In March and April, Iraqi Prime Minister Mustafa al-Kadhimi visited Saudi Arabia and the United Arab Emirates in search of financial aid. What he got instead was a commitment of investment: $3 billion from each government. And both capitals noted at least part of their investments will target renewable energy. That won’t do much to alleviate a budget deficit projected for nearly $20 billion this year or prevent another currency devaluation, but it is a sign of new realities in the Gulf. Wealthier oil producers are willing to help, but they will expect a return on it, and they will prefer to channel it through their own firms and investment vehicles to meet their domestic economic development needs.
For oil exporters in the Middle East, this is a moment of change. Countries that are able to build businesses across the energy sector (including in petrochemicals but, more importantly, in renewables like solar and hydrogen) that complement existing hydrocarbon industries will stretch the lifespan of their natural resource revenue—and possibly their political authority.
Saudi and Emirati investment in Iraq should be seen through that lens; the $6 billion was essentially a way to open the door for those countries’ own businesses, namely the national oil companies Saudi Aramco and Abu Dhabi National Oil Company, which want to stay in the game as global energy companies. They’ve been looking to build their presence in the renewable energy business, specifically in solar and hydrogen production, for electricity and transport fuels. Finding markets for these activities is imperative, and Iraq could be a good early customer.
For one, Saudi Arabia is already committing to export electricity to Iraq, which proves the case for the viability of a shared power grid among Gulf Cooperation Council countries—and has the bonus of lessening Iraq’s dependency on Iranian gas.
But is the investment good for Iraq? The country is in the depth of a severe economic crisis: a currency devaluation, a junk status credit rating, an external debt burden the International Monetary Fund expects to average about $5.8 billion per year between 2021 and 2023, and a fiscal deficit burdened with a public sector wage bill that accounts for 50 percent of government spending. On top of that, there is Iraq’s difficulty to meet its domestic electricity production needs, endemic corruption, and poor delivery of services. And there’s the oil sector that desperately needs investment and political stability.
Iraq is pulled in conflicting directions, given its reliance on Iran for trade and electricity resources and a need to improve relations with its Arab Gulf neighbors, which have the investment power. Saudi Arabia and the United Arab Emirates have seen an opportunity to intervene but not with aid or loans or even a central bank deposit to help shore up the currency. Rather, Saudi and Emirati commitments of $6 billion in foreign investments signal confidence in their own development goals.
A more immediate influx of cash, even as a loan, would have done more to ease the government of Iraq’s financial woes. The investment commitment will not be a cure-all for Iraq. But if even partially allocated, it would be more than Iraq’s foreign direct investment net inflows than in the last decade (which have been negative). There is only room for growth from here.
But there is reason for caution and some optimism in these investment agreements.
In 2018, the UAE made similar commitments for $3 billion in investment in Ethiopia, of which $1 billion was dedicated as a central bank deposit. Since then, according to data from fDi Markets, there has been just one investment allocation from a UAE state-related entity: a $28.7 million project by Sanad Aerotech, owned by Mubadala, the Emirati sovereign wealth fund that provides aircraft engine maintenance. The project is in partnership with Ethiopian Airlines. The largest Emirati investment since 2018 has been a private real estate project. In November 2018, a $646 million real estate project by Dubai-based Eagle Hills began constructing an urban mixed-use project.
The Ethiopian experience with an Emirati investment commitment has shown three things: One, a state commitment to invest is not cash in hand and may take years to bear fruit—even if it is ever delivered in full. Second, it is difficult to allocate or place massive investments in some regional economies, especially those in political crisis or transition. Mubadala, as a sovereign wealth fund, has been given a political directive to invest in Ethiopia but may find it hard to connect with large and suitable local opportunities. And third, sometimes the openings for opportunity come more from private sector actors than state investment vehicles. That’s not a bad thing overall. But it does change the way the recipient government might have input over local development policy in the kinds of jobs created and the kinds of longer-term goals the money can achieve. In the Ethiopian case, the aircraft engine maintenance project is good for higher-skilled labor development and supporting the tourism industry’s expansion. Real estate investment, which is substantially larger, does more to create lower-wage construction jobs and housing that serves a wealthy, small segment of the population.
Iraq’s financing and investment needs are significant. It should accept all the help it can get. Iraq joins a wide slate of regional economies looking to the Gulf for aid and investment, from the Horn of Africa to the Levant. Some of those states are also competitors in the oil and gas business; all are potential markets for energy products. But for Middle Eastern oil exporters to survive the energy transition ahead, there is already an advantage to those that can control and devote resources to alternate and renewable energy—and those states that put their own development needs first.
