Kurdish Iraq faces economic ‘tsunami’
ERBIL - Iraq’s Kurdistan region is in danger of being drowned by an economic “tsunami” as global oil prices plunge, its deputy prime minister said, warning it could undermine the war effort against the Islamic State (ISIS).
Four months in arrears and deeply in debt, the Kurdistan Regional Government (KRG), which depends on oil revenue to survive, has been hit hard by oil’s slump to less than $30 per barrel from more than $100 a barrel in 2014.
Even before oil’s recent losses, the autonomous region was unable to meet its public payroll, which includes the salaries of its own armed forces, the peshmerga, which are on the front line against ISIS.
“The world is focused on the war against ISIS but nobody wins a war bankrupt,” Qubad Talabani said in a January 14th interview. “I think this is something the coalition against ISIS really do need to factor into the equation.”
The peshmerga has emerged as a key component of the US-led coalition’s strategy to “degrade and destroy” the radical Sunni militants, driving them back in northern Iraq with the help of air strikes.
But Talabani said the economic crisis threatened progress on the battlefield: “The most dangerous impact it can have is on morale. We are getting desertions. People are leaving their posts — it will increase.”
The oil price crash has compounded Kurdistan’s economic woes, which began in early 2014 when Baghdad slashed funding to the region to punish it for exporting crude on its own terms in pursuit of economic independence from Iraq.
Then ISIS overran one-third of Iraq, driving more than 1 million refugees into the region of 5 million people and scaring off foreign investors.
To tackle the crisis, Kurdistan ramped up independent oil exports in 2015 to more than 600,000 barrels per day (bpd) but at current prices the region is still left with a monthly deficit of more than $700 million.
Asked whether the KRG was calculating it might be better off resuming oil exports under Baghdad’s auspices in return for a slice of the revenue from their combined exports of more than 3.8 million bpd, Talabani said it would make little difference.
“I don’t think this is a calculation we’re thinking of or they’re thinking of because it doesn’t actually change the equation for anyone,” he said. “At this oil price, a couple of hundred thousand barrels here or there is not going to fix Baghdad’s problems and it’s not going to fix ours. We have to think of another formula to fix our economic problems”.
A 2015 deal in which the KRG agreed to export 550,000 bpd of crude through Iraq’s state oil marketing firm SOMO in exchange for reinstatement of its budget share was never properly implemented. The same arrangement is embedded in Iraq’s 2016 budget but Talabani indicated the KRG did not intend to implement it.
“The fact that the control continues to lie 100% with the central government and the lack of clarity with our share of the budget and how it’s calculated would restrict us from going along with what’s written in the 2016 budget,” Talabani said.
“We don’t want to rule out a deal but we want a deal that’s fair,” he said, adding that it need not entail the KRG exporting oil via SOMO.
After the oil-fuelled economic boom it enjoyed in the wake of the US-led invasion of Iraq in 2003, the Kurdistan region faces spending cuts and economic reform, and is also looking efforts to raise non-oil revenue.
In December, the KRG cut the allowances of ministers and other officials by as much as 50% and eliminated perks enjoyed by senior civil servants. Talabani said bigger changes were on the way.
“We’re not bankrupt yet but if we don’t enact structural and actual reforms the current situation is not sustainable,” he said.
The reforms will target three main areas: fuel subsidies, the power sector and the public payroll, which costs the region $800 million per month. The KRG has already opened the fuel market to private companies and will consider selling parts of the electricity sector, Talabani said.
“This is a tsunami,” he said. “Either we react and respond to it or get dragged under. The initial step is to stop the ship from sinking.”
The region, which has debts of $15 billion-$18 billion, is also considering ways of raising money abroad such as soft loans, bailouts, pre-payment agreements and monetising assets, including oil infrastructure, Talabani said. Plans to issue a $500 million Eurobond were derailed by falling oil prices and rising political tensions but could be revived in the future.
Despite recent gains on the battlefield, Talabani said he did not expect an offensive to soon retake the northern city of Mosul: “I don’t think the Iraqi armed forces are ready”.
The peshmerga will play a role in the offensive whenever it happens but the Iraqi Army must take the lead, he said.
In the meantime, more needs to be done to find a political solution. “I don’t see any traction on political reconciliation in Iraq,” Talabani said. Compared with a year ago, Sunni disenfranchisement is deeper and Shia mistrust of Sunni intentions greater, he said.
“All of these are factors that are going to slow down our progress in the war to degrade and ultimately destroy ISIS,” he said.