The KRG Bond: A Double-Edged Sword

By Harem Karem and Kamal Chomani:

No long-term economic strategy

There is no long-term economic strategy

In an article entitled ‘The KRG Economy: Booming or Dooming’, published March 2015, we explained how the Kurdistan Regional Government (KRG) had stumbled into financial crisis. Since then, things have only worsened. The KRG debt has surpassed $22 billion – 190% of its GDP; this includes $2 billion owed to civil servants and $4 billion owed to international oil companies, while the rest is owed to local banks and political-party-owned companies. Worse still, the deficit is growing rapidly because the government has so far failed to implement austerity measures – live within its means.

Nevertheless, after dragging their heels for months, the cabinet ministers have finally come up with an ingenious solution: instead of plugging the black-hole, they are resorting to selling bonds. Last week, the KRG Deputy PM and Finance Minister attended a meeting in London organised by Goldman Sachs International and Deutsche Bank AG to negotiate the terms of a $5 billion loan with international investors, at around a 11.5% interest rate – possibly the highest borrowing rates in sovereign markets. The coalition partners have various reasons to opt for borrowing as a quick and easy measure; their common denominator is a desire to prevent the government from collapsing, although neither have the strategic plans nor the means to repay the debt.

Borrowing money from international institutions is a temporary solution to a permanent problem that will trigger serious ramifications; it will neither remedy the deformed welfare state and nor satisfy a corrupt system which the Kurdistan Democratic Party-led cabinet is most responsible for. The public will be worse off by nearly $8 billion – with no substantial reforms or strategic investment plan, and no prospect for creating jobs and/or promoting growth; worse still, if the KRG is willing to pay high interest rates on international debt, there is no guarantee that the lenders of the $22 billion, whose money was borrowed at a 0% interest rate, won’t demand interest too. On the other hand, this will complicate even further the KRG’s bitter relations with Baghdad; a scenario neither side can afford. The sale of the $5 billion bonds seems to have been delayed for now due to investors’ concerns over legal issues with Baghdad.

Instead of recklessly indebting today’s and future generations for the sake of their own greed, there is a range of alternative, permanent measures the KRG can employ, from within its borders, to raise money; along with substantial reforms, the government can sell lands to raise more than the requested $5 billion. Furthermore, the cost of processing the KRG’s oil output of more than half a million barrels per day – currently $17 pb, through refineries owned by corrupt politicians – can be re-negotiated and reduced to an acceptable $7 pb. This alone could save the government more than $2 billion a year, and return more than $3 billion a year to government coffers from revenue and customs which has been pocketed by the political parties’ officials.

Another effective measure would be to pass a law under the name of ‘repatriation of the stolen tens of billions of dollars hidden in international banks’: investigate all top officials, past and present, and ask foreign governments to assist. At the very least this will make it difficult for more KRG billions to be injected into private bank accounts abroad.

With over 1500 international companies operating in the Kurdistan Region, introducing corporate tax on them and raising corporate tax on local companies would bring in extra revenues. Moreover, taxing alcohol, tobacco, telecommunications and vehicles – industries mostly controlled by serving top politicians – would bring in large sums. The parliamentarians supposedly representing the electorate must stop being puppets of corrupt politicians and start putting the public interest first.

If the proceeds of this $5 billion debt were intended to fund strategic infrastructure developments like Bekhma Dam (which has been halted due to opposition from the incumbent president’s village), it would undoubtedly have served a good purpose, and could be justified. However, if approved, the proceeds of this debt will most likely go to fund infrastructure developments through giant companies owned by corrupt politicians and political parties, who have controlled all the KRG’s macro and micro tenders; the $5 billion will soon end up in the corrupt politicians’ pockets and the public will have to pay it back to the international investors at the highest interest rates on the market. Last, but not least, the debt repayment arrangement would open doors to corrupt politicians for money laundering. A double-edged sword, indeed.

11 Responses to The KRG Bond: A Double-Edged Sword
  1. Fouad
    July 3, 2015 | 18:55

    It proves government’s total failure and lack of right plannings at all to cope with ongoing monetary crisis. Borrowing is like piece of cake. Paying it back will cost Kurdistan dearly in future. Current KRGs foreign policy will make Kurdistan never get out debt. It will make us dependent for years. Barzani should relax and let Kurdish expert economists handle the debt crisis from now on. That is the one of the key reasons I emphasize that presidential system of governance is disadvantageous.
    Of course, corrupt KRGs politicians need the funds to complete their incomplete projects. Their comfort is more important than country’s development. They come first. Very alas, some have not gleaned their corruption lessons in the course of last few years. They do not care at all! Where is some sense of responsibility. Don’t push citizens to an uprising for if God forbids it happens encore, that would imply an immediate end for some. How much is enough to some ?

  2. Rezqar
    July 3, 2015 | 19:03

    Very sad! Everything I see an article like this, it makes me feel no one really care about Kurdistan. It does not help to boost KRGs image at all overseas. I am repeatedly asked the same question by my classmates regarding widespread corruption and lack of democracy. How shameful!

  3. Amanj
    July 3, 2015 | 19:08

    There are two probabilities: Either President Barzani KDP does not take any advice or the US Admin has no power to exert positive influence. I am losing faith here in both. Thank you for changes!

  4. Sendi
    July 3, 2015 | 23:46

    Do you really think the US Intelligence Services is not aware of billions of unaccounted for US dollars and money laundering across the Middle East? They should no longer remain mute. Just freeze and expose the funds to public. Dictators will wrap up their luggage and leave power voluntarily.

  5. Bob Waterhouse
    July 4, 2015 | 10:11

    What about the debt to the international oil companies that produce the oil? I’ve lost the family fortune investing in these oil shares and am having to take out loans myself!

  6. Hardi
    July 5, 2015 | 01:43

    Why not to get rid of them all at once. They are not better than Gaddafi, Mubarak, Saddam. Same Fabric! Make a senior independent Kurdish Peshmarga Officer in charge to oversea fair and free elections in Kurdistan.

  7. HAWAR
    July 9, 2015 | 00:05

    .Kurdstan now is run by two Family Mafias, and so long Barzany remains in power there will be no hope for a better future,things will keep going from bad to worse for this so called leader has proven over and over again that his loyality is only for himself and his family. He treats Kurdstan as a private property and people of Kurdstan as his own servants.This is the better truth and who ever denies it is fooling himself.

  8. Sardar
    July 11, 2015 | 20:31

    How much has President Barzani spent to bribe ( let’s describe it as lobbying ) American military industrial complex and Huge oil incorporations to guarantee his extension term? I guess it can not be less than 50 million.
    I love Obamas version of Democracy: Government of Masood Barzani for Masood Barzani by Masood Barzani.

  9. Mohsin
    July 11, 2015 | 20:42

    Masood Barzani brags that even the Change Movement ( Gorran) despite all its power has not been able to topple me. What can the youths of Kurdistan do? He is a able to make foreign countries violate their own constitutions for his sake.

    To youths of Kurdistan who leave involuntarily:
    Egypt revolution all started with one person on the streets.
    Don’t leave your homeland. Make the Shahs of Iran, Hosni Mubarak of Egypt, Gaddafis of Lybia leave the country.

  10. Nadir
    July 14, 2015 | 00:57

    Mr. Adam Barzani insightful remarks in on 7/13/2015.

    I would like to make a few points in short: Who is your audience to be advised here? Isn’t the corrupt leadership mindset that has given rise to all current pain and sufferings forced upon Kurdish Nation today. Isn’t the lack of skilled leadership that has caused growing rift among Kurdish political parties in South. That has undermined Kurdish national unity. That has not helped present Kurdistan’s image in its best way possible. That is responsible for present financial crisis.

    How long for should we tolerate corruption epidemic, lack of basic services, soaring unemployment, etc.

    You are well aware of all the facts, nor are Kurdish citizens uneducated.

    Democracy must be promoted. No one should be treated special. All citizens are equal. What is HE President Masood Bazanis reservation here about it?

    Kurdish citizens are fearful of retaliation to demand for their rights in some cases constructively criticize KRG officials in South. They could end up behind bars, disappeared forever or shot to death on the streets. Such cases are plentiful. Citizens do not reserve the right to express their views freely in a democratic Kurdistan.

    You may expect more political activities from members of Kurdish community in diasporas. Kurdistan belongs to all and everyone should help improve it, especially when it is in peril.

    When will Kurdistan change? That is my question to you? How can it change when leadership never changes?

  11. Sara
    July 18, 2015 | 22:46

    My request to both KRG and current US Administration: Time has come to bring to an end all wars, withdraw US troops from Iraq and merely focus on peace promotion from now on.

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