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Iraq needs assist, however Saudi Arabia and the United Arab Emirates see funding alternatives

By Karen E. Young is a resident researcher at the American Enterprise Institute.

April 30, 2021, 4:45 p.m.

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 an investment commitment: $ 3 billion from each government. And both capitals found that at least part of their investments will be in renewable energy. That won't do much to cut a budget deficit of nearly $ 20 billion this year or prevent further currency devaluation, but it does mark new realities in the Gulf. Wealthier oil producers are ready to help, but they will expect a return, and they will prefer to run them 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 petrochemicals but especially renewables like solar and hydrogen) that complement existing hydrocarbon industries will extend the lifespan of their natural resource revenues – and possibly their political authority .

Saudi Arabian and Emirati investments in Iraq should be seen through this lens. The $ 6 billion was essentially a way of opening the door for these countries' own companies, 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 have tried to expand their presence in the renewable energy business, particularly in solar and hydrogen production, for electricity and fuels. Finding markets for these activities is imperative and Iraq could be a good early stage customer.

On the one hand, Saudi Arabia has already committed itself to exporting electricity to Iraq, which proves the viability of a joint electricity network between the countries of the Gulf Cooperation Council – and has the advantage of reducing Iraq's dependence on Iranian gas.

But is the investment good for Iraq? The country is in a serious economic crisis: a currency devaluation, a credit rating with junk status, a foreign debt that the International Monetary Fund expects to average $ 5.8 billion per year between 2021 and 2023, and an a-burdened budget deficit on the payroll public sector, which accounts for 50 percent of government spending. In addition, Iraq has difficulty meeting its domestic electricity needs, endemic corruption and poor service provision. And there is the oil sector, which urgently needs investment and political stability.

Iraq is being dragged in conflicting directions as it relies on Iran for trade and electricity resources and needs to improve relations with its neighbors in the Arabian Gulf who have the power to invest. Saudi Arabia and the United Arab Emirates saw the opportunity to intervene, but not with help or loans or even a central bank deposit to prop up the currency. Rather, Saudi Arabia and the Emirates' pledges of US $ 6 billion for foreign investment signal confidence in their own development goals.

A more immediate flow of cash, even in the form of loans, would have done more to relieve the government of Iraq's financial troubles. The investment commitment will not be a panacea for Iraq. However, with partial allotment, this would be more than net foreign direct investment inflows into Iraq than in the past decade (which were negative). From here there is only room for growth.

However, there is cause for caution and optimism with these investment agreements.

In 2018, the UAE made similar commitments to invest $ 3 billion in Ethiopia, of which $ 1 billion was used as a central bank deposit. According to fDi Markets, there has only been one investment allocation since then from a state-owned company in the UAE: a $ 28.7 million project by Sanad Aerotech, owned by Mubadala, the Emirates' state fund that maintains aircraft engines. The project is a partnership with Ethiopian Airlines. The largest investment in the Emirates since 2018 was a private real estate project. In November 2018, a $ 646 million real estate project at Dubai-based Eagle Hills began construction of an urban mixed-use project.

Ethiopia's experience with an investment commitment from the Emirates has shown three things: First, a government investment commitment is not a cash on hand and can take years to bear fruit – even if it is ever delivered in full. Second, it is difficult to make or make massive investments in some regional economies, especially those in a political crisis or transition. Mubadala, as a sovereign wealth fund, has received political instruction to invest in Ethiopia but may struggle to connect with large and appropriate local opportunities. Third, the opportunities for opportunities sometimes come from private sector actors rather than government investment vehicles. Overall, that's not a bad thing. However, this changes the way the recipient government has an impact on local development policies in terms of the types of jobs created and the types of longer-term goals the money can achieve. In the case of Ethiopia, the aircraft engine maintenance project is good for the development of a more skilled workforce and supports the expansion of the tourism industry. Real estate investments, which are much larger, do more to create lower-wage jobs and construction housing that serve a wealthy, small segment of the population.

Iraq's funding and investment needs are substantial. It should accept all the help it can get. Iraq joins a wide range of regional economies seeking aid and investment in the Gulf, from the Horn of Africa to the Levant. Some of these states are also competitors in the oil and gas business; All are potential markets for energy products. In order for oil exporters in the Middle East to survive the impending energy transition, those who can control and use resources for alternative and renewable energies already have an advantage – and those states that put their own development needs first.

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