Kurds protesting near Syrian-Turkish border.
(photo credit: REUTERS)
In light of the current economic crisis in Iraqi Kurdistan, the Kurdish Regional Government (KRG) has been forced to make drastic reforms to reshape their economy, which could be too ambitious given the challenges they face. Almost all the obstacles the KRG faces are due to the current security crisis brought on by the establishment of the Islamic State (ISIS) in 2014.
Before ISIS, the economy in Iraqi Kurdistan was considered to be booming. Between 2004, after the fall of Saddam Hussein, and 2014 foreign investments and the local standard of living were steadily increasing. In fact, in 2013, a report from The Economist Intelligence Unit ranked Iraqi Kurdistan, in terms of security and political stability, fifth in the region, ahead of Saudi Arabia and Israel. On a worldwide scale, they were ranked 83rd, tied with China. In terms of business environment, the same report ranked Iraqi Kurdistan seventh in the region, ahead of Jordan and Egypt, and on a worldwide scale they were ranked 57th, ahead of Russia.
Between 2004 and 2014, the economic philosophy used by the KRG was very similar to what the United States refer to as “trickle-down economics”; laissez faire if you will. The government did very little to tax and regulate the private sector, in hopes that the benefits produced by investors would eventually be dispersed among the local population. Tax requirements were essentially nullified, particularly for those investing in projects involving tourism, infrastructure and housing. In short, the KRG allowed the private sector to dictate the direction of the economy and for some time, the results were actually quite positive.
According to the Kurdistan Regional Government Council of Ministers, in 2009 the Kurdistan Region’s annual growth rate was at seven percent. In 2010 it was at 9% and according to Invest In Group, the Kurdistan Region’s growth rate was at 12% in 2012, predicted to reach 8% in 2013. Entering 2013, according to Trade and Industry Ministry reports, during the first quarter more projects were underway in Kurdistan than were completed in all of 2012. The KRG was investing in more than it had the capital to back up at the time. As the expression goes, their eyes were bigger than their stomach.
When 2014 came, the KRG was met with the simultaneous calamity of ISIS attacks and the financial crisis which was largely brought on by the Iraqi federal government cutting the constitutional budget of KRG in February 2014 and then falling oil prices; the price of oil has since risen. Due to the security threat, virtually all foreign investors withdrew and the KRG was unprepared to handle the loss of revenue. Fast forward to 2016 and 1,500 local companies and contractors have gone bankrupt. Investment has dropped by $15 billion and the market has dropped by $60b. As a result, economic growth dropped from 2013 to 2014 by 13% to 8% and then in 2015, to just 3%. In addition to the setbacks mentioned above, the region is expected to lose an additional 50,000 jobs by the end of this year.
In order to compensate for the economic downturn, the KRG is searching for sources of revenue it has not tapped before. Currently, the KRG is dependent on foreign loans from allies, particularly the United States, South Korea, the United Kingdom and Japan. In fact, in April of 2014, the US agreed to extend $415 million in financial assistance for Peshmerga salaries. First and foremost, the KRG is focusing on reducing its operational budget, a move which could not come at a worse time as Iraqi Kurdistan must accommodate a growing number of refugees as well as sustain its Peshmerga fighting forces, the primary combatants against ISIS. In addition to these expenses, unemployment among the Kurdish population is at 20%, a 9% increase from when the crisis began. Meanwhile, among refugees unemployment is at 70%, with the KRG having to provide them with food, water, shelter and health services.
In restructuring the economy, what were once entitled public services are now taxed. For example, the KRG has begun imposing stricter traffic laws with fines to enforce them. It has also raised the prices on entry visas and customs. Another such example would be altering energy policy. Currently in Turkey, for instance, a kilowatt of electricity costs 30 cents, while in Jordan a kilowatt costs 20 cents. However, in Kurdistan, a kilowatt costs only three cents. Such low costs are due to a culture in government of looking to provide for the people.
The other area of reform is healthcare. Shortly after the KRG gained autonomy, healthcare and insurance was provided by the government. However, due to the recession, it has become impossible to fund, and therefore many consider the quality of service to be inadequate. Those who can afford to seek medical attention from the private sector typically do so. In response to the deterioration of the public sector’s health care system, the KRG is exploring fundraising tactics such as instituting fees for the care received.
Overall, KRG has limited options for internally improving the economy. The only primary resource the KRG has to potentially keep the Kurdistan Region financially afloat is oil. However, this too has been slow to benefit the local population because until recently, the majority of workers in the region’s oil and gas industry have been foreigners with a history of better training. Goran Mustafa Muhamad from the Kurdistan Regional Government Council of Ministers claimed that “[The locals] could not engage with the sector,” meaning that few jobs in the industry were available to the indigenous population. This is largely due to historically inadequate training in Kurdish universities with “an industry too new for [Kurdistan],” Muhamad added.
In recent years, the KRG has been funding students’ study overseas, predominantly in the US and UK, for better training in hopes that the oil industry in the region will eventually become independent. The only other industry that has seen some improvement since the crisis unfolded is agriculture, even though imports still lead exports.
The KRG apparently did not anticipate the possibility of a sudden recession, in this case largely brought on by the emergence of ISIS, which seems to have financially overwhelmed it. This is made evident by the KRG’s erratic attempts to reshape its economic policies and limit dependence on foreign loans. What with combating ISIS and providing for the dramatic influx of refugees, it is unlikely that the KRG’s attempts to reshape the economy will prove effective enough to free it from dependence on foreign loans in the near future.The author is a teacher in Erbil, Iraqi-Kurdistan. Glenn has a Bachelors in Psychology and a Masters in Conflict Resolution and Mediation which he received from Tel-Aviv University.