By HE Ashti Hawrami, Minister of Natural Resources, Kurdistan Regional Government
It is time for Kurdistan’s leaders to engage with the realities of the economic challenges facing the Kurdistan Region. It is time to set aside differences and work together to find solutions that will set Kurdistan on a sound economic basis for the future.
Over the last 2 years, preparations for structural reform have been made by the Kurdistan Regional Government (KRG) in consultation with the World Bank, but until now the main focus of officials, political parties and the media has been on government revenues (namely from oil) while the KRG’s expenditures remained unchecked.
The current situation is not sustainable. The simple fact is that we in the Kurdistan Region have been living and continue to live beyond our means. We all must take responsibility: the government, the parliament, the political leaders, the parties and the media. Hoping that an increase in the oil price will magically salvage the situation is not a serious policy option. It will do nothing to cure the KRG’s underlying troubled financial position.
Those are the blunt messages I delivered in a speech to the Middle East Research Institute (MERI) annual forum in Erbil, where I presented detailed factual data on the KRG’s revenues and spending since 2010 to show that each year, spending has substantially exceeded income.
I demonstrated that the rise of ISIS, the influx to the Region of refugees and IDPs, the budget cuts from Baghdad and the slump in the global oil price have put huge pressures on the KRG’s economy. Those factors also affected the ability of the International Oil Companies (IOCs) working in the Kurdistan Region to invest and to increase production to meet the 1 million barrel per day of crude production that had been the KRG’s target by 2016.
I also highlighted the KRG’s growing debts and the huge gap that has accumulated between the KRG’s revenues and expenditure over the last 6 years. I warned that if the KRG carried on as before with its uncurbed spending and without real reforms, then even if we reached 1 million barrels of crude oil production per day and oil returned to $100 per barrel we would still not cover our financial requirements.
That last remark in particular sparked comment in the Kurdish media and some irresponsible outlets and political voices distorted what I said to serve their own agendas.
It is important to consider the following facts:
- 1. The KRG’s debts currently total approximately almost 24.0 trillion Iraqi dinars ($20.0 billion), which include almost 4.0 trillion Iraqi dinars of unpaid/deferred salaries of public sector employees. The huge debt can be easily attributed to the past unaffordable 28.0 trillion Iraqi dinars wastefully spent to subsidise fuel and electricity costs. Those subsidies began in 2010 on a small scale, but then spiralled out of control, more than tripling in 2011 and 2012. The subsidies continued during 2013 and 2014, despite the budget cuts by Baghdad and the fall in the oil price, as the KRG found itself unable to act to limit the damage. Indeed, the KRG was pressured by Parliament, particularly some members of the energy committee and their political sponsors, to actually increase the subsidies. The result was a further expansion of the KRG’s debts.
- 2. When the oil price was more than $100 per barrel (in 2012 and 2013), the KRG Finance Ministry’s actual annual spending was almost 18 trillion Iraqi dinars. This comprised an allocated budget share from Baghdad of 14.5 to 15.0 trillion Iraqi dinars and a deficit of 3.0 to 3.5 trillion Iraqi dinars. The deficit was funded largely by the KRG Finance Ministry borrowing huge sums of money from local private banks, and partly by deferring payments due to the construction and electricity generating companies contracted to the KRG.
- 3. In addition to the Finance Ministry’s 18.0 trillion Iraqi dinars annual spending, the Ministry of Natural Resources also spent some 5.0 to 6.0 trillion Iraqi dinars per year to finance fuel subsidies for public use and for power generation. Hence, when the oil price was around $100 per barrel, the overall KRG annual spending was 23.0 to 24.0 trillion Iraqi dinars (1.9 to 2.0 trillion Iraqi dinars per month).
- 4. If the Brent oil price bounces back in the future to $100/barrel (which would bring a price per barrel for Kurdistan of $90 after discounts for quality and prepayment finance costs), and if the KRG produces 1 million barrels/day (say 100,000 barrels/day for refining and 900,000 barrels/day for export) the gross monthly revenue would then be 2.8 to 2.9 trillion Iraqi dinars. After transportation costs and payments to the producers (IOCs) with respect to their full contractual entitlement, the net amount that would be left for the KRG equates to around 2.0 to 2.1 trillion Iraqi dinars per month.
- 5. Although, in theory that net income almost matches the full KRG’s expenditure at the level that existed prior to our budget cut and prior to the oil price collapse, under current policies, this huge monthly income would still not be enough to move forward.
- 6. For instance, there would be no surplus to pay the 4.0 trillion Iraqi dinars backlog of unpaid salaries or to make any repayments towards the other 20.0 trillion Iraqi dinars of accumulated debt. And if the KRG’s past uncapped spending policies continue, there would be no surplus revenue to fund any pay increases, or to take on more employees, or to expand subsidies (for example to ensure 24-hour electricity).
- 7. In addition, an oil revenue increase would also be accompanied by demands to immediately start servicing our debts. Over the following 24 months we would need to pay the backlog of unpaid salaries and repay our other debts. To achieve this we would need to put aside 800 billion Iraqi dinars of KRG income per month just to settle these debts. The KRG then would be left with around 1.2 to 1.3 trillion Iraqi dinars real cash in hand to manage expenditure levels of 1.9 to 2.0 trillion Iraqi dinars per month that existed in the period 2011 – 2013.
So, unless we reform our system, our income will clearly not be enough. The oil rich countries in the Gulf are in a similar position. Their governments are taking difficult decisions, cutting subsidies across the board and planning to shift away from overreliance on oil revenues.
In Kurdistan, we must remedy the situation and undertake structural reforms to reduce reliance on energy prices. We must remove some of our unjustifiable expenditures, cut back on most of the subsidies, and find new sources of non-oil revenues. We must grow by nurturing new industries in the private sector outside oil and gas.
Finally, I know that sometimes it might be inconvenient or even painful to be told the truth, but I believe the people of Kurdistan are entitled to the facts.
I have witnessed during my last 10 years of service to the Kurdistan Region all the economic shortcomings, and now I have decided to go public with my views. My intention is to create a genuine debate on this hugely important issue, which is why I also said the government and the political parties in the Region share responsibility for the current crisis.
There are no magic solutions. A rise in the oil price or oil production won’t fix it. There are no hidden pools of oil revenue. The KRG alone cannot solve the problems without the political will of all concerned in the Region.
As I emphasized at the MERI forum, it is imperative that political leaders recognize the realities and work together to find common and enduring solutions to the Region’s deep economic challenges.
