16 Sep 2020

Iraq’s Market and Protectionist Strategy

Chronic conflicts and wrong economic policies have pushed most of Iraq’s industries and producers out of business. They faced great losses at the local market and could not compete with cheaper and better-quality imports. Now, the market is import-dependent to the extent that the Iraqis producers are left with a small share in the local market. The chronic instability and endemic corruption have kept them from addressing the import-dependency. Crude oil exports, comprising more than 98 percent for the country’s exports and 93 percent of the public revenue, have been used to cover the import dependency. However, the oil revenue is not available anymore in the same bulk, and revitalizing the country’s private sector and economy basically needs robust protectionist policies such as tariff, import quota, and subsidies.

Since 2018, the Federal Government of Iraq (FGI) has placed tariffs on some products and put quota on some industrial and agricultural products. It has a farm-support program to buy grain products (wheat and barley) in prices higher than their market prices. As a result, some local food producers and industrial sectors have recovered. Now, Iraq is near to self-sufficiency in wheat and barley. Local soft drink factories recovered, and Iraqi cement and aluminum products also compete with imported products. Wheat production in 2020, in spite of the COVID-19 disruptions, is estimated to be 6 million metric tons (MMT), while the total consumption is estimated at 8.8 MMT.

ICPAR Market Research Team

Beside the structural economic, political, and security issues in Iraq, currency depreciation in Iran, Turkey, and Syria has made Iraq the dumping ground for neighboring countries cheap imports. The cheap imports could be favorable for Iraqi consumers, but they will put most of the Iraqi producers out of business unless some anti-dumping measures will be taken given the fixed value of Iraqi Dinar (IQD) against USD and relatively high production cost due to unfavorable business environment.

These policies have already shifted the dynamic of some of the Fast Moving Consumer Good (FMCG) product competition landscape in the market. It might be the early to start forcing the importing companies to bring in their operation into the country or replace them with locally produced products. However, it is clear that the current government’s agenda and loud voices in the mainstream would continue to expand the existing protectionist policies to safeguard local products. This will lead to significant changes in the market share of many products and competition of many FMCG products.

A Sizeable Market Outside of International Corporation’s Map

Iraq’s tough business environment and instability did not only keep the import-dependency but rather pushed out local investors to look for outside opportunities. The country looks like a funnel that can’t circulate the oil revenues within the economy, and most of the Iraqis’ income directly is spent on imported goods. Despite increasing oil revenues and bringing in heavy cash into the economy for the great part of the last 17 years, Iraqis’ general well-being did not improve. Youth unemployment is about 36 percent and national poverty rate is expected to reach 38.7 by the end of this year, under a high moderate forecast scenario of the World Bank Group.  

 The structural issues have pushed many well-known FMCG brands and companies away from directly engaging in Iraq. They have left the market at the hand of local traders who mostly overlook sustainability of the market and building long term success for short-term wins. With the consumer behavior adopted on the cheapest products, the market has been full of low-quality products despite the income growth for many Iraqis. This caused many local businesses to think about production as the quality of the consumed products has lowered down by most of the competing importers to take a greater market share. The local businesses adapted by functioning as packaging factories and competing imported FMCG in many sectors.

Leaving Iraq for local traders by most of the international FMCG corporations and not investing in a 40 million population market directly allowed the rise of many packaging companies in the neighboring countries such as Turkey and Iran. It also led the local businesses to shift to production since there was no need for a history of any sectors. The market becomes full of packaged products from many companies with no background or expertise. The local businesses could not only compete with foreign production, but also provide better services and products since they are more aware of the consumer demands. 

According to an interview with Dolphin Sea CEO, “As Iraq goes through constant crises, many businesses moved into trading and especially FMCG; however, the competition got so tight, so it is hard to make any money while the risk is much higher compared to the past because every company looks for cheaper products. Consequently, a lot of new players enter the market, but only few remain.” The high level of competition and risk has forced many to think about producing from Iraq, where some market incentives are available. Here, they have leverage to pressure governments to assist them more and limit the access of the foreign brands into the market.

The Government Support 

For years, Iraqi Governments promised to support the local products, but the support was never provided properly due to pressures from the neighboring countries or interests of politically linked traders and importers. The political elite who is mainly in the import business have played a big role in canceling out the government support until 2018, when great youth pressure for employment appeared. The Iraqi government started to impose customs-duty on products that have local substitutes such soft drink products, snack products, fresh foods, and agricultural products.

Unemployment rate, which is estimated at 17 percent, along with the youth protests made the FGI implement the new tariff code. It also pressured the Kurdistan Regional Government (KRG) to follow the same tariff-code, which was severely neglected to promote trading and make Iraq slowly become a hub for regional companies.

 However, it is clear for the both politicians and businesses that the current situation is not sustainable and Iraq has to support local productions; otherwise it will face more social and political unrests not just from the young generations but also farmers and low-income people. 

In Oct 2019, when young people took the streets of the Baghdad, it was clear that big changes were coming, and the status quo must change sooner or later. They were not just protesting to change the political structure but rather the whole economic regime in favor of local producers. The banner of “Made in Iraq” was visible among the young protesters as a sign of supporting local producers against neighboring countries’ cheap imports.  

 Aside from pressuring the government to make economic changes, Iraqi market is one of the biggest markets in the region with good consumption capacity. This has given the Iraqi Government an upper hand to implement its rules on all the companies not only FMCG ones.

Companies Are Bowing Down

As FGI increased taxes or banned imports like potato chips and soft drinks, some companies have faced tough choices of whether losing their market share or bring in their operation into Iraq. Previously, the market was dominated by the Iranian and Turkish brands. Extra tariffs revived local brands but also pushed many players to start setting up their production lines inside the country, and it also pushed some others to think about bringing in their operation into Iraq. 

Brands like Lays started its production plant in Iraq motivated by high rate of the consumption in the market and trying to avoid the high taxes. Lays now has around 25 percent if not more of the potato chips according to industrial sources working in the snack market. In the long run, the market is expected to be fully covered by the local brands as new products are starting operating across the country. In addition, with a new protectionist strategy, the local producers for the first time have a chance to compete not just with the imported products but also with the other local brands.

Dramatic oil revenue crash as a result of the COVID-19 impacts in the international oil market has exposed FGI and KRG to huge fiscal deficit, but it also forced them to look for increasing their non-oil revenues and address the increasing public pressure for job opportunities and more stable economy. Leaders in the both governments have showed that revitalizing the private sector is where change needs to start. The new economic reality has pushed Baghdad and Erbil ruling elites to discuss various strategies to develop Iraq’s private sector in order to cope with the risen unemployment and poverty rates. Finance Minister Ali Allawi is expected to come up with his white paper regarding the economic issues by the end of this month. 

Also, the Iraqi Government extended its support for the soft drink industry too. The sector was majorly dominated by the local water production companies for bottled drinking water, and Coca Cola and Pepsi which both have production plants in the country. But unlike the snack industry, the soft drink market is much bigger especially considering many factors such as improper water distribution in Iraq and hot weather that encourages a high level of soft drinks consumption across the year for many of the consumers. 

According to an ICPAR estimate which are based on interviewing many stakeholders across the country, the market volume of the bottled water in 2020 is around 2 billion liters. The estimated carbonated drinks are also around 1 billion liters. These estimates make Iraq one of the biggest countries for soft drinking consumption in the region. With the current installed industries in the country and the protection from the government, this can be the threshold for the current local players to expand their operation for many other sectors and create a health competitive environment that benefits the consumers and the economy. 

Currently, the local brands are trying to use the government protection to fill the gap in juice market. Previously, the Aujan Group Holding’s Rani was dominating the market, but with high taxes and import-bans the brand hardly survives in the market. According to an ICPAR source, the size of their sales in Iraq was over 250 million units annually, and losing this market has pushed the brand to work on setting a production plant in Baghdad. With the competitiveness from Rani, the local brands will need to keep up their productions and fight for their shares in an over 1 billion liter market. 

Protectionist Policies and long-term Growth

There are many examples in modern history to show how protectionist policies boost or hinder economic growth; however, what is essential is these policies should be limited to certain timelines, not for long term periods that might destroy the competitiveness in the market and eventually harm consumers. There are many sectors in the economy that need protection from the government, but this should be to help these businesses to set their work and find a fair ground to compete with the imported and cheap products from Iran and Turkey. 

Regardless of what will be the best scenario for an economy like Iraq, opening more businesses in many diverse sectors, mostly in the FMCG sector, will pressure the government for their protection. Such a created pressure would shape the market for the long term, favoring the local brands over the imports. This could create an important opportunity for investment and therefore reshape the whole economy in the long run. 

The ongoing political and economic dynamics has the risk of leading the market towards more protectionism which is likely to create a path to large scale stagnation of the Iraq’s economy. It might leave consumers with no choice but to use inferior local products. Thus, protecting the local production should be understood in its long run effects and benefits not just blindly implemented which can easily make the consumers the hostage of the local producers. 

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