Analysis

The Kurdish Economy Is Tottering, but at Least They Can Still Afford Fireworks

Iraqi Kurdistan is stuck between a deadlock in Baghdad and a ballooning debt – but restaurants and hotels are packed and New Year’s celebrations were nothing less than spectacular

The citadel of Erbil, the capital of the autonomous Kurdish region of northern Iraq, during New Year's eve celebrations, December 31, 2019
AFP

A new kind of refugee arrived this month in Iraq’s Kurdish region. They were the employees of the U.S. Embassy in Baghdad, many of whom were evacuated from the heavily protected building in the capital’s Green Zone after the targeted killing of one of Iran’s top military commander.

When they arrived, the Americans discovered that they were not the only diplomats who took temporary refuge with the Kurds. Employees of the British Embassy and those of other European countries arrived too, waiting for the fury of the “Iranian revenge” to blow over.

Among those who did not manage to escape the threat, however, were 120 employees of a Kurdish logistics company that supplies the air force base that was hit by Iran’s retaliatory strike. The workers reported they were afraid to leave the base, which is in the Anbar Province, and return to their homes in Kurdistan because they feared they would be attacked by Shi’ite militias looking to engage anyone aiding American forces in the region. These employees usually leave for vacation once every three months, but they are now spending their fourth month on the base, without anyone worrying about their security while on their journey home.

U.S. soldiers inspect the site where an Iranian missile hit at Ain al-Asad air base in Anbar province, Iraq, January 13, 2020
JOHN DAVISON/ REUTERS

They are not the only Kurds who are suffering from the Soleimani affair. Poultry farmers in the Kurdish region, who produce over 160 tons of poultry meat and export part of it to Iraq, have reported a steep drop in sales – as have Kurdish traders who import goods from Turkey for Iraqi businesses.

Yet more serious damage may be caused to the budget of Iraqi Kurdistan, if the agreement signed between the Iraqi government and the regional government is not approved as soon as possible. The Kurdish region is supposed to receive about 13 percent of the Iraqi government budget in return for the proceeds from 250,000 barrels of oil a day produced in the region’s oil wells. The agreement may have been signed, but it still needs to be approved by the Iraqi parliament.

Opponents of the agreement in Baghdad say the transitional Iraqi government did not have the authority to sign the deal – and until an accepted government is formed, the agreement is not in force. The Kurdish region is continuing to produce about 500,000 barrels of oil a day, and exports them through the port of Ceyhan in Turkey, but the Turkish government is obligated – at least officially – to keep the funds intended for the Iraqi government in trust. The Kurdish region is unable to make use of all its oil revenues and pay off its public debt, which has reached $17 billion.

The Kurdish leadership is also worried that American forces will withdraw from Iraq and leave the region without their critical protection. In an act of protest, the region’s representatives in the Iraqi parliament decided to stay away from the vote on the law requiring foreign forces to leave Iraq, which was passed this month. They rejected the demand that the American forces also leave the Kurdish region, which is defined as an inseparable part of Iraq. The American military presence is the most important guarantee for the calm the region has enjoyed since 2003, without which it could not have been able to develop a flourishing economy, bring in investors and pay for the day-to-day expenses of the region’s government.

The Trump administration may have made it clear to Iraq that it does not intend on withdrawing its forces from the country, but the Kurds have learned from bitter experience and know that such American promises are only good on the day they were made. And it is not only the Kurds who enjoy the American patronage – because of the security and stability in the region, it attracts Chinese and Russian firms, one of which, Rosneft, operates the Kurdish oil pipeline that crosses the border into Turkey and is the way most of its oil is exported.

The problem is that quite a large part of the region’s revenues have not found their way to serve the 6 million residents. As elsewhere in Iraq, politicians, tribal leaders and well-connected businessmen in Kurdistan have managed to divert a large part of these revenues into their own pockets. According to estimates from the Kurdish Commission of Integrity in the region’s Justice Ministry, the local government lost out on some $356 million in income over the past three years. Kurdish economists call this a very conservative estimate, estimating the real loss figure is between $2 billion and $3 billion.

U.S. President Donald Trump (R) speaks with Iraqi Kurdistan President Nechirvan Barzani (L) at the World Economic Forum in Davos, January 22, 2020
AFP

The prime minister of Kurdistan, Nechirvan Barzani, managed to pass a reform in the Kurdish parliament aiming to root out coruption. The reforms set a ceiling for pensions, cut the salaries of members of parliament by up to half, and canceled the salaries and benefits of “ghost soldiers,” those falsely registered as serving in the Kurdish Peshmerga forces.

These steps cannot uproot the plague of corruption by themselves. The country is losing big in projects awarded to contractors – which have never been carried out. Tax collection from companies and businesses is a chronic weak point, and oversight over customs revenues imposed on imported goods, or on government spending, almost does not exist.

Some 300,000 refugees who arrived from Syria and Iraq also live in Kurdistan, though their number might go up to 1 million. The Kurdish government says it needs about $1 billion a year to maintain the services it provides to these refugees. But when the region’s leaders take pride in spending some $800,000 this year just on the fireworks for the New Year’s celebrations, when the hotels and restaurants are packed with tourists, and real estate deals are on the rise, it is still too early to expect many to worry about the future of Kurdistan’s economy.