Does the KRG economy need a stronger Iraq or a stronger Kurdistan?

By Arian Mufid:



In 2014 the south of Kurdistan has engaged in figurative hokey cokey over whether it will focus more on assisting Iraq or on becoming an independent Kurdish state. This debate and the promise of a referendum by the president of Kurdistan was muted by the fall of Mosul to ISIS in June. However, no matter how long they take to hold the promised referendum, there should be no prevarication in tackling the KRG’s (Kurdistan Regional Government) faltering economic performance.

Barzani first raised the referendum issue in response to the actions of former Iraqi prime minster Nuri Maliki who withheld the KRG’s 17 per cent share of the Iraqi budget. This caused the KRG to delay paying civil servants’ salaries, leaving many three months in arrears with thousands of families struggling to get by. The ongoing military conflict motivated the KRG to enter into further negotiations with Baghdad, leading to the recent agreement by Iraq to release $500 million in frozen budget payments to the KRG in exchange for 150,000 barrels of Kurd oil per day. Having lost trust in the central government, the KRG has rightly insisted on receiving the $500 million before releasing the oil. However, this budget crisis has exposed the precarious position of the south of Kurdistan economy and its excessive dependence on an inherently unstable Iraq.

With Peshmarga forces now fighting on several fronts against ISIS, which retains control of areas such as Sinjar, Jalawla and Sadia, the housing and tourism markets have been badly hit, and the once-buoyant demand for holiday homes dried up this summer. Furthermore, the parlous security situation has damaged the region’s trade with the rest of Iraq. Goods are being stockpiled because they cannot be safely transported by road to Baghdad and the south of Iraq. Growth has stalled in the south of Kurdistan, falling from an annual 14% to just 3%.

The word on everyone’s lips is inflation, now running at a punishing 76%. This is a worsening but not new phenomenom. The south of Kurdistan is in a far weaker economic state than the KRG had anticipated. The KRG budget is dominated by a $750 million dollar per month wage bill for civil servants and it is seeking a $5 billion loan from private sources in Europe to boost state coffers.  The economy is imbalanced by an import-oriented strategy that has fuelled inflation. Early one morning in the summer of 2013, I was sharing breakfast with a family in the city of Erbil and observed that the cheese had come from Turkey, the yogurt from Iran, there was Kraft cheese from Saudi Arabia and other foods from Turkey. Under this KRG the region is producing hardly any goods and the money supply is being diverted into external hands.

The KRG has no central bank and for this reason it has been unable to control the market mechanisms of monetary supply and demand. The financial crisis started in March 2014 with banks running out of cash. The KRG introduced some financial instruments to purchase assets and jump-start bank lending , but to little effect. The markets were emptied of cash and many contractors became bankrupt, with three committing suicide due to the financial pressures.  The KRG had no economic strategy to tackle this problem and it still has none.

The KRG economy relies too much on the revenues of oil and gas. Recent global crisis trends are reflected in low oil and commodity prices and,  in response to falling world oil prices, the KRG resorts to increasing sales taxes on goods, a kind of taxation that always hits the poor hardest, and Kurdish consumers have to pay an excessive $1 per litre for petrol for their cars.

These problems mean the KRG must adopt a coherent economic policy, sooner rather than later. It needs to tackle systemic corruption. One priority should be the inflated pension payments that are based on peoples’ allegiances to either of the two dominant parties, KDP (Kurdistan Democratic Party) and PUK (Patriotic Union of Kurdistan). The Gorran movement has claimed that there are 100,000 of these ‘political pensions’.  There is also the issue of MPs who get $10,000 per month pensions for life after doing their stints in parliament!

The one-time oppositional Gorran movement’s loud talk about economic reform has produced nothing yet. But change is essential. Recently, European countries that have done more to reform their economies, such as Ireland, Portugal and Spain, are set to see greater growth than France or Italy which have largely rejected reform. Delays to reform will make the outlook for the KRG even gloomier and see investment pulled out of the markets as confidence falters, according to a local estate agent in Erbil.

For the past decade, until recently, investors have been encouraged by the climate of peace and apparent tranquillity in the south of Kurdistan. It has been seen as a land with prospects and not one fertile for terrorism. Investors from the south of Iraq brought a lot of cash and invested this in real estate and telecommunications. Improving political stability, following the 1990s civil war, attracted foreign direct investment in oil and gas sectors and about 54 international companies have invested in the south of Kurdistan. The region has continued to present difficulties, due to the lack of advanced financial infrastructure and capital markets, making it complex and risky for investors to assess growth. However, the south of Kurdistan was not hit by the 2008-9 world economic slowdown because investors there were not relying on the banking system. The economy, and inflation, continued to grow, due to booming oil sales and an expanding housing market in which homes in the suburbs of Erbil could be bought for $200,000 and sold for $300,000 within six months.

Recently some investors have been spooked by the ISIS attacks but, notwithstanding the problems in the south of Kurdistan, the economic consequences for the rest of Iraq are likely to be far worse. For ten years there has been a big growth gap between south and north of Iraq (the south of Kurdistan). Iraq’s main budget has been continually engulfed by war and security crises while, in the south of Kurdistan, there has at least been investment in infrastructure such as electricity, gas, roads, etc. Observers say Baghdad has gone backwards and seems like a vast undeveloped village while Erbil has blossomed and looks like a second Dubai.

If the correct steps are taken, the KRG could move away from its dependency on 17 per cent from Iraq and – despite all the perils and challenges that lie ahead – the citizens of the south of Kurdistan could benefit from a more balanced and independent economy.

3 Responses to Does the KRG economy need a stronger Iraq or a stronger Kurdistan?
  1. KIM
    November 22, 2014 | 21:57

    Staying with artificial Iraq may be better for the overall economy of South but it won’t be for a long period of time. No guarantees. Independence is about the recognition of our national identity and our freedom. Kurdish leadership should go for independence if they truly imply it and Washington should officially announce its support if they are a true ally of Kurds and Kurdistan. We only need Turkeys cooperation and that can be done by US influence. Another most effective power is the general public will. There is no logic to holding an unnecessary referendum in South given the sensitivity of time unless if it’s a new tactic to falsely keep public busy for few more years in order to prolong illegitimate terms and make public forget about corruption using terrorism pretexts.

  2. Ari Ali
    November 22, 2014 | 22:28

    Either way , it needs much weaker tribalism and much stronger accountability , transparency , laws and regulations enactment and enforcement and willingness to peacefully transfer power as dictated by ballot boxes . Look at the scene now and compared to 20 years ago you see not a lot of change : Nichervan barzani KRG chronic PM . Masror Mesud Chief spy for KDP areas . Qubad Jalal deputy PM ( PM in PUK areas ) . Bavel Jalal Chief spy officer PUK area .Son of Kosrat resole etc. Of course , there is no problem with any kurdish citizen holding any office . But this becomes a thorny issue and ordeal when they monopolise power and wealth ; and some how they become above any laws . As time went each one has developed his own entourage and associate . A person like Quad has blatantly said to the BBC , they deserve the ( illegal ) posts and money becuase his father has sacrificed a lot and fought Saddam Hussain. This mentality/attitude/behaviour must change or else ISIS will take over sooner or later . Al Talabani , Al Barzani, Al Kosrat , and all the other war lords must awaken up to the existenal danger on the door step of their fiefdom . It is very stupid of them to rely on Turkey , Iran or USA because all these used them in the past repeatedly then throw them to the dogs . But hey who listens or make an endeavour to see beyond their noses .
    To the editor : I can not see any reason why you are two minded of approving this comments . It is just putting facts together !

  3. Suzan
    November 23, 2014 | 17:15

    Kurds reclaimed all Kurdish territories back, including Jalawla. End the war and proclaim your independence in South now. What are Kurds waiting for? DFR should exert more pressure on Obamas Admin to support Kurds independence formally.

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