Oil Curse Symptoms in the Kurdistan Region

By Shwan Sharey:

The production and export of oil in the Kurdistan Region of Iraq (KRI) shows signs of the oil curse that exists across the region. The Kurdistan Regional Government (KRG), a sub-state actor, like the Gulf and African states exhibits signs of this oil curse. These include a lack of transparency in energy management, weak political and economic institutions to deal with energy management and the lack of a long-term energy policy to deal with oil price volatility.

The lack of transparency in energy management by the KRG is a sign of the oil curse. The public and even the majority of members of the Iraqi Kurdistan Parliament know little or nothing regarding production sharing agreements, sign-on bonuses, fees, royalties and other payments between the Ministry of Natural Resources (MNR) of the KRG and oil companies, the flow of oil revenues from international oil trade companies to government accounts and how these revenues are spent and used. Sherko Cevdet, a member of the Iraqi Kurdistan Parliament and head of the Committee on Natural Resources in the Kurdistan Parliament says, “We don’t know how much was withdrawn from the money accumulated in Halkbank [a Turkish state-owned bank that holds the deposits of the Kurdish oil revenue] we don’t know how much interest rate the money yielded as well.” Some Kurdish politicians argue that the KRG should not release full information regarding oil to the public because the central government in Baghdad, which has imposed economic sanctions on the Kurdistan Region since early 2014 due to the region’s unilateral and independent oil exports, will create more problems for buyers of Kurdish oil and the KRG’s oil policy. Although Baghdad uses varied tools to block the sale of Kurdish oil on the international market, disclosing oil information to the members of the Iraqi Kurdistan Parliament and later to citizens would restore public confidence in the government’s oil polices and prevent an autocratic government. However, failing to improve transparency will create an autocracy in the region. Having less transparency and accountability allows the autocrats to stay in power for a long time because they can conceal their own corruption, increase spending to win the support of the elite, reduce taxes to win the support of the general public, and buy the loyalty of the armed forces.

The KRG has extractive and weak political and economic institutions (extractive political and economic institutions concentrate power and resources in the hands of a small group of people who act without checks and balances, constraints and rule of law) for dealing with energy management. Since the region became semi-autonomous in 1991 and before the production of energy in the KRI, the region has had extractive and weak political and economic institutions mostly due to the intervention of the two main political parties: the Kurdistan Democratic Party and the Patriotic Union of Kurdistan. It is critical for a country or a region to have strong or inclusive institutions (inclusive political and economic institutions allow broad participation of the citizens and place constraints and checks on politicians and enforce property rights and encourage free-market systems) by the time energy production begins. When the KRG began energy production, the region already had extractive political and economic institutions. Oil will become a serious curse for the region if the KRG does not immediately reform its institutions to become more inclusive. For instance, the KRG Minister of Finance does not know enough about the oil sales. Instead, the KRG Minster of Natural Resources does. According to Dr. Denise Natali, a Senior Research Fellow at the Institute for National Strategic Studies, the KRG has about 16 bank accounts in which to deposit its oil sales. The KRG Minister of Finance has access only to one, Turkish Halkbank, account, which has only $14 million in deposits. Meanwhile, the Minister of Natural Resources and Prime Minister Nechirvan Barzani control all the remaining bank accounts. In theory, the KRG Minister of Finance should have access to all of the 16 bank accounts, and the current situation shows how weak the KRG Minister of Finance is.

The KRG lacks a strong and long-term energy policy to deal with oil price volatility. The KRG depends on oil for more than 95% of its annual budget. Therefore, fluctuations in the price of oil affect the region’s economy drastically. The KRG did not have an effective oil policy of diversified investment in its economy even during its oil boom. Increasing the oil production and export capacity of the region without having an effective oil policy of diversified investment will not put an end to the economic crisis and stabilize the economy in the long run. There is an assumption among Kurdish politicians that by increasing the KRG’s oil exports to more than 1 million barrels of oil per day (bpd), the KRG will be able to pay its civil servant salaries without a delay. However, exporting 1 million oil bpd does not mean our economy will be stable or that the crisis will be over. This is because the region mainly depends on oil sales for its annual budget. Therefore, any large reduction in the global price of oil will reduce the region’s oil revenue and bring another economic crisis, which the KRG will have difficulty facing. This is because it takes time for the government to increase the oil production and the pipeline export capacity.

The KRG needs a stabilized oil and gas fund law. The current Oil and Gas Fund Law of the KRG is not well designed. It has several defects: it doesn’t have a mechanism and timeline for moving money in and out of the fund. It is not clear how much revenue will be allocated to its objectives. The investment spending objective is not clear. Having a stabilized oil and gas fund law can be used for diversifying the economy by investing the oil revenue in different efficient and productive sectors such as infrastructure, education and health. Constantly investing in different sectors through the use of oil and gas fund law reduces the harm of oil price volatility.

Improving these three main symptoms of the oil curse will not fix all of the problems, but they pave the way to transforming the oil curse into an oil blessing for the region.

Sources

Shwan Sharey is a lecturer at Ishik University of Sulaimani

On Twitter: @shwansharey