Iraqi Kurdistan facing economic crunch
Erbil - Despite its vast oil resources, Iraq’s autonomous northern Kurdish region is facing an economic crunch caused by fleeing foreign capital in the wake of attacks by Islamic State (ISIS) militants, falling oil prices and official corruption.
A World Bank report said the Kurdish area’s economy had contracted by 5% in the first few months of 2015, primarily because poverty more than doubled from 3.5% to 8.1%.
The region had seen significant economic growth in recent years due to foreign investment. Western firms, mainly oil and gas exploration companies, flooded the Kurdish market.
However, economic difficulties began to surface in 2014 when Islamic State (ISIS) militants took over areas near Kurdistan and attacked Kurdish areas. Tensions with Baghdad was already brewing over Kurdistan’s cut of oil revenues, prompting the central government to drastically reduce budget allocations to the region. That resulted in a serious cash crunch; civil servants haven’t been paid since August.
The Kurdish areas are ruled by the Kurdistan Regional Government (KRG), which has long been at odds with the central government in Baghdad. A top media commentator, who spoke to The Arab Weekly on condition of anonymity, said 70% of foreign investments in the area had been withdrawn. “What we have now is mostly local firms with links or some sort of representation to foreign companies,” he said. He explained that the crunch is partly caused by corruption. There have been Kurdish media reports suggesting that 37,000 barrels of oil were smuggled daily from the area and sold cheaply on the black market.
“Powerful people are behind this to make quick financial gains,” he claimed. Analysts pointed to Erbil, the capital of the province, saying recession there was evident because of a visible economic lull. Restaurants are nearly empty and activity in the marketplace and shopping malls is also slow. Hotels reported less than 20% occupancy and building construction for office and apartment spaces has come to a virtual standstill.
“The area is in a war zone with Daesh on its doorstep,” Khalil Othman, a Baghdad economist, said using the Arabic acronym for ISIS and referring to the Kurdish region.
Othman said the war is costing “bundles and there’s a lot of money also spent to host hundreds of thousands of displaced people and refugees in the area”.
It is estimated that several thousand Syrian refugees, who fled the war in their country, live among the 2 million displaced Iraqis in the Kurdish areas after fleeing from various violence-stricken spots across Iraq.
Other reasons for economic troubles, Othman said, include differences with the central government in Baghdad over the Kurdish cut of oil revenues and the inability of Kurds to agree on a way to elect a president after the term of Masoud Barzani expired in August.
But Amin Baker, a lawmaker with the Kurdistan Alliance bloc, blamed the recession mainly on instability caused by ISIS violence. “The Kurdish area is part of Iraq and, like any part of Iraq, it is affected by the instability and violence sweeping across the country,” Baker wrote in a recent newspaper article.
“It is only a reflection of the economic crisis experienced by Iraq as a whole. Besides the instability, another primary reason is the significant drop in oil prices, which affected all of Iraq, whether the Kurdish areas, or any other part of the country.”
Othman and other analysts warned that a dispute between the federal government in Baghdad and the KRG over oil is likely to escalate amid accusations by each side that the other breached a December 2014 agreement. The accord stipulates that the KRG must transfer 550,000 barrels of oil per day to Baghdad’s central government for export, in return for 17% of the state budget.
Saad al-Hadithi, a spokesman for Prime Minister Haider al-Abadi, said KRG “is bound to an oil production ceiling which it didn’t respect”.
“The quantity is falling every day. We haven’t received half of the quantity agreed upon in the past five months and this, in turn, reflected negatively on the nature of the relationship between the federal government and the province,” Hadithi said in remarks carried by state media.
Kurdish Prime Minister Nechirvan Barzani (Masoud Barzani’s nephew) was quoted in Kurdish newspaper reports as saying the agreement with Baghdad was “inappropriate for Kurdistan” and that he had sent new proposals to Baghdad to alter it.
“Our economy is really suffering and we’re concerned that it would completely collapse… We hope that Baghdad will understand our crisis,” Nechirvan Barzani said, without an explanation of what he expects from Baghdad and what proposals he has sent.
Iraqi oil expert Kamel al-Mehdi dismissed as “inflated” a recent KRG estimate of the total amount of reserves under its control at 45 billion barrels, saying 38 billion barrels was a more reasonable estimate.
Othman said although tourism by Iraqis used to fill in a small gap in the Kurdish coffers, “KRG was deprived of the income because Iraqis are no longer going to Kurdistan in view of the long delays and the bad treatment some have received at entry checkpoints into the area.”