ERBIL, Kurdistan Region - Economic growth in Iraqi Kurdistan could take a hit of around 5 percentage points this year partly because of the humanitarian and social crisis provoked by the advances of Islamic State militants since June, says the World Bank.
Sibel Kulaksiz, a senior economist at the World Bank who recently led a mission to the region to conduct an economic assessment, said growth would be much lower this year.
No official data exists but gross domestic product growth had been forecast at around 8 per cent this year, suggesting a drop to 3 per cent. Total GDP was estimated at more than $20 billion by the Kurdistan Region Statistics Office in 2011.
“As a result of multiple crises, aggregate demand continues to be low and economic growth is expected to be considerably less than in the previous year,” Kulaksiz told Rudaw in a telephone interview from Washington. She and is expected to return to the region next month to present its findings.
A growth figure of 3 per cent would compare favourably with the European Union, for example, but disparities of wealth and inequality remain large in the oil-rich region.
Even before the crisis, the economy had been suffering because Baghdad stopped the transfer of revenues to the Kurdistan Regional Government in a dispute over independent Kurdish oil exports, leaving the KRG unable to pay its bills.
The KRG is planning to apply for an international loan. It had consulted with international banks and had “legal support” to apply for foreign loans, Qubad Talabani, deputy prime minister, told the cabinet on Sunday.
But financial analysts say the government is unlikely to prove successful with the major western investment banks. Longer-term, the KRG might be tempted to seek credit from non-western sources set against future oil revenues, which would be costly and highly controversial, they say.
This year’s growth reflects mostly private sector activity and financial support from the oil sector but the economy has mostly run on arrears.
Meanwhile, an influx of refugees and internally displaced people (IDPs) because of the ISIS crisis has seen the population jump by around 17 per cent, putting severe strain on the local economy and public services, said Kulaksiz.
The impact and stabilisation costs for the overall economy are high while a suspension of public investment projects is affecting growth.
“The construction sector has been particularly affected, with small companies reporting bankruptcy,” she said.
“A surge in violence led to supply-side shocks. The ISIS crisis has had a significant effect on trade flows as a result of disruption in transport routes. Foreign direct investment flows have declined and operations of foreign enterprises have been adversely affected.”
A sharp increase in domestic energy demand and prices has lowered economic activity. Similarly, water demand is increasing and sanitation in IDP and refugee camps is a growing concern.
The humanitarian crisis is also increasing the burden on education, health, and food security.
Even before the flood of IDPs and refugees, the economy had significant infrastructure needs. There are also structural issues related to corruption, lack of finance and credit, and an inadequately educated workforce.
“While it is a priority to provide necessary relief to economic and social issues caused by the crisis, it is also important for the government to develop longer-term strategies to address structural development issues,” said Kulaksiz.
“The KRG is aware of the issues and wants to encourage the private sector to initiate a transition to a more diversified economy. In collaboration with the government, we aim to provide economic growth diagnostics to analyse the potential sources of economic growth and identify the binding constraints to allow the KRG to make informed decisions on policy reforms in the short and long-term.”
Investment in Kurdistan has been significant in recent years. There were more than 1,200 private foreign firms in Kurdistan, 730 of them Turkish, according to the World Bank’s 2012 Iraq Investment Climate Assessment.
There was nearly $22 billion in projects in the region funded by Iraqi investors, mostly Kurdish. But the Kurdish government still employed around 1 million people - equivalent to more than 20 per cent of its population - the report said.
Another World Bank report has highlighted the concerns of investors. Corruption and political instability were considered either a major or a very severe constraint for more than 70 per cent of firms surveyed in 2011 by the bank.
“Corruption takes many forms: bribes to officials, informal payments to inspectors or tax agents, or paying protection fees to police” the report said.
An anonymous call-in service that could trigger legal action against corruption was among the bank’s recommendations back in 2011.
Nearly a third of Kurdish firms also reported serious constraints regarding access to land. The KRG was urged to facilitate access to land by easing regulations and modernising the land registry.
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