Some International Companies Cautiously Return to Iraq

After disruptive anti-corruption protests earlier this year, a degree of stability has returned to parliament. Weak oil prices that sapped its economy have staged a fragile recovery. And Iraqi forces have beaten back Islamic State to just a few pockets in the country, most recently driving them from Fallujah and Ramadi.

Since then, interest in the country from serious investors has increased, said Mudher Salih, a former senior central bank official who advises Prime Minister Haider al-Abadi on financial policy. “After Fallujah and Ramadi everything changed,” he said.

Part of that change is foreign capital, and deal-scouting executives are cautiously returning to Iraq and improving its business outlook.

In January, General Electric signed contracts worth $1 billion to upgrade Iraq’s electricity infrastructure, the company’s largest power deal in the country since 2008. GE, which has been operating in the country for years, said it “continues to see growth opportunities going forward.”

In April, the World Bank’s International Finance Corporation arranged a $375 million financing package for an Iraqi power company, backed by Lebanon’s Bank Audi—the bank’s first major investment in the country. The deal is a sign of the IFC’s increased support for Iraq in the 12 months to June 2016, which was accompanied by an “increase in interest by investors from the region,” said Mouayed Makhlouf, IFC Director for the Middle East and North Africa. Bank Audi declined to comment.

In a sign that some companies are betting that even tourism could begin to pick up, Wyndham Hotel Group announced plans to open two new hotels in Najaf, a pilgrimage destination for Shiite Muslims, by 2018.

“It takes a long time to develop new hotels so you can’t wait until the moment before the thing is in all the travel magazines,” said Daniel Ruff, Wyndham’s president for Europe, the Middle East and Africa. “Once you are the first mover you see some opportunities emerging quickly and growth can be really fantastic.”

International law firm Eversheds says it is working on two deals to acquire assets in the country—the first Iraqi acquisitions the firm has handled in more than 12 months.

Another big reason for optimism: the International Monetary Fund.

Last month, it approved a $5.3 billion bailout for the cash-strapped country, helping to plug its budget shortfall and restore investor confidence. The deal requires Iraq to undertake significant economic changes, cutting spending and tackling corruption, and paves the way for additional assistance.

Driven by higher oil production, economic reforms and diminished threat from the militant group, the World Bank expects Iraq’s economy to grow about 7% this year.

Foreign direct investment in Iraq—primarily a function of spending by international oil companies—could increase by around 20% this year to nearly $4 billion, according to estimates by Astrit Sulstarova, head of the investment trends and data unit at the United Nations Conference on Trade and Development. In 2015—a year of military uncertainty and falling oil prices—FDI crashed 30%.

Iraq is still in a delicate situation. The price of oil—the main source of government revenue—remains under pressure. The country’s budget deficit ballooned to 14.3% of GDP last year and is expected to be closer to 15% in 2016.

Meanwhile, a mounting humanitarian crisis threatens to overwhelm the government, adding to the pressure on spending. The U.N. estimates more than three million people already have been displaced by the war against Islamic State in the country and millions more could be affected by a coming campaign for the extremists’ Iraqi capital of Mosul and ongoing offensive.

And anti-corruption protests have dogged and disrupted the Iraqi government, and could resurface.

The hurdles facing companies also remain significant. A stifling bureaucracy and rampant corruption make for a challenging environment. Simply starting a business requires about 10 different procedures and takes roughly a month, according to the World Bank. It is little surprise, then, that Iraq ranks 161 out of 189 countries in the World Bank’s 2016 ease of doing business rankings.

The Iraqi government in particular, makes a difficult business partner. Mohammed Al Khasaky, chairman of Iraq’s AKG Engineering Construction & Trading Group described working with the government as “impossible.” His company, like many others, hasn’t been paid in more than a year.

Still, Mr. Khasaky is eager to continue to operate in Iraq, provided he can avoid relying on government money. “Any opportunity we are ready to work if the money is coming from outside the Iraqi government,” he said.

Sami al-Araji, chairman of Iraq’s National Investment Commission, acknowledged the challenges facing businesses, but said it is looking at “all means and ways to try to alleviate the difficulties of the companies.”

Activity in the country’s oil sector is tentatively improving and the government is working to build interest in underdeveloped oil fields and major infrastructure projects.

According to Iraqi officials, Exxon Mobil Corp. and China’s state-controlled PetroChina Co. are in talks to help boost production from two of the country’s smaller southern oil fields. Exxon declined to comment and PetroChina didn’t respond to a request for comment.

—Ghassan Adnan contributed to this article.