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Fri 10 Jun 2016 12:26 AM

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Sounding the alarm for Iraqi Kurdistan

It has taken near-bankruptcy for Iraqi Kurdistan to face up to its corruption and inefficient government. But with the outside world reluctant to lend a hand, worsening sectarianism and a war on its doorstep, can the region fix itself?

Sounding the alarm for Iraqi Kurdistan

"This economic shock was a wake-up call for us. It kicked us into action,” says Kurdistan’s Deputy Prime Minister Qubad Talabani.

The 38-year-old, English-accented politician is sitting in an armchair in his Erbil office but it is the same rhetoric that he has delivered to Western diplomats from whom he is seeking financial support.

The autonomous region in the north of Iraq is facing bankruptcy – a stark shift in gears from the dazzling growth experienced less than three years ago. But the crisis has revealed more than just Kurdistan’s over-reliance on oil (which accounts for well over 90 percent of its revenues) and its painful attachment to a hostile Baghdad that renders it almost incapable of controlling its own future.

It has also heightened attention on sectarianism within the region – between competing families, districts and political parties – as well as the inept government processes and corruption.

This is why Talabani is eager to convince the outside world, as well as the Kurdish population, that the government is changing, the government is cleaning itself up. He knows that if he cannot make a convincing argument, Kurdistan will remain in its quagmire.

“We’re not just asking for handouts, we’re helping ourselves as much as we can, we’re reforming our governance in the way that we can,” Talabani says. “We’re trying to overcome our own short comings by ourselves but obviously we’re going to need some help along the way.”

He concedes the government was “a little slow to start” but says it has identified three principles on which its reform hinges. They are the usual: reducing expenditures, raising revenues and structural reforms within the government.

With oil at the heart of Kurdistan’s economic survival, it is also the crux of reform. Kurds routinely wonder who is profiting from the 500,000-plus barrels of oil exported each day, and the government is yet to answer the question with full transparency.

“We’re in the process of tendering out an audit of our oil process to make it more transparent to our public. I think that is going to go some way to restoring public confidence,” Talabani says. “It’s a complicated sector and as a government we’ve fallen short on effectively delivering a message to our public on the oil sector. To have a third party come in, audit the sector and publicise the findings is not going to solve all our problems but I think will go a long way to showing people that we’ve got nothing to hide when it comes to the oil and gas sector.”

The World Bank says an "inclusive and efficient" financial system is imperative for Kurdistan to strengthen its private sector.

Talabani does not voluntarily use the word corruption, but he is quick to agree that it is “absolutely” entrenched in the region. While most independent global analyses do not differentiate between Iraq and the Kurdish region, in a report published last year Transparency International said while corruption was less widespread in Kurdistan than in Iraq as a whole (which was ranked the eighth most corrupt country of 168 in 2015), it is high on a global scale.

The Economist Intelligence Unit, meanwhile, scored Iraqi Kurdistan in the mid-thirties on a scale of 0-100, with zero considered corrupt and 100 clean (Iraq received a score of 10).

President Masoud Barzani said in March he had ordered the judiciary to carry out corruption investigations, starting with his own family (his nephew Nechirvan Barzani is the prime minister and his son Masrour Barzani is the chancellor of the Kurdistan Region Security Council) and political party, the Kurdistan Democratic Party.

A month later the parliamentary Integrity Commission said it was investigating 21 cases of corruption from across the region. Arrests already have been made, including of the manager of an immigration department and the head of the region’s central bank, as well as his deputy.

But some argue those arrested are being used as scapegoats, helping to divert attention from the roots of the problem.

Talabani, who hails from the Patriotic Union of Kurdistan (PUK) party, counters that work is also under way to make government processes more formal, to “create an environment where it’s difficult for corruption to exist”. That includes creating clarity around tenders, the role of government and business licences.

But not even the deputy prime minister lacks confidence that the planned changes will erode corruption.

“You’re still going to have kick-back processes, you’re still going to have super powerful companies that are super connected that are going to muscle their way into contracts - this is going to require a different strategy,” Talabani says. “But first things first are to plug the holes in the ship, and we’re going to do that by streamlining our government processes. I think that will address up to maybe 80 percent of the corruption that currently exists.”

Similar to the majority of Gulf states, Kurdistan’s public sector is severely bloated. About 1.4 million people receive a government payment, including employees (an estimated 720,000), pensioners, social security recipients and contractors. That is as much as one in five people (estimates of the total population of Iraqi Kurdistan vary widely but the KRG says it is 5-6 million).

The government hopes privatising parts of the electricity sector will help reduce outages in Erbil.

The government believes a significant proportion of state payments are made to ‘ghost’ employees, people claiming multiple salaries or benefits, or relatives who continue to accept payments from a former or deceased recipient. The extent of the problem is unknown because there is no record.

The KRG plans to create an electronic database with biometrics and iris scans of all state benefit recipients and employees.

“This is going to address a big hole in our expenses,” Talabani says. He declines to estimate how large the waste is nor how much the project will cost, saying, “[it will cost] not nearly as much as what it’s going to save us”.

He has set an ambitious target to register everyone by the end of the year.

Government departments also are planned to be streamlined, while some services will be outsourced or privatised, starting with the electricity sector.

“We’ve got a government that’s overbearing, that’s very dominant in all sectors of life, so we’re trying to right-size our government but also to right-size the involvement of our government in key sectors,” Talabani says.

Rationalising the government also will help to alleviate some of the liquidity crisis. In January, Kurdistan’s reported deficit was $400m per month. The government says austerity measures and revenue generation have seen it scaled back to $100m a month.

The trouble began in January 2014 when Baghdad cut off payments worth 17 percent of the national budget in retaliation for the KRG’s commissioning of a pipeline to Turkey, which would allow it to independently export oil for the first time.

In August the same year, the value of its prized asset began to nose dive from above $100 a barrel to less than $30. In the same month, ISIL strengthened its presence in the region, including capturing Mosul – 85km west of Erbil – and reaching within 20km of the Kurdistan capital. Unsurprisingly, foreign investors responded by fleeing. Few have returned.

While oil accounts for nearly all of the KRG's budget it employs only 1 percent of the population, according to the World Bank.

The KRG has set a target to double oil output to 1 million barrels per day (bpd) by the end of 2017. It claims that there are up to 45 billion barrels of reserves within its territory - equivalent to almost a third of Iraq’s total deposits - are widely doubted and Genel Energy’s recent halving of reserves at its Taq oil field added weight to such doubts.

Exports via its pipeline to Turkey was suspended for three weeks in February-March during a military operation by Turkey against Kurdish militants on its territory. During that time, Ankara transferred a $200m lifeline to Erbil, which it has strengthened ties with in the past decade. Exports are still below their previous maximum level of about 600,000 bpd, but reached 513,000 bpd in May, according to the Ministry of Natural Resources.

Kurdish forces also now control the Kirkuk oil field, after the Iraqi army fled as ISIL forces approached in mid-2014. The KRG agreed three months ago to pay the Kirkuk district $10m a month for access to the oil.

The presence of ISIL has forced the redirection of some state funds to the armed forces, the Peshmerga, and the resultant refugees. Although the war also has helped the KRG attract financial support from the West, which views Kurdish forces as their strongest ally against the militant group.

In April, Talabani’s mission to Washington successfully garnered $415m from the US administration to support the Peshmerga.

The KRG has acknowledged Kurdistan cannot survive purely on oil. But plans to diversify - into agriculture, industry and tourism, in particular – have been slow moving.

“It’s an easy, nice campaign slogan to say ‘yes, we’ll lessen our dependency on oil'. It’s been said since 1992, but it’s never really happened. Why? Because the numbers just don’t add up,” Talabani says. “We have somewhat of a confused economy right now. It oscillates between a free market economy to a very state-run economy and it bounces between the two. We need to lock in where we want to be. Do we believe in capitalism, do we believe in socialism, do we believe in something in between? And then we follow that chart.”

As well as interim aid, the region desperately needs foreign direct investment (FDI). But unlike during the decade preceding the economic crisis, when Erbil was blossoming into a new regional capital comparable to Dubai, the unstable situation, coupled with the global economic downtown, is keeping most investors away.

While the region has among the most liberal foreign investment laws in the Middle East, the economic instability has shone a brighter light on the lack of defined investment processes. What investors were previously willing to sweep under the carpet in return for high yields is no longer worth the risk.

Masoud Barzani has been the leader of the KDP since 1979, when he took over from his father.

The KRG says it has been recording the process of every transaction, including the number of days and signatures it required, in the past year and that the findings will eventually be made public in a bid to improve transparency.

“Some of the findings will be embarrassing,” Talabani concedes. “Why does it take 26 signatures to do something that could be done in one day? But this is partly the point; we want to show everybody what we have and then we can fix it, because we [will be able to] generate the support necessary to make the changes we need to make.

“I think that will absolutely help attract FDI.”

Talabani is direct and unswerving as he details the KRG’s roadmap to reform. But scepticism remains rife, among both Kurds and outsiders.

Citizens have protested in various towns over pay cuts and even unpaid wages.

Iriqi political sociologist and president of the Iraq Institute for Strategic Studies in Beirut, Faleh Abdul Jabar, says the announced reforms are simply lip service. 

“I think this is pure rhetoric to appease international observers,” Jabar, who has analysed Kurdistan for three decades, says. “You can’t combat corruption unless you have a strong judiciary, unless you have a strong parliament to put checks on each decision. You don’t have that in Kurdistan, you don’t have that at all in Iraq.”

Without FDI, the KRG is seeking support from international governments. But its ability to do so is hampered by its status as an autonomous region within the borders of Iraq, depriving it of the sovereignty it needs to apply for financial assistance from international organisations such as the World Bank and the International Monetary Fund. International governments also are less inclined to offer direct support without the backing of the central government, which for all intents and purposes does not want to do anything that will strengthen Kurdistan politically or economically.

The predicament has, however, added weight to calls for independence, which has been sought for decades. President Barzani announced via the media on March 23 that a referendum would be held in October. But the vote has been dismissed by some as an attempt to divert attention from Barzani’s own political woes, while others argue independence is an unrealistic dream in the current environment.

Masrour Barzani says Kurdish independence would help defeat ISIL.

Jabar says Kurdistan is missing a number of prerequisites for independence, the first of which is cohesion.

Decades-old divisions between regions within Kurdistan have deepened amid the economic crisis. In October last year, five people died in violence that erupted in Sulaimaniyah. One of Kurdistan’s most influential regions, Sulaimaniyah is controlled by the PUK, led by the Talabani family, and breakaway party Gorran.

They are in a power struggle against the Barzani family’s ruling KDP. Following the violence, which was directed at the KDP’s offices, the party announced it would no longer recognize Gorran member and parliament Speaker Youssef Muhammad, paralysing the parliament.

“Kurdistan is on the verge of another failure in building the Kurdistan nation within Iraq,” Jabar says. “The split between Sulaimaniyah and Erbil has never been so dramatic. It’s a crisis. The sectarian tension is on the increase.”

Even if the region is able to unite, Jabar says independence from Iraq will not save Kurdistan from its territorial difficulties.

“They need international recognition – that would be hard to come by. Turkey wouldn’t allow it; Iran might even occupy part of Kurdistan; the US won’t endorse it.

“You can’t say, ‘I’m independent’. Independence requires capacity to defend your borders, law and justice etcetera. [You need] to have enough resources to sustain the people. If you don’t have peace, what’s the meaning of claiming independence?

“I think it’s an escape to the future – there’s no direct independence on the table, that’s what all of them know. It’s just symbolic, with some political consequences favourable to the KDP.”

Talabani, whose PUK is the minor partner in the current government coalition and remains locked in a power struggle with the KDP, is careful to declare his support for independence while not ignoring the practicalities.

“It’s never a good idea to launch an IPO when you’re bankrupt,” he says. “I’m not ruling it out; I’m not saying it’s going to happen tomorrow. It will happen one day.”

But if an independent Kurdistan is to flourish it will need to be better prepared than it is today.

Moakley Irrell 3 years ago

Bad tidings for Kurdistan: US - Turkey relations may improve in case Hillary Clinton is elected President. The greater the chances of Mrs. Clinton to take the Oval Office, the more obvious it becomes that she will not sacrifice alliances with great world powers for the sake of defending the interests of small peoples.

Alfred 3 years ago

There was no mention of their currency. When, and at what rate, will the IQD revalue and enter the international markets.