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Analysis

How Can Iraq’s Kurdistan Economic Woes Be Eased?

Thursday 12 January 2017
How Can Iraq’s Kurdistan Economic Woes Be Eased?

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Alwaght- At the time being, the key problem– even outstripping the threat posed by ISIS terrorist group– that the regional government of Iraq's Kurdistan is grappling with is the economic crisis. The Kurdish region’s government has always argued that foreign and imposed factors coming from developments in Iraq, the region, and the world have given rise to such a situation.

Since 2014, Kurdistan has faced three waves of an economic tsunami, striking it hard. The first began in February 2014, when the regional government came to blows with the central Iraqi government over some issues such as the share of Kurdistan from the federal budget. This trouble was followed by rise of ISIS and its sweeping expansion in Iraq in June 2014. The terrorist group’s emergence in Iraq pushed high the security and military costs, beside rendering displacement of over 2 million people in the region. The displaced people streamed to the Kurdish-controlled areas which enjoyed relative secure conditions. Finally, the all-of-a-sudden drop of the oil prices in the global markets in mid-2014 dealt the ultimate crushing blow to the economy of the Kurdistan region. This comes while the economists insist that improper and exceeding investment, corruption, the large size of the government, and reliance on oil incomes for financial sources are the leading triggers of the current financial crisis of Kurdistan.

The ongoing economic gloom pushed the regional government to suspend an array of public service projects. This pressure did not stop to this point; the government is now facing difficulty paying regularly the salaries of its employees, a situation stirring a public concern, and even discontent. The public demonstrations in different cities of the region grow bigger day after day, alerting the officials of the Kurdish government that such protests by no means are good signs. The rallies are moving toward pressing the government. The strains on the government played out by demonstrations and strikes of the state employees and teachers in several cities of the region. Ali Mohammad Saleh, a representative of Gorran (Change Party) and deputy head of the Economic and Financial Commission of the Kurdistan regional parliament, has asserted that day after day the citizens and state employees reach the reality that the government has no plan to address the economic crisis, so the future will see even an increase in the pressures imposed on the government.

Oil dispute and Erbil-Baghdad crisis-hit ties

The World Bank in a report on the economic status of the Kurdish region has maintained that the region deeply relies on oil as its source of funding. The report, additionally, suggests that Kurdistan earns 85 percent of its income from its oil sales. This comes while in the last accord between Erbil and Baghdad officials reached in 2014, the two sides agreed that the regional government of Kurdistan should export 550,000 oil barrels per day from the oil fields under its controls in association with the State Organization for Marketing of Oil (SOMO). The central government agreed to give the Kurds their share from the federal budget, which is 17 percent. But the regional government failed to fulfil commitments and so the agreement did not go into effect. Ashti Hawrami, the oil minister in the Kurdish cabinet, said that Baghdad allocated an annual budget of 15 trillion Iraqi dinars (roughly $12 billion) for Kurdistan while the region’s annual expenses are 18 trillion dinars. The deficit in budget is made up for through borrowing money from the foreign investment banks and companies active in Iraq’s Kurdistan, according to the Kurdish oil minister. Therefore, the most important hurdles blocking implementation of the agreements between Erbil and Baghdad is the high level of Kurdistan’s foreign debts. In fact, with supposition that the troubled economic conditions of the region will continue, it is impossible to pay the debts off by the money raised from implementing the agreement.

Abdul Sattar Majid, the agriculture minister of the Kurdistan region, has noted that the government even in the next year cannot implement the deal with Baghdad because according to its debts and deals with a couple of oil companies, it has to deliver its oil to them. This means it cannot deliver daily 550,000 oil barrels to the SOMO, according to him. The agriculture minister said the region's debts to the companies were $200 billion, so even in 2017 the people and the government should not await arrival of any money from Baghdad. Although the 2017 Iraqi budget was finalized with 17 percent of it allocated as a share of the Kurdistan government, delivery of the share is dependent on Erbil’s commitment to its pledge of sending 550,000 oil barrels per day to the Iraqi national oil marketing company.

Furthermore, lack of a clear outlook for the debts payoff has caused the foreign companies to review investment plans in Kurdistan and even raise legal cases against the government of the region. For example, the London Court of International Arbitration issued a verdict, calling on Kurdistan government to pay $2 billion in damage to the Emirati Dana Gas company. Moreover, the Crescent Petroleum, a UAE-based oil firm, has sued the government of the Kurdish region for $11 billion, almost equal to the budget of the region for a full year. 

Need for political approach change and introducing economic reforms

In the current situation, there is no way that can work miracles to settle the economic crisis hitting the government of Kurdistan. The only way is a wide-ranging economic reform that covers all administrative areas. Actually, the time has come that the Kurdish leaders face the fact of the need for reforms. Any plan for economic reforms might cover the following areas:

1. Cutting spending by downsizing the government and reducing energy sector subsidies: According to James Park, the senior economic advisor of the Kurdish regional government, one of the most important structural problems of the Kurdistan’s economy is that the government spends a large portion of the oil incomes to pay its employees' salaries, instead of doing investments. The advisor asserts that the salary and electricity subsidies in Kurdistan hold the highest rate across the world. They reach 40 percent of Kurdistan gross domestic production (GDP), or something close to $10 billion. On the other side, a large share of the government borrowing comes to provide funding for the fuel of the region’s power plants. The economic expert advises that the Kurdish region’s planners and politicians should do reforms through downsizing the big body of government which prohibits it from any easy economic moves. He also recommends energy subsidy cuts.

2. Boosting agriculture and tourism sectors: The economic experts believe that one of the effective ways to tackle the economic crisis– while Kurdistan is declining to observe terms of deal with central government– is to empower and expand other sectors of the economy, including the agriculture, industry, and tourism. This, perhaps, helps easing part of the region’s economic woes. Another solution to help boost Kurdistan’s economy is tax increase with a consideration of the citizens' employment conditions, boom in the agriculture sector, and the different breeding companies active across the region.

3. Paving the way for inflow of foreign investment: In today’s world there is a tough competition on attracting further foreign investment between the global countries. Suffering from income shortages, the Kurdish government has to prepare suitable conditions to absorb foreign money in different sectors of its economy to weather the present pressing crisis. Some of the measures that the government can do for investment attraction in the short run are as follows:

Heightening the standards of financial order and battling official corruption

According to the Norway-based U4 Anti-corruption Resources Center, the political corruption and weak mechanism of administration in the Kurdish region have produced economic corruption, and thus a failure to use of the finances efficiently in Kurdistan.

During the recent decade, Kurdistan witnessed arrival of big money which could be directed into the production sectors and so result in an economic boom for the autonomous region. But, due to financial corruption and bribery the money was transferred abroad.

Settling rifts with Baghdad

One of the major fields on which Erbil needs to focus in order to pass the economic troubles is rebuilding its ties with the Baghdad-based central government. At the present time, success of Erbil-Baghdad military cooperation in fighting terrorism across the country indicates that the two sides are profiting from a reduced level of disputes. Although calling off Kurdistan’s referendum on independence is tied to a decline by the regional and international powers to support the Kurdish independence bid, the overarching drive behind these powers to withhold backing from the Kurds' bid is consideration of oppositions from the central Iraq government.

Late in 2016, the whistle-blower website WikiLeaks published a cable of the natural resources minister of Kurdistan regional government to Berat Albeyrak, the Turkish oil and gas minister. The cable appears to show that the Kurdish minster suggested that Erbil wants to sell number of Kurdistan’s oilfields for $5 billion to Turkey to raise money to pay the region’s debts to Ankara. If concluded, the deal will unleash a new wave of tensions between Erbil and Baghdad, and the outcome could be moving to a confrontation especially on the disputed oil-rich regions like Kirkuk. This, in turn, means further deterioration of the Kurdistan's conditions. So it is in its best interest to seek ways for debts payoff under deals with the central government.

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Kurdistn Economic Crisis Oil Iraq Budget Dispute Protests

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