Alaco

09.12.2015 | Energy-rich Iraqi Kurdistan’s financial troubles are threatening political upheavals

The semi-autonomous Kurdish region of Iraq says a financial crisis has left it struggling to pay the salaries of Peshmerga fighters battling ISIL in the north of the country. Erbil’s economic problems have also fuelled political tensions which have threatened the stability of the territory.

As of last month, the Kurdistan Regional Government, KRG, was three months behind with salary payments to civil servants and Kurdish troops, known as Peshmerga, who have been playing a critical role in combating ISIL.  Recently, they retook the northern town of Sinjar from the Islamic insurgents, cutting the supply line between the latter’s strongholds in Syria and Iraq.  But the plunging oil price, the cost of the military campaign and accommodating over a million refugees have put a severe strain on the region’s budget.  “We have a huge financial gap,” the region’s Minister of Natural Resources Ashti Hawrami said last month. 

Energy-rich Kurdistan has been largely relying on exports of oil through Turkey because of a long-running dispute with Baghdad over its budget allocation.  The KRG is entitled to 17 per cent of federal funds, about $1.1 billion, in return for a proportion of its petroleum output.  But the agreement broke down in March last year, with both sides blaming each other.  This prompted the KRG to unilaterally export its oil through a new pipeline to the Turkish port of Ceyhan.  The move angered the federal authorities, which threatened to sue those who buy Kurdistan’s output.  In late 2014 Erbil and Baghdad officials tried to sort out their differences, but a new deal soon unravelled.   The Kurds say that between January and June 2015 they received only about 40 per cent of the funds they were due. 

Since July, independent sales of oil have enabled the KRG to generate revenues of between $800 and $850 million a month.  Nonetheless, after months of delays, the Erbil authorities have only recently started paying Kurdistan-based foreign companies for the oil they produce.  Given its importance to the economy, the KRG is keen to ensure there’s no drop in production, but many companies are reportedly still owed substantial sums and some have taken legal action to pressure the government.  At the end of November, the London Court of International Arbitration reportedly ordered the KRG to pay $1.98 billion to a consortium led by the Sharjah-registered firm Dana Gas.  The award was for payments the consortium said it was owed for producing condensate and liquefied petroleum gas products from the Khor Mor and Chemchamal fields.  

To make matters worse for the Erbil government, the Kurds’ patience over unpaid salaries is wearing thin.  Tensions came to a head in October when thousands of people attacked the offices of the ruling Kurdish Democratic Party, KDP, blaming it for the economic crisis.  At least four people were killed and dozens injured in clashes with KDP security forces.  The party claimed the violence had been orchestrated by its coalition partner, Gorran, whose cabinet ministers were subsequently sacked.  The political dispute has yet to be resolved, with the KDP rejecting Gorran’s demand for its government representatives to be reinstated as a precondition for talks. 

The October protests are also said to have been fuelled by a simmering crisis over Masoud Barzani’s tenure as President of Kurdistan.  Barzani, who is also the leader of the KDP, should have stepped down when his term in office – which had been extended by two years – came to an end in August.  Opposition parties say a clause in the region’s draft constitution stipulates that the outgoing president should be replaced by the parliamentary speaker until new elections are held.  The KDP points out, however, that the same clause permits Barzani to remain in office if war or natural disasters prevent a ballot from taking place.  The party wants to prolong his presidency, arguing that he is the only Kurdish leader capable of combating ISIL. 

The political tensions are likely to be exacerbated by the continuing economic crisis.  The KRG is keen to address the latter, signalling its readiness to resume talks with Baghdad on oil-revenue sharing and the region’s budget allocation.  But Kurdistan’s independent oil sales are likely to be an obstacle, despite Hawrami‘s assurances that he is seeing signs of Baghdad removing its opposition to the policy. 

In an effort to boost revenues, the KRG says it aims to increase petroleum production from the current 700,000 to one million barrels a day, and is also planning to supply Turkey with natural gas in the next two to three years.  At the same time, the Erbil authorities acknowledge there is a need for spending cuts to shore up the region’s finances.  KRG Deputy Prime Minister Qubad Talabani said this month, “Our people have become accustomed to generous government salaries and other payments funded by oil revenues.  But what was feasible at $100 [a barrel] is not sustainable at $40.” 

The KRG is confronted with a challenging economic balancing act and it will have to take decisive action.  If it continues to struggle, the region will face further instability, which in turn will undermine confidence amongst foreign investors that are so crucial to the region’s future.