This chapter aims to generate a better understanding of the informal economy in Iraq (i.e. its extent, characteristics and diversity) and discusses recent developments and legislative efforts to tackle informality from a multi-policy approach, in particular in the context of the COVID-19 pandemic. It aims to identify the causes and consequences of informality, to build a baseline for monitoring progress towards formalization, to build consensus around the situation of informality, and finally, to pave the way for discussions between policy makers, constituents and relevant partners on the priorities and responsibilities for the transition to formality agenda.
Informality and Structural Transformation in Egypt, Iraq and Jordan
A Framework for Assessing Policy Responses in the MENA Region
4. Informality in Iraq
Abstract
Key messages
As of 2021, approximately 5.73 million people were informally employed in Iraq, making up 66.6% of total employment.
Among them, 4.72 million were in the informal sector, or 54.8% of total employment. There are also significant numbers of people with informal jobs within the formal sector – for example, those in major corporations or government agencies without long-term contracts or social security contributions.
The private sector, especially in retail, construction, and transportation, is predominantly informal. Non-citizens are more likely to have informal employment.
Informal employment correlates with educational attainment. Majority of workers without degrees are in informal employment. Most workers with university degrees are in formal employment.
Men (68%) are more likely to hold informal jobs than women (44%). This discrepancy might be due to a higher percentage of women working in public employment.
Insecurity undermines access to education and jobs and deters both employers and workers from entering formal labour relationships. Corruption undermines trust in formality. Transparency International ranked Iraq 157th out of 180 countries in 2022. Limited government capacity to enforce employment and business laws favours informality. Complex legislative environment, hampering formal representation and creating legal uncertainty.
From demand side, there are limited incentives for businesses to register. In addition, factors that do not favour formalisation include bureaucratic procedures for business registration, lack of awareness among workers and businesses about their rights and obligations, mistrust in institutions, stemming from perceived corruption and costs associated with registration and subsequent obligations deemed too high by businesses.
Existing laws relating to labour, social security and economic units present several weaknesses, including in terms of the absence of some key implementing regulations, barriers to freedom of association, limited coverage (particularly in the case of social security), or in terms of onerous burdens imposed for the formalisation of enterprises. However, significant efforts are currently underway in the field of social security in particular to expand scope and coverage of social insurance schemes to informal workers.
4.1. Economic conditions
Multiple and wide-ranging the factors contributing to informality in Iraq. These include barriers relating to the structure of the labour-market and macro-economic conditions; challenges to government capacity to effectively legislate and enforce compliance; and demand-side barriers to formalisation, including in relation to awareness of rights and obligations, administrative and financial barriers, and the lack of incentives to formalise. This chapter analyses the highly unique Iraqi context, and the findings point to key factors that require specific attention in the country, including the large public sector in the labour-market, corruption - which results in limited trust in institutions - and the legacies of the conflict and political tensions, which affect the macro-economic environment and thereby, formal job creation and business development. These require tailored and evidence-based policies to effectively promote the formalisation agenda in Iraq.
Iraq’s economy is heavily reliant on oil, which has contributed 99% of exports, 82% of government budget, 42% of GDP, yet represents less than 1% of employment over the past decade. Outside the oil sector, services contribute the largest share of GDP, while agriculture contributes less than 10%.
The dual shock of the COVID-19 pandemic and political instability had a direct impact on the economy and on the welfare of Iraqis especially among informal workers, whether as employees informally employed or independent workers with or without employees owning or operating an informal enterprise, and those in self-employment. The contractions in both oil and non-oil sectors in 2020 caused disruptions to employment, increased job losses, and reduced household income. The macro-economic situation and COVID-19 pandemic have contributed significantly to the lowering domestic demand, thus driving many small industries out of the market. However, the recent economic recovery supported by soaring oil prices and rising oil production due to Ukraine crisis has contributed to some accumulation of fiscal buffers and reserves. The fiscal and external balances due to recent increase of oil prices are projected to post surpluses this year, decline over the medium term in tandem with oil price declining trend (IMF, 2022[1]).
4.1.1. Poverty and vulnerability
Prior to COVID-19, the poverty rate stood at 20%, with rates higher among children aged 0 to 14 years than other age groups, while some 42% of the Iraqi population were deprived in more than one dimension of wellbeing (whether education, health, living conditions, etc.) (UNICEF, 2018[2]). In turn, some 25.8% of people are living just above the poverty line, and thereby vulnerable to falling into poverty in case of covariate or idiosyncratic shocks. Indeed, the poverty rate was estimated to rise by 11.7% due to COVID-19, reaching 31.7% in 2020 (UNICEF/World Bank, 2020[3]). Poverty and vulnerability are particularly high among the large number of forcibly displaced people living in Iraq. Indeed, according to the Iraq Humanitarian Needs Overview of 2022, an estimated 2.5 million IDP or returnee population are in need of some form of humanitarian assistance, of whom 45% are children (or an estimated 1.1 million children) (UNOCHA, 2022[4]). As a result, children remain exposed to various vulnerabilities and protection risks, including child marriage, child abuse, and child labour.
Educational attainment rates in Iraq are relatively low, with 33% of young people aged 15 to 29 unable to read and write, and a further 33% having only completed primary education (World Bank, 2017[5]). Similarly, access to healthcare – which is largely publicly funded – is limited, with staff shortages and geographical disparities in terms of quality and availability of services (World Bank, 2017[5]).
4.1.2. Labour force
In Iraq only 39.5% of the population aged 15 and over are in the labour force (compared to a global average labour force participation rate of 59.3%) (ILO, 2022[6]), with significant disparities between men and women, where 68% of men are in the labour force compared to only 10.5% of women. Only some 26.5% of youth aged 15 to 24 are in the labour force.
According to the latest Labour Force Survey conducted in 2021 (CSO/KRSO/ILO, 2022[7]), the unemployment rate stands at 16.5% (or 1.6 million people), again, with significant differences by age and gender: while 14.7 of men are unemployed, this rate reaches 28.2% among women, and as high as 35.8% among youth. While for men unemployment rates fall with educational level until university level, for women, unemployment is lowest among those who are unable to read and write, and among those with secondary educational attainment. There are also significant variations by region with lowest unemployment rates seen in Babylon, at 5.5%, and highest rates in Nineveh, at 32.8% – over six times higher.
The sectors that employ the largest share of the workforce are construction (16.3%), public administration and defense (15.9%), and wholesale and retail trade (14.2%), while agriculture, forestry and fishing account for 8.4% and manufacturing accounts for 6.2%.
Around 37.9% of all jobs are in the public sector, while the private sector accounts for 61% of employment (with the remainder working in both sectors, in state-owned enterprises, etc.). It should be noted that “private sector” covered more than private corporations and quasi-corporations, and included unincorporated enterprises which in principle should have been considered as part of the “household sector”.
Compared to the public sector, the private sector has lower job security, benefits, and often lacks formal contracts. Informality is a major issue within the private sector in Iraq and affects the quality of both products and services as well as jobs. Job opportunities available for youth are also more likely to be in the informal economy than the formal economy. This proliferation of small-scale economic activities in the informal economy, though providing a cushion in times of crises, is in the long-term going to cause a perpetuation of informality in the labour market if not addressed.
4.2. Overview of national regulatory and strategic frameworks
A wide range of reforms has been made over the past decade to strengthen legal protections and guarantees for workers and to improve the business environment. A number of these reforms, such as the Kurdistan Region in Iraq Labour Law and the draft Law on Pensions and Social Security for the Private Sector are ongoing. This section presents an overview of the legal coverage and level of protection offered by relevant legislation and regulations, with a focus on the labour laws, social security laws and legislation governing refugees’ access to employment in Iraq. It also reviews relevant legislation for economic units.
4.2.1. Legal environment for employment and labour
The Labour Law, (Labour Law No.37 of 2015) and draft Labour Law for Kurdistan Region in Iraq KRI (as of September 2021) regulate the employment relationships, contracts, working conditions and entitlements of workers in the private sector. The Laws and their substantive provisions cover all workers in the private sector who receive a wage or other remuneration for their work. The provisions of both laws are intended to apply equally to enterprises of all sizes and to all economic and occupational sectors. Under general conditions issued by the Ministry of Labour and Social Affairs (MoLSA), Iraqis and foreigners are required to be registered with MoLSA for the purpose of social security, income tax and access to labour protections provided for by law.
Workers are defined in both laws as ‘every natural person, whether male or female, working under the guidance, supervision and control of an employer’, and the existence of this legal relationship is based on the factual existence of the relationship. In turn, ‘work’ covers any effort by a worker in return for a wage, whether ‘permanent, casual, temporary or seasonal’, and ‘wage’ is defined to include ‘any amount or benefit due to a worker in return for any work performed’. Likewise, the definition of ‘employer’ in the Labour Laws is broad, covering ‘any natural person or legal entity who employs one or more workers in return for a wage of any kind’. These guarantees ensure that all workers in paid employment in the private sector, whether formal or informal, are covered by the law.
Neither the Labour Law nor draft Labour Law for KRI are restricted to Iraqi citizens. Rather, the Laws explicitly aim to ‘regulate the work of foreigners working or wishing to work in Iraq’ and they apply to ‘all workers in the Republic of Iraq’. The Laws further prohibit discrimination on the basis of race, color, sex, religion, religious community, opinion or political belief, origin or nationality. Groups of workers who are not de jure covered by the labour law are unpaid workers, the self-employed and civil service, armed forces, police and internal security.
With regards to contracts, neither Labour Laws explicitly state the different types of contracts permitted. Both laws permit the use of limited duration contract, unlimited contracts, sub-contracts and part time contracts but do not explicitly refer to the use of casual, daily and temporary work largely. This leaves a level of ambiguity that needs to be addressed through a Ministerial Regulation.
Under the 2015 Labour Law, and draft KRI Law, penalties for labour law violations have significantly increased compared to previous legislation. The labour inspectorate sits within the Ministry of Labour and Social Affairs and involves Tripartite Inspection Committees who are empowered to undertake workshop inspections to monitor and enforce application of the labour law. The committees are empowered to access workplaces throughout the country without prior notice to undertake examinations; take samples from the workplace; and compel employers and managers to institute changes as necessary.
The labour laws also outline conditions of employment. Indeed, wage protections, including entitlement to minimum wages, regulation of working hours, and occupational health and safety (OSH) apply equally to all workers covered by the labour law. Specific regulations to govern the daily working hours for workers in certain professions, occupations and sectors, including agriculture and family workers are to be regulated by Ministerial regulations. But until these regulations are issued, some ambiguity around working hours will persist for these groups of workers. Both Laws also regulate ‘women’s work’ and include prohibitions of arduous work and of night work, with some exceptions. Protective measures are applied to women’s employment, which highlight the principle of equality of opportunity and treatment between men and women in employment and occupation. The effect of these provisions on women who want to work in such sectors or occupations or during the night, is to place them in a precarious position, where they can only do so informally and without legal protection.
4.2.2. Legal environment for social security
Under the current legal framework for social security, Law No. 39 of 1971, a series of decrees were envisaged to gradually extend coverage to groups of uncovered workers. These decrees did not materialize due to a range of procedural and political hurdles and security constraints. This law is set to be superseded by the draft Law on Pension and Social Security of 2016 (‘draft Law), which is before Parliament, in which all workers covered by the Labour Law of 2015 are to be enrolled and insured in all branches of social security, and extends coverage to self-employed workers (through optional insurance, although this is still a point of discussion) and workers in the informal economy. It also introduces unemployment insurance. The draft Law attempts to cover the informal economy, including informal workers who are defined as ‘a group of individuals and small enterprises producing goods or providing services and operating for their own account without a license’.
The Council of Representatives in Federal Iraq voted on May 2023 to adopt the new Social Security Law for Private Sector Workers, which introduces far-reaching reforms to the social security system for private-sector workers.
The new law, which will replace Law No. 39 on Pension and Social Security for Private-Sector Workers of 1979, brings the social security system for private sector workers in closer alignment with ILO Social Security (Minimum Standards) Convention, 1952 (No. 102), which was officially ratified by the Government of Iraq in March 2023.
The law significantly expands the legal coverage of the social security system, covering all workers including informal workers, the self-employed and contributing family workers. It also expands the range of entitlements to include maternity and unemployment benefits for the first time. The law will also provide health insurance obtained from public, cooperative, and private providers.
The new Social Security Law provides some forms of optional pension insurance for the ‘informal economy’. In recognition of the heterogeneity of the informal economy and inherent challenges of defining workers in this group, it has been recommended by the ILO that the draft Social Security Law develop differentiated provisions and coverage approaches based on the type of work arrangement for workers in the informal economy. For example, addressing the issue of capacity to pay contributions among informal sector workers is a key to ensure the demand for social security. The draft laws committed that tax funding is channelled to subsidize contributions for the long-term branch of protection (pension, survivors, and long-term disability) for eligible workers in the informal economy. Subsidizing contribution remains a cheaper alternative to providing social assistance, but also sets the incentive structure correctly for persons in the working age.
Enterprise registration is a precondition to enrolment of workers in social security. Registration in social security takes place through the local Retirement and Social Security Department in each governorate and the cost for registration depends on the number of employees. To facilitate the registration process, the Ministry of Trade’s website includes an electronic system that directs employers to register workers and enables electronic payment contributions. Under relatively new procedures, upon registration of an enterprise, employers are directed to the Social Security registration process. In the absence of an enterprise registration number, employers cannot register with the Social Security Fund, nor can they enroll individual workers in the enterprise in the Fund. The requirements for registration are not currently uniform across all sub-national offices or branches, however the Ministry has a Social Security Information Department that provides information and assistance.
4.2.3. Laws Regulating Economic Units
The Companies Law No.21 of 1997 (as amended in 2004) is the main legislation governing enterprises in Iraq, including KRI. The Law governs two types of companies – private sector companies, and mixed companies (companies jointly established by private persons and the public sector with the public sector holding at least 25% of the capital).
The Federal Income Tax Law No.113 of 1982, (as amended in 2003) is the main law governing tax in Iraq. The General Commission for Taxes (GCT) is the chief tax authority in federal Iraq while in KRI, the main tax authority is the Income Tax Directorate. The registration process involved automatic notification to the GCT in federal Iraq. In KRI, registration has previously been completed at the time of making the first corporate tax filing at the end of the financial year. In addition to social security contributions, employers are required to withhold taxes on behalf of employees and pay the tax to the tax authorities every month (quarterly in KRI) as well as submit annual tax returns on behalf of their employees. There are penalties for failure to pay taxes or late payment of taxes for both Federal Iraq and KRI. Tax policies in Iraq have been criticized by employers for their lack of transparency and for allowing for corruption in collection, for the poor calculation methods which are not related to an enterprises’ profit and the lack of fair and just taxation.
4.2.4. National strategies and policies
In addition to the above legislative environment, there are also five strategies initiated by the Iraqi government and KRG aimed at fostering the economy and reducing poverty in Iraq, which are highlighted as part of the formalization process because at their core, these strategies aim to promote economic development by increasing access to resources for formally registered businesses. In other words, these create financial incentives to promote formalization of businesses. In turn, these strategies promote formalization by requiring economic units to provide tax declaration forms and details of workers and contractors in order to access government tenders. More details about government initiatives and programmes are outlined in the last chapter. To note that while there are committees within the Ministry of Planning (including on private-sector development) responsible for monitoring progress against implementation of the strategies, these do not conduct systematic public reporting on said progress, which hinders assessments of the extent to which objectives of the strategies have been achieved.
More recently in October 2022, following the newly established government of Iraq, the Prime Minister Office has now put in place a new Government Programme. The Programme is focused in addressing unemployment issues; creating work opportunities for young women and men; and reforming the economic and financial sectors, especially agriculture, industry, and banking sectors and supporting the private sector. The Programme has 23 different spheres including: combating unemployment and creating job opportunities; investment; social protection and fighting poverty; human rights and women empowerment; and political legislation, and reforms. The Programme also highlights on how to unleash the potentials in the investment environment and expand its horizons through reforming and streamlining the procedures in force in the investment departments and support investors for the purpose of developing all sectors covered by the investment law to create job opportunities for the Iraqi workforce. In the effort to address high rates of unemployment, the new government in office is also planning to provide support for public and private sectors as well as encourage the establishment of small and medium enterprises, provide soft loans, follow up on their implementation and completion stages, and provide advice and expertise to ensure their success and operation. The government Programme highlights the reform of social assistance system and the endorsement of the social security and pension law as priorities for this government.
Poverty Reduction Strategy (PRS) was first launched in 2010, but was difficult to implement due to the armed conflict. The second phase of the PRS was then introduced in 2018 and focuses on enhancing the life of poor citizens. The new PRS strategy focuses on security and stability, good governance, fair distribution and diversification of incomes under a market economy, and finally, mitigating the negative impacts of economic reforms on the poor. The PRS demands reforms to contribute to improving living standards, protection against risk and hazards and achieving economic empowerment as well as turning unskilled workers with no proficiency into productive, and integrated contributors to society.
Private Sector Development Strategy (PSDS) of 2014-2030 outlines as its’ vision statement the development of “a viable and thriving national private sector, that is regionally competitive and globally integrated, led by the business community, which contributes to economic diversification, sustainable development and job creating”. This strategy includes elements of the PRS and reconstruction and development framework, and represents an agreement between the government and representatives from the private sector and international development partners. The PSDS envisions a cohesive, coordinated and cooperated agreement between the government and private sector that increases job opportunities. The PSDS aims to promote the ability of the private sector to diversify the national non-oil economy and contribute to economic growth and improve the environment for doing business in Iraq and Kurdistan in order to promote economic recovery and increase competitiveness. Investing in the private sector and focusing on the unemployed workers and those living near or below the poverty line will support in achieving this. The table below outlines the four pillars under the plan, and their objectives and related activities.
Table 4.1. Four Pillars of the Private Sector Development Strategy
White Paper for Economic Reforms of 2019 anticipates a reform process over three to five years as implement by the Crisis Cell for Financial and Fiscal Reform. The white paper has two main objectives: first, to initiate an immediate reform programme addressing the budget deficit to create fiscal space for the medium-term reforms package; and secondly, to put the economy and the federal budget on a sustainable path, after which Iraqis can decide and choose the economic direction of the country. The White Paper outlines five key pillars for the reform including achieving sustainable financial stability, creating sustainable job opportunities, improving basic infrastructure, strengthening basic services and protecting vulnerable groups and finally, improving governance and introducing changes to the legal framework. Activities under this last pillar have direct implications for the formalization agenda, as these include:
Reviewing and amending the official guidance concerning government contracts.
Introducing e-governance systems to strengthen oversight of government contracting and the collection of taxes and customs.
Introducing an electronic governance system in the field of government contracting and tax and customs collection.
Completing the project establishing the National Information Center to facilitate the introduction of government e-services to citizens, and automate the procedures for obtaining key documents such as nationality and passports and accessing pensions and social security.
Kurdistan Region of Iraq 2020 outlines the vision for the Region’s development and what steps the KRG is taking to improve its’ population’s well-being. The Vision is presented across four key pillars focusing on social policy, economic policy, infrastructure and governance. The priority within the labour market is to reduce underemployment, promote skills, and reforming the social insurance and pension laws to “ensure that private sector workers have protections and benefits that are fair and that will attract more of the working population into the private sector”. In turn, the second pillar on enabling private-sector growth directly addresses the issue of informal economic units, as one of the key monitoring indicators is the “time it takes to start and close a formal business and the cost of doing so”.
Furthermore, the Government of Iraq is in the process of elaborating a National Employment Policy, together with ILO technical support. The policy will have a strong focus on informality in the labour market, outlining key interventions to address this challenge, given its significance to wider employment. A detailed labour market analysis using the LFS results has been finalized, in addition to supplementary thematic studies for the NEP’s employment diagnostic in order to build a knowledge base on both the supply and demand sides of the labour market. A series of capacity building activities have been undertaken for government, employers’, and workers’ representatives, on analysis of labour market indicators, on designing and implementing effective employment policy (both jointly and separately), and on effective reporting in line with Iraq’s obligations as a signatory to ILO Convention 122. The draft of the Employment Policy document will be finalized by the Technical Committee, with ILO support, based on the findings of the LFS and the issues identified, and recommendations proposed in the employment diagnostic as well as this analysis. The NEP will lay the groundwork for a constructive and informed social dialogue in order to ensure that the economic future of Iraq works for everyone and leaves no one behind.
4.3. Key statistics and drivers of informality
4.3.1. Key statistics on informal employment
The LFS 2021 reports on the size of informal employment. The results show that the number of persons with informal jobs was 5 734 000, representing almost two-thirds (66.6%) of total employment. Of these, about 4 723 000 were employed in the informal sector, corresponding to about 54.8% of total employment, but there were also a significant number of persons with informal employment in the formal sector (1 011 000 persons). An example of this category of persons is an employee working in a large private corporation or a government agency with a short-term contract without social security contribution by the employer.
Figure 4.1 shows the share of informal employment for particular groups of the employed population. The results may be interpreted as the differential risks of being engaged in informal employment by particular categories of persons, expressed in terms of gender, citizenship, educational attainment and branch of economic activity. The data indicates that men are more likely than women to hold informal jobs (68% compared to 44%, which may result from the higher share of women in public employment, compared to the share among men), so do non-citizens over citizens, less educated over more educated, those engaged in agriculture than those engaged in industry or services.
Figure 4.1. Informal employment for particular groups of the employed population, Iraq
Share of informal employment in total employment
Note: Agriculture includes agriculture, forestry and fishing; industry includes mining and quarrying, manufacturing, electricity, gas, steam and air conditioning supply, water supply, sewerage, waste management and remediation activities, and construction; services include wholesale and retail trade, repair of motor vehicles and motorcycles and the remaining branches of economic activity.
Source: LFS 2021.
The figure below also illustrates the share of employed persons by completed education level and formality or informality of employment. This data indicates the informal employment is closely correlated with educational attainment. The vast majority of workers with no degree are in informal employment, while the majority of workers with university degrees are in formal employment.
Figure 4.2. Employed persons by completed education level and formality/informality of employment
Source: Labour force survey 2021.
4.3.2. Key statistics on informal sector
The private sector’s activity is mainly informal and concentrated in retail, construction, textiles, trade, transportation, hospitality, food and chemicals (IMF, 2017[8]). The industrial base in Iraq is considered weak and not diversified, suffering from years of neglect and lack of supportive business environment and industrial policies.
There are limited nation-wide surveys that provide up-to-date, comprehensive and in-depth statistics on the prevalence of informal enterprises in Iraq. A recent survey conducted in 2020 by UNDP on MSMEs, covering Baghdad, Basrah, and Nineveh (where 20% of the nation’s MSMEs are located), found that 80% of MSMEs were informal – defined as “not registered with any entity” (MOP et al., 2021[9]). The survey found that registration rates increase with the size of the enterprise, with only 17.2% of micro enterprises being registered with any institution, compared to 34.1% among small enterprises and 68.5% among medium enterprises. In turn, registration was higher among all categories with the Tax authority, compared to other institutions including local municipality and company registry. With regards to social security, 0.1% micro-enterprises in the survey were registered (or 2 out of 322 respondents), while 0.6% and 5.6% of small and medium enterprises (respectively) were registered.
When looking at registration by economic sector of activity, the survey found registration to be highest amongst enterprises in agriculture and fisheries (largely driven by registration with the Agricultural Association, driven by the services provided to its members), as well as those in trade, transportation and storage, among whom registration exceeded two-thirds.
By far the main reason given by respondent enterprises for not registering was that they did not believe themselves to be required to register (66.5% of respondents), while fewer highlighted that they lacked knowledge or understanding of the registration process (6.5%) or that the registration fees were high (3.5%).
More data on the characteristics of informal businesses was captured by a World Bank survey of informal sector-enterprises conducted in 2021, which collected data from four urban areas in Iraq, namely, Baghdad, Basrah, Najaf and Sulaymaniyah (World Bank, 2021[10]). The survey also reported on the reasons for not formally registering, providing respondents with a list of options. The findings highlighted that a high share of respondents reported taxes, inspections, bribes, and the lack of benefits as the core reasons for not formally registering. The survey also captured the sectors in which such enterprises operated, indicating that the majority of such enterprises were engaged in retail (re-selling goods).
Figure 4.3. Percentage of businesses across sectors
Source: World Bank, 2021, The Informal Sector Enterprise Surveys www.enterprisesurveys.org, The World Bank Group
The research also found that the vast majority of surveyed informal businesses had been started using the owner’s own funds, as opposed to accessing finance, access to which is typically limited for informal businesses. And indeed, among surveyed businesses, less than a third had accessed loans.
Figure 4.4. Percentage of informal businesses started with owner’s own funds or accessing loans
Source: World Bank, 2021
4.3.3. Drivers of informality
An informality diagnostic conducted by the ILO in Iraq in 2021 based on a desk review, key informant interviews and primary qualitative data collection with workers and employers identified some of the key drivers of informality in the country. These were divided into three main categories: national contextual drivers; barriers relating to government capacity; and demand-side barriers – namely, barriers relating to the situation of workers and employers (ILO, 2021[11]). Many of these are relevant in understanding the widespread perception of the ineffectiveness of the above-mentioned initiatives in tackling the informality challenge. These are summarized briefly below and complemented by findings from the Key Informant Interviews s conducted as part of this project.
Supply-side barriers
The first factor affecting informality in Iraq is the prevailing security situation. Indeed, the growing influence of armed groups and use of violence to resolve conflicts or to gain access to resources remains a persistent challenge in Iraq, and this has caused huge damage to the operation of institutions, private sector business activities, employment, and the size and level of formalization. There are several channels through which the security situation affects the formalization process. Firstly, the security situation has affected education levels, which affects the size skills in the labour force, which limits the prospects of labour-market entrants to find decent work. The security situation has also led to high rates of poverty and vulnerability, known key drivers of informality, as workers have limited better options.
Key informant interviews also identified that the volatility of the security situation also drives uncertainty about future economic prospects, and negatively affects employer’s willingness to formalize their workers and provide them with contracts.
A second element identified in the informality diagnostic is the prevailing level of corruption in Iraq, which is generally acknowledged as being correlated with informal economy activity. Indeed, Iraq ranked 157th out of 180 countries in Transparency International’s annual corruption perceptions index in 2021 (while Jordan ranked 58th and Egypt ranked 117th) (Transparency International, 2021[12]). Corruption – including in relation to misallocation of government financial resources - in Iraq results in an absence of capacity, coordination and clear allocation of responsibilities and resources. This leads to less capacity for financial and management planning and inefficiency in implementation, mismanagement of resources, lack of transparency and accountability, and an unfinished decentralization process. Thus, entrepreneurs consistently list corruption as one of the most severe obstacles to doing business in Iraq according to the World Bank as business activities in such an environment are likely to be costly, which can explain the growth of informal economy.
The third barrier is the government capacity, which is not only undermined by corruption, but also limited financial and human resources. For one thing, neither the Iraqi government, nor the KRG have data on non-registered enterprises, which presents a challenge to addressing informal sector activity. In turn, the government has limited capacity to enforce the provisions of the laws applicable to employment and business. The labour inspectorate in Iraq faces a number of challenges that hinder its ability to contribute to formalization of the labour market through effective inspection, notably due to the limited manpower required to conduct inspection. While the initiative by MoLSA to strengthen enforcement is an excellent initiative in the right direction, the gap between what is required and what is available remains vast. In turn, there are also reports of poor governance within the labour inspection. These elements, combined with the outdated technology and tools available to the labour inspectorate have meant that the agency has largely concentrated its energy on monitoring formal and larger registered establishments and a large number of unregistered MSMEs and informal employment largely remain beyond the scope of labour inspection in practice. Finally, it was also reported in the informality diagnostic that the courts have virtually no powers of enforcement in practice with regards to labour disputes which limit the use of formal dispute resolution mechanisms by workers.
The legislative environment is also identified as a driver of informality, either due to the outdatedness or restrictions imposed by existing laws or the absence of implementing regulations. Firstly, social dialogue in Iraq suffers from the absence of a supportive legal environment, and informal workers are largely unrepresented by formal labour organisations and trade unions. Another challenge is the absence of implementing regulations, which impede the effective application of the laws. Indeed, a significant number of provisions in the Federal Labour Law envisage and require the formulation of implementing regulations, but most of the anticipated regulations have not yet been drafted or issued. This contributes to legal uncertainty and challenges in the application and enforcement of the law. In turn, some of the existing regulations and business registration laws are not meeting the needs of business owners. For example, there is no law to formalize the self-employed and sole-owner businesses with the Chamber of Commerce, and current laws and regulations are identified as limiting opportunities to grow new economic business units such as ICT, social, and economic consultancy services.
A further challenge relates to the lack of incentives, mainly for employers, to register their businesses. This is also related to the issue of trust, but also to the perceived lack of public services which their taxes are meant to finance, and in terms of benefits and services available to registered businesses. These include, for example, tax exemptions, but also, importantly, access to finance and credit – identified in the interviews as a key need for many enterprises.
Finally, the administrative processes required to register businesses impose heavy bureaucratic requirements which, combined with the time required to complete them, represent a barrier to registration and formalization. Indeed, processes to register a business remain highly bureaucratic and difficult to navigate, even with the introduction of the electronic business registration system, which has reportedly been ineffective. Administrative procedures are identified as complicated due to outdated ways of working, lack of capacity, lack of the use of technology, over-centralization of authority and inaccessibility of services, nepotism, inefficiency/delayed decisions, bureaucratic obstruction and abuse of authority. Because of the complexity of the procedures, some respondents noted the need to establish a specific department in the company to manage the registration process, or to hire lawyers to do so, which is costly. In turn, respondents noted that there is little support for small enterprises to register, either from Government or from employer organizations. And even when a company is registered, processes to fulfill obligations under the law remain time consuming.
Demand-side barriers
On the demand side (barriers relating to characteristics of the workers and employers themselves), limited awareness among workers and businesses of their rights and obligations under the relevant laws is the first stumbling block in terms of compliance with these laws. This is a particular challenge among workers, whose lack of awareness impedes their ability to uphold those rights, which is a direct impediment to improving working conditions and job security. In turn, some workers believe that even if they were aware of their rights, they would not defend them (including through formal dispute mechanisms) for fear of losing their employment.
Trust in institutions was also highlighted as a driver of informality: without trust in institutions to fairly uphold the law – but also to effectively provide services – workers and businesses may not consider formalization worthwhile. This is closely related to the issue of corruption noted previously. Indeed, the informality diagnostic highlighted a low level of confidence among businesses in government institutions, largely based on perceptions of corruption. Lack of trust in institutions was noted by some businesses as being one of the key reasons not to register, while in some cases, businesses reported underreporting worker salaries to avoid paying social security contributions due to the lack of trust in the Social Security department. This issue is not always recognized or acknowledged by the government institutions themselves, which impedes their willingness to address this as a challenge.
In addition to the perceived incentives (or lack thereof) to formalization, another important consideration – or barrier – is that workers and businesses are faced with the cost of doing so and willingness to pay. The informality diagnostic identified many businesses who considered the cost of registration, and the subsequent taxes and social security obligations, as being too onerous – particularly in light of the limited rewards or benefits noted above.
4.4. Linkages between shocks, vulnerabilities, and the informal economy in the country
There is limited available information about the linkages between shocks and informality, and what exists focuses largely on the impacts of the COVID-19 pandemic. Here, a survey conducted by the ILO and Fafo in June 2020 (Kebede, Stave and Kattaa, 2020[13]) to assess the impact of the pandemic on small-scale enterprises and workers in 2020 found that only 23% of respondents were “working as usual” – i.e. same working hours and salary as before the pandemic. Among the remaining respondents, 35% were working reduced hours, a quarter of respondents had been permanently laid off – many of whom are also the main income-earners in their households – while 15% were temporarily laid-off. Similarly, World Bank estimates of unemployment rate suggest an increase in unemployment of 1 percentage point between 2019 and 2020, from 12.76% to 13.74%. In turn, income from employment has fallen by 16% between February 2020 and December 2020, largely driven by a reduction in working days, reduction in income from the same job, or unemployment of a household member. In turn, the ILO and Fafo assessment finds that respondents with verbal contracts (i.e. informal) saw a 40% reduction in income due to a reduction in working hours, while those on written contracts (more likely to be in formal employment) did not see their incomes reduced (Kebede, Stave and Kattaa, 2020[13]). In turn, workers on written contracts were more likely to be “working as normal” compared to workers on verbal or no contracts. These categories of workers are particularly vulnerable as they are unlikely to have access to formal social security.
With regards to impacts on enterprises, the survey found that 31% of surveyed enterprises (largely informal) were operating as they did prior to the pandemic, but only 18% believed that they would be able to remain operational for more than one month at the time of the survey. One of the biggest obstacles they identified for the future were reduced demand and loss of revenue.
4.5. Government programmes and initiatives
There is a range of programmes and initiatives implemented by Ministries and government agencies that aim to promote formal job creation and contribute to the formalization process. Unfortunately, there is very limited available information about those initiatives themselves, even less so on their success in creating decent work and promoting formalization. What is known is outlined where relevant.
In 2015 the Central Bank launched an initiative to finance registered small and medium enterprises in the field of agriculture, industry and construction to support employment generation and to finance small projects. To be eligible, the company must be registered. In the event of a financing request from a borrowing person (rather than a company), this person must have an identity registered with the CoC, in addition to a license to practice the profession and the rest of the official papers.
The Ministry of Trade is working to bring in foreign investments to the country through various marketing approaches, facilitating logistics and providing tax exemptions, which promotes job creation in a formal process. Furthermore, the Ministry is currently working on introducing the "one stop shop" to cut the bureaucratic red tape and to ensure business owners have the support and advice they need to succeed quickly. In turn, a new "single-window" system has been launched online to simplify the process for Iraqi citizens, including by removing multiple in-person visits into one. The system is the result of collaborative efforts by UNCTAD, the governments of Iraq, the US and the Global Entrepreneurship Network.
As a part of their services, the Chamber of Commerce provides loans and financial support to start-ups and existing economic units. For example, the COC in Baghdad is supporting access to finance and loans by Rafidain bank to its members - formally registered businesses - with an interest rate of 6% annually. In Erbil, the COC successfully supported the start-up of three factories in the KRI in partnership with UNDP by providing nearly 70% of the business startup costs.
In turn, the Companies Registration Office is contributing to the formalization process by providing a new service for people with special needs and the elderly. Indeed, the CRO has appointed mobile officers who can visit such applicants to process their applications, which facilitates company registration and renewal processes and any other legalization processes.
The Ministry of Finance (MoF) is currently aiming to strengthen partnership with the private sector to contribute and to advance the formal economy in Iraq. To achieve this plan, the Ministry - in coordination with the Iraqi Central Bank - is supporting access to finance through loans in public and private banks. The governmental banks, Rasheed and Rafidain, are providing loans with interest rates starting from 2%, lower than that which private banks receive from the Central Bank, which stands at 6-8%. In addition, on September 21, 2021, the Iraqi government announced a new policy that aims to strengthen the skills of the MoF in preparation of a gender-responsive budget, with support from the World Bank. This policy will include the development of women's skills with a focus on digital skills, enhancing the capacity to conduct research on women and youth in informal work and unregistered businesses and finally, creating a favourable working environment for women.
MoLSA has made efforts to strengthen oversight and enforcement of social security rights and responsibilities by appointing inspectors to examine old and newly registered enterprises to ensure workers’ participation in social security. In the event that employers have not paid contributions, inspectors will issue fines and warnings. Eventually the enforcement department seizes enterprise finances to enforce payment of contributions. There is also a level of coordination reported between labour inspectors and the Social Security Department. In the event that a suspicion arises within the Social Security Department, a report is sent to the Inspection Department to follow through with an inspection of the enterprise, which relies on the registration of an enterprise. However, there is an absence of data, which makes it difficult to assess the effectiveness of this process in ensuring the enrolment of all eligible employees and payment of contributions in registered enterprises, and low levels of enrolment continue to prevail as a significant number of employers evade their financial obligations. There is also a lack of data on the number of workplaces that have been found to be non-compliant with enterprise registration, employee social security enrolment and/or employment contracts and working conditions, as this has not been published or shared.
The Ministry of Planning has also established a specific team to analyse the informal sector, with the objective of strengthening the availability of data to inform effective policy decisions.
Finally, in response to COVID-19, several social protection measures were adopted by the Supreme Committee for Health and National Security. On 4 April 2020, the introduction of an emergency grant called Minha providing eligible households with a monthly payment totalling of IQD 150 000 (roughly USD 125) was announced. The intervention was implemented by the Ministry of Planning in all governorates, covering households of workers in the private sector not in receipt of social security payments from government. The payments were disbursed in mid-May, and as of July 3rd, some 7 million of the 12 million individuals considered eligible had received the payment – while 13 million had applied. Some 67 000 households registered with the Minha scheme were also then included in the recipient list for the regular Social Safety Net (SSN) programme. In addition, The SSN cash transfer programme was vertically expanded, whereby 600 000 recipients received a one-time top-up. On April 7th, the Ministry of Labour and Social Affairs also launched the “1 Million Food Basket”, a campaign to distribute food to those most in need due to the preventive measures and economic downturn. Households were targeted using the SSN registry. Penalties for late payment of social security contributions for the month of February 2020 were also waived until the end of March 2020.
Additional measures included:
Suspending all repayments due on residential plots of land sold or leased to citizens from all government institutions until the end of the current emergency, with no penalty interest for a period ending on 31/07/2020 at the latest.
Exempting commercial, industrial and other government real estate tenants from paying rental fees for the duration of the current emergency.
Exempting occupants and tenants of commercial, industrial and other properties that belong to municipal institutions from paying cleaning services fees for the duration of the emergency.
The suspension of mortgage repayments for three months for borrowers from the Ministry of Housing, Construction and Municipalities’ Housing Fund.
The suspension for three months of the repayment of loans obtained from the Central Bank of Iraq’s ‘1 and 5 trillion dinars’ finance schemes for small and medium size business projects.
Yet, there is a general perception in Iraq of the ineffectiveness of these programmes because of limited government focus on the implementation of the Labour Law and the absence of government cooperation. In turn, the ILO and Fafo assessment of the impact of COVID found that the majority of enterprises surveyed (89%) were not aware of the support provided by government (Kebede, Stave and Kattaa, 2020[13]).
4.6. Concluding remarks
The transition to formality highlights the complex nature of the drivers of informality, and the findings from this research confirm the multiple and wide-ranging the factors contributing to informality in Iraq. These include barriers relating to the structure of the labour-market and macro-economic conditions; challenges to government capacity to effectively legislate and enforce compliance; and demand-side barriers to formalisation, including in relation to awareness of rights and obligations, administrative and financial barriers, and the lack of incentives to formalise. However, the Iraqi context is also highly unique, and the findings point to key factors that require specific attention in the country, including the large public sector in the labour-market, corruption - which results in limited trust in institutions - and the legacies of the conflict and political tensions, which affect the macro-economic environment and thereby, formal job creation and business development. These require tailored and evidence-based policies to effectively promote the formalisation agenda in Iraq.
Existing laws relating to labour, social security and economic units present several weaknesses, including in terms of the absence of some key implementing regulations, barriers to freedom of association, limited coverage (particularly in the case of social security), or in terms of onerous burdens imposed for the formalisation of enterprises. However, significant efforts are currently underway in the field of social security in particular to expand scope and coverage of social insurance schemes to informal workers.
References
[7] CSO/KRSO/ILO (2022), Iraq Labour Force Survey 2021, International Labour Organization, Central Statistical Organization, Kurdistan Region Statistics Office, Iraq, https://www.ilo.org/beirut/publications/WCMS_850359/lang--en/index.htm.
[6] ILO (2022), ILOSTAT Data, https://ilostat.ilo.org/data/ (accessed on 13 November 2023).
[11] ILO (2021), A diagnostic of the informal economy in Iraq, ILO Regional Office for Arab States, Beirut, https://www.ilo.org/wcmsp5/groups/public/---arabstates/---ro-beirut/documents/publication/wcms_830086.pdf.
[1] IMF (2022), Iraq Economic Monitor (December-2022), International Monetary Fund, https://www.imf.org/en/News/Articles/2022/12/07/iraq-staff-concluding-statement-of-the-2022-article-iv-consultation-mission.
[8] IMF (2017), “Iraq – Selected Issues: IMF Country Report August 2017”, IMF Country Report, No. 2017/252, International Monetary Fund, https://www.imf.org/en/Publications/CR/Issues/2017/08/09/Iraq-Selected-Issues-45175.
[13] Kebede, T., S. Stave and M. Kattaa (2020), Rapid assessment of the impacts of COVID-19 on vulnerable populations and small-scale enterprises in Iraq, International Labour Organization, Fafo, http://search.ilo.org/wcmsp5/groups/public/---arabstates/---ro-beirut/documents/publication/wcms_751209.pdf.
[9] MOP et al. (2021), Iraq MSME 2020 Survey, https://www.undp.org/iraq/publications/iraq-msme-2020-survey.
[12] Transparency International (2021), Corruption Perception Index 2021, https://www.transparency.org/en/cpi/2021 (accessed on 13 November 2023).
[2] UNICEF (2018), 2018 Multiple Indicator Cluster Survey (MICS6 ) Briefing, https://www.unicef.org/iraq/reports/2018-multiple-indicator-cluster-survey-mics6-briefing.
[3] UNICEF/World Bank (2020), Assessment of COVID-19 Impact on Poverty and Vulnerability in Iraq, UNICEF/World Bank, https://www.unicef.org/iraq/media/1181/file/Assessment_of_COVID-19_Impact_on_Poverty_and_Vulnerability_in_Iraq.pdf.
[4] UNOCHA (2022), Iraq Humanitarian Needs Overview 2022 (March 2022), https://www.unocha.org/publications/report/iraq/iraq-humanitarian-needs-overview-2022-march-2022.
[10] World Bank (2021), Informal Sector Enterprise Surveys What Businesses Experience: Profile of Cities in Iraq, World Bank, Washington, DC, https://www.enterprisesurveys.org/content/dam/enterprisesurveys/documents/informal-enterprise-survey/Iraq%202021_Informal%20Sector%20Enterprise%20Surveys_Profile%20of%20Cities_English.pdf.
[5] World Bank (2017), Iraq Systematic Country Diagnostic, World Bank, Washington, DC, https://doi.org/10.1596/26237.
For further reading
Government of Iraq (2022), Iraq Labour Force Survey 2021, https://iraq.un.org/sites/default/files/2022-07/wcms_850359.pdf.