Al-Najjar told Al Majalla that the "private sector can build better schools" because "that is their business," while education remains the government's preserve and responsibility. "We are giving the land for the project to the investor, who builds the schools, and we rent it back from them for 10 years," the development fund chief said. "Using this scheme, we can build 10 schools for every school we built in the past. We are mobilising almost $4bn in private funds to build the schools and then rent them out. From this, we are creating many job and investment opportunities."

"This is the first time" such a thing has been tried in Iraq, he noted. "It's a new concept. Similar to that, we are going to be doing something called lease-to-buy. Again, investors will build the houses for the citizens, and citizens will pay the government rent and back the investors. We have more investors than we have projects for."

Routine challenges

High levels of corruption, as well as an entrenched and deeply bureaucratic system contributing to it, are likely to hinder the development fund's attempts to achieve the desired results. In his 2023 speech at the UN General Assembly, Prime Minister Mohammed Shia' Al Sudani said that "identifying and combatting corruption has been our foremost priority", especially as corruption and terrorism are "interconnected".

According to Transparency International's most recent report, Iraq currently ranks 154th globally out of 180 countries in terms of corruption, an improvement of three places from last year, when it was 157th.

Another challenge is the widespread belief in Iraq that every citizen is entitled to a regular salary and/or a job from the government if they have a relevant degree. In recent years, protests have been held across several regions by those with medical and other degrees demanding immediate employment by the government.

However, according to one Mosul resident Al Majalla spoke to, the hospital where his close relative works employs a large number of staffers at its pharmacy. The hospital itself has access to very little medicine, and patients typically must buy all supplies for surgeries and other medical procedures from outside the hospital. Thus, his relative tends to do almost nothing the entire day alongside multiple other employees as part of a severely inefficient system.

AFP — Members of an Iraqi family show their ink-stained fingers after voting in the 2023 Iraqi provincial council elections, the first such vote in a decade, outside a polling station in Sadr City in eastern Baghdad, on December 18, 2023.

Al-Najjar noted that regular elections also conflict with deeply ingrained notions about the "right" to government employment. After 2003, he said, politicians fishing for votes have played on the high levels of unemployment and the general sentiment of entitlement to a government salary to get them.

Before that, he said, "I don't think there were more than 600,000 public sector employees, while now we have 5 million. With the democratic system came the idea that every time the opposition wants to hurt the government, they move these crowds to demonstrate" for jobs, he stated. "Now, for years and years, we have been producing these kids out of our universities without an economic plan."

"The contribution of the private sector to the economy is so negligible that it doesn't present itself as a serious alternative or competitive" to government positions, he said.

Many Iraqis also combine a government salary or monthly payment for relatives "martyred" in violence against terrorism or for other reasons with informal sources of income. In a taxi Al Majalla took on the way to the interview with al-Najjar, the driver said that he had finally been granted a "pension" for his son, who was killed during the "fighting against the Americans in 2006".

Rampant corruption and a deeply bureaucratic system hinder the fund's attempts to achieve the desired results

He had been waiting for this money for over a decade, he noted, and it had only come under the current government. That is why he said that he felt that the current prime minister is the "best we have ever had," albeit not perfect.

Al-Najjar commented on similar government payments as "a way of getting $500 for doing nothing and then making maybe $2,000 (a month) driving a taxi."

"For almost 70 years now," he said, "we have had a so-claimed socialist government. They've turned the country from managing the economy to managing a petrol station. That's our economy today: we export, get the cash, distribute it to salaries."

For multiple generations, "all they have seen is working for the government," he said, "and this has become a culture." The Iraq Development Fund is trying to change this culture, "but it will take time".

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