Macroeconomic Determinants of Investment Performance in Iraq: Evidence from Fixed Capital Formation (2012–2025)

Abstract

Investment performance in Iraq is measured in terms of Gross Fixed Capital Formation (GFCF) over the period 2012-2022 for the study under investigation. The forecasts and analysis are extended to 2025. With the help of the Auto-regressive Distributed Leg (ARDL) Model the relationships of GFFC with Economic Growth Rate, Inflation Rate, Interest Rate, and Exchange Rate is studied. The results indicate that the second most important determinant of investment performance is the exchange rate. The effect of economic growth is positive and strong, being that growth has an accelerator effect. The depreciation of the exchange rate has a negative effect on GFCF on account that it raises the cost of imported capital goods. The inflation will have a negative but lagging effect, whereas the interest rates will have a low significance because of the predominance of state-owned banks. As per the study, the GFCF is expected to recover reaching about 20.6% of GDP; however, that is of course assuming a continuity in the economic growth and an exchange rate fluctuation stability. Policy suggestions point to the management of exchange rates, different financing sources for investments and restructuring to help the private sector.