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Kurdistan - Iraq - Economy

The economy in the Kurdish region of Iraq took a hit after the wet-firecracker referendum on secession of 01 November 2017. The central government in Baghdad closed international airspace, tourists stayed away, and there was been fighting between Iraqi forces and Kurdish Peshmerga. And while a ceasefire was soon in place, uncertainty continued to affect the region and its economy.

Iraq’s Kurdish Regional Government (KRG), heralded by Masoud Barzani its (then) President, soldiered ahead with the independence referendum plan, despite being told quite clearly not to do so by Baghdad and other regional players who had geopolitical and economic investments in Iraq. That led to a spectacular blunder as within days of the euphoria fading, oil fields in the Kirkuk region had been taken back by Iraqi forces making the elite in Erbil look at best stupid, and at worse, like a corrupt posy of amateurs playing monopoly with other people’s money.

The loss of Kirkuk cannot be underestimated in its political and economic impact. Until then, the KRG was producing 600,000 barrels of oil a day and barely managing to meet the (then) monthly overheads of a semi-autonomous state of around $700 million a month. The list of foreign investors who were not being paid monies promised in advanced oil sales for cash, was also growing.

It is believed that the central bank is only receiving a fraction of the $550 million (dropped from $700 million as state salaries have been slashed) it needs to pay government ministries and salaries and only has around $2 billion in reserves. The historical blunder by Erbil, combined with endemic corruption of public funds (which even irks the Americans), wide scale nepotism, and a wholesale contempt for anything which whiffs of democratic reform, all culminated into a crisis building up which recently sparked street protests with a number of people shot dead.

The Kurdistan Region of Iraq (KRI) was largely immune to the insecurity and conflict witnessed elsewhere in Iraq, especially following the 2003 Iraq War. This has allowed KRG to promote its burgeoning private sector and attract foreign investments in both oil and non-oil sectors. However, starting from mid-2014, the plunging of oil prices coupled with increasing threats to security have intensified pressure on the overall Iraqi as well KRI’s economies, necessitating a need for action to address the immediate and medium-term challenges presented in this report. Government of Iraq (GoI)’s fiscal position has deteriorated and political tensions have increased with widespread demonstrations demanding reforms across legislative, executive, and judicial branches.

Material indicators of wealth and the attributed status that is granted with such expressions of wealth are important within Kurdish society. Following the liberation of Iraq from Saddam Hussein in 2003, a lot of oil money flowed into the region, and Kurdistan enjoyed a decade of prosperity and growth. Unfortunately, while many entrepreneurs took advantage of the money coming in, there was little knowledge on how to manage the capital inflows in order to diversify the economy, invest in sustainable development, finance needed infrastructure projects or build a robust banking sector. Instead, those with money started building gated communities, high rises, hotels, and buying high-end car dealerships. They developed lavish life styles and kept their money out of mistrusted local banks.

The post-war economic boom that the KRI enjoyed meant that pre-existing social hierarchy and patterns of education, wealth and status changed. There is resentment towards individuals who are less educated and conventionally are of a lower social status but who have the financial ability to compete.

Oil export revenues, which had been received from the central government as budgetary transfers, constituted about 85 percent of the Government’s fiscal revenues. However, the sector’s estimated share is only 1 percent in region’s employment. Combined with a difficult enabling environment for private sector business development, skill formation that is not as advanced as desirable, and strong incentives for people to seek jobs in the public sector, it undermines other sectors’ competitiveness in local and international markets and suppresses private sector development and domestic production in tradable sectors and exports.

The immediate challenge consists in coping with (a) the deep fiscal crisis, and (b) the security and social problems brought about by the conflict with the Islamic State in Iraq and Syria (ISIS) group and the resulting influx of Syrian refugees and Iraqi Internally Displaced Persons (IDPs). These challenges are clearly immediate priorities for the KRG, and would bear significant repercussions nationally and internationally if inadequately addressed. The medium to longer-term challenges pertain to moderating dependence on the oil sector and transforming the KRI economy into a diversified one that supports private sector-led economic growth and job creation in a sustainable manner.

The Kurdistan Regional Government (KRG) faced an economic and humanitarian crisis as a result of the influx of Syrian refugees (starting in early 2012) and more recently the Internally Displaced Persons (IDP) in 2014. According to a February 12, 2015 KRG – World Bank report, economic growth contracted 5 percentage points in the Kurdistan Region of Iraq (KRI), and poverty rate more than double increasing from 3.5 percent to 8.1 percent.

The stabilization cost for 2015 is estimated at US$1.4 billion in additional spending above and beyond the KRG budget. This estimate could get much higher depending on how long the crisis persists. While the KRG has been responsive to addressing the needs of the displaced population up till now, more resources are needed to avert this humanitarian crisis and address the needs of the displaced population in the medium and long-term. Impact refers to the immediate economic and fiscal effects on the KRG economy and budget, while stabilization cost refers to the additional spending that would be needed to restore the welfare of residents of the KRI.

“The international community remains deeply concerned by the circumstances facing the refugees and Internally Displaced Persons in the Kurdistan Region of Iraq,” said Robert Bou Jaoude, World Bank Special Representative for Iraq. “We hope that this assessment will support the KRG’s dialogue with its national and international counterparts and that a swift resolution to this problem will be identified.”

The study highlights how prices and unemployment have increased, and refugees and IDPs entering the labor market are pushing wages down. A surge in violence led to supply side shocks. The ISIS crisis has had a significant effect on trade of goods and services. Transportation routes were disrupted. Foreign direct investment flows have declined and operations of foreign enterprises have been adversely affected. Disruption of public investment projects have had a negative impact on the economy.

“As a result of the Syrian conflict and the ISIS crisis, KRI’s population increased by 28 percent placing strains on the local economy, host community, and access to public services. We accepted and treated them as our own by providing access to all public services in our region," said Dr. Ali Sindi, KRG Minister of Planning. “While our government has allocated significant resources?through the Immediate Response Plan?to accommodate the needs of the displaced population, it cannot address this big scale humanitarian crisis on its own. Greater support from the national and international partners will be needed to rise above this humanitarian crisis and meet the needs of the displaced.”

The Ministry of Planning (MoP) laid out broad objectives as guidelines for policy formulation through the Kurdistan Region of Iraq 2020: A Vision for the Future, with the diversification of the KRI’s economy away from the oil sector being at the core of these objectives. The success of these reforms and the ability to deal with multiple shocks will require support from KRG’s partners. This report is the first phase of the potential World Bank assistance to the KRG to design and implement long-standing reforms. The second phase of the technical assistance is expected to provide implementation support for the Government. The KRG has already started implementing austerity measures including wage bill and subsidy reforms.

Iraqi Kurdistan Regional Government (KRG) has the credibility of Wikileaks emails which claim that Turkey’s ruling Justice and Development Party (AKP) had given Kurdistan Region $200 million. Four days after the failed coup attempt in Turkey, on 19 July 2016 Wikileaks released a cache of nearly 300,000 emails sent by AKP. One of the emails posted on the WikiLeaks website, dating back to March 15, 2016, purported to show evidence that the AKP gave Massoud Barzani $200 million in financial aid. KRG’s Spokesperson on Thursday rejected the allegation and clarified in a statement that KRG received $150 million from Turkey “as a loan”.

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Page last modified: 31-12-2017 18:37:24 ZULU