Stock exchanges usually follow, rather than lead, fundamental developments in a country’s financial system. Indeed, up until the late 20th century, relatively few countries even had a single stock exchange. One of these recent introductions to the workings of a stock exchange occurred in Iraq with the founding of the Iraq Stock Exchange very soon after the 2003 invasion of the country.
Perhaps this could be better termed a re-introduction though. Iraq already had a stock exchange which had shut during the war, but the new one established in 2004 was born into an entirely different political and economic situation. The exchange has witnessed and survived these changes, and the country’s instability, going back virtually to the beginnings of the new Iraq.
The Iraq Stock Exchange was not the first stock exchange in Iraq. It was preceded by the Baghdad Stock Exchange, founded by the old regime of Saddam Hussein in 1992. This exchange hosted trading in 140 listed companies. The old exchange provided a market into which the government sold shares in state-owned firms being privatized, often only partially. Thus, it was not an exemplar of private enterprise; many listed companies were still state-run and regime insiders were the exchange’s most important participants, often owning the largest pieces of the firms being sold off. The Baghdad Stock Exchange closed with the American-led invasion on March 19, 2003.
The new Iraq Stock Exchange opened in June 2004 following an order by the occupation’s Coalition Provisional Authority. The exchange was able to reopen so quickly in large part because of the old exchange; traders working the exchange floor were hired from among the old exchange’s members. The Coalition Provisional Authority’s Order Number 74 also created the Iraqi Securities Commission and commercial laws and accounting standards were in the midst of being rewritten.
It was a broad array of reforms being carried out in such short time. The Eastern European experience after communism warned of mixed results after rapid economic reforms undertaken in an entirely new and unfamiliar political and legal framework. Further, Iraq had security problems on top of this.
Nonetheless, the exchange opened its doors in whatever form it could. It took over the premises of an Italian restaurant in a volatile Baghdad neighborhood. The restaurant’s bar was turned into the desk where successful trades were recorded into a computer. The exchange operated with limited hours, from 10 a.m. to noon on just two days a week. Like the old exchange, the Iraq Stock Exchange was seen as providing a crucial market into which to sell the shares of state-owned firms slated for privatization in the new Iraq.
It took years for the exchange to make up lost ground. Many of the firms listed on the old Baghdad Stock Exchange had failed during the war and its aftermath, as many relied on the toppled regime for their survival. After a few months of launch, the new market still had only about half as many companies listed on the exchange as compared to the Baghdad Stock Exchange.
There were other tiny exchanges in the Middle East; the Beirut Stock Exchange had just fourteen listed firms in 2003 and one in Dubai has sixteen, but these were in smaller countries than Iraq. In Baghdad, many of the listed companies would not see a single trade in an entire day and trades could only be executed in person where prices could be observed on whiteboards.
A market index of Iraqi shares peaked in March 2005 at 74 points. It then fell almost two-thirds in the subsequent year, sitting at 25.4 by March 2006. The economy was growing slower than expected but there were other problems as well, including some even more pressing than the frequent power outages that plagued the exchange. Indeed, in 2007, there was no month in the year which saw more than an average of nine hours per day of electricity supply to Baghdad.
Rather, the most pressing issue was the security situation; the early days of the exchange were plagued by security concerns. The escalating insurgency threatened the country with civil war. Iraq’s vital oil exports were targeted by the sabotage of oil pipelines. Civilian deaths from the violence rose precipitously, especially in 2006. Stocks moved with new developments on this front. When the chairman of the Basra International Bank and his son were abducted in February 2006, shares in the bank lost 30% of their value.
The exchange itself was well fortified against these looming threats. It was protected from attack by razor wire, concrete blast walls, and guards armed with Kalashnikov rifles. In its early months, the number of investors permitted on the premises of the exchange were severely limited, to just twenty when the exchange first opened. The chief executive of the exchange, Taha Ahmed Abdul-Salam, used to carry a pistol at the exchange he ran.
Growth and Challenges
Despite the security concerns, the exchange grew. Trading volumes on the Iraq Stock Exchange rose from $1.5 million per session in 2004 to $2-3 million by 2006. More companies were listed with time, despite purges of noncompliant firms usually because of inadequate or persistently delayed financial reporting. More investors and traders participated in the exchange, which opened trading to foreigners in 2007. In the late 2000s, the security situation began to improve and electronic trading was introduced in 2009. The cruder era of the exchange’s history was now behind it.
Crises came and went. In the aftermath of the global financial crisis of 2008, trading volume fell to under $1 million in 2009; banks had made up the largest share of the market. One particular bank drove much of the market index’s growth just before the crisis, the North Bank. North Bank shares increased from 2.25 Iraqi dinars to 4.75 within a month. Trading in the bank’s shares made up 92% of the stock exchange’s trading volume in July 2007. Altogether, the market index rose from a level of 25.9 to 40.9 that July, a 60% rise in a single month.
By the 2010s, Abdul-Salam, who used to carry a pistol while head of the exchange, would find himself complaining more about the city’s traffic than security. The market was by now open five days a week. In 2013, the exchange floated shares of Asiacell, the country’s largest telecom company whose $1.3 billion listing doubled the total capitalization of the exchange. It also lifted daily trading volumes up to $5 million.
At this point, the exchange was still plagued by an ineffectual banking sector where payments from outside Baghdad could take a week or more to settle. Iraq possessed only a nascent and uncertain regulatory environment and oversight of the exchange was weak. Trading was frequently suspended for companies facing delays in producing required reporting. Trading in the shares of twenty companies was suspended in 2012 alone, a rather large fraction of the listed universe, and two of these firms were delisted entirely the following year.
Even a decade or so after its creation, many listed companies barely trade at all and the economy of Iraq, oil dependent with a smaller private sector, also limits the size of the exchange’s addressable market. Nonetheless, it came a long way from the converted Italian restaurant with capacity for only twenty traders that was called the Iraq Stock Exchange in 2004.
The Iraq Stock Exchange has witnessed more than its fair share of crises in its short history. Of course, insurgency and political instability have been prime causes of this, but no doubt contributing to the uncertainty, for better or for worse, has been the rapid thrust into the modern economy that the country has been subjected to. No longer an economy cut off from the rest of the world by sanctions and baptized into the free market system by the provisional government established after the 2003 invasion, Iraq has had to develop a basic financial infrastructure in short order. Whether its creation was premature or not, the turn of events has meant that the Iraq Stock Exchange has witnessed the country’s introduction to modern finance from its infancy, when security affected prices as much as earnings.
More from the Tontine Coffee-House
Read about the state of Iraqi currency before and after the invasion of the country. Also, learn about the boom and bust of a rudimentary stock exchange in neighboring Kuwait. Lastly, consider subscribing to this blog’s newsletter here.
1. Crowcroft, Orlando. Iraq Stock Exchange Goes from Bunker Mentality to Boom Times. Institutional Investor, 30 Sept. 2017.
2. Kaehler, Juergen, et al. “The Iraqi Stock Market: Development and Determinants.” Review of Middle East Economics and Finance, vol. 10, no. 2, Aug. 2014, pp. 151–175.
3. Mulligan, Thomas S. Fear Yields to Hope on This Big Board. Los Angeles Times, 24 Oct. 2004.
4. Shubber, Kadom J., and Talal A. Kadhim. “The Baghdad Stock Exchange: A Dismal First Decade … a Growth Path Ahead?” Governance and Risk in Emerging and Global Markets, 2005, pp. 121–132.
5. Bremer, Paul. Coalition Provisional Authority Order Number 74: Interim Law on Securities Markets, Coalition Provisional Authority, 2004.
6. Wong, Edward. A Gloomy Barometer: Iraq’s Stock Exchange. The New York Times, 11 Apr. 2006.