OPINION: Kurdistan's economy deeply needs radical reform

In 2019, confidence in Kurdistan’s economic future was beginning to return. Billions of dollars in construction projects that had lay stagnant since 2014 had begun resuming. Oil production had reached 450,000 barrels per day. The region’s trade volume was nearing a historic $19 billion – even more than prosperous years of 2012 and 2013, before ISIS.

Then came the outbreak of the COVID-19, dashing those hopes and devastating the global economy.

Now, the health of Kurdistan’s economy is at risk of asphyxiation — and there is no guarantee that it will be strong enough to weather multiple ongoing global crises if the government doesn’t make deep and radical economic reforms, and fast.

As soon as it became clear that the outbreak warranted bold measures, the government quickly implemented a full lockdown of its cities – closing public places, roads, shopping malls, government offices, ports by land and air, and all but essential private companies. This saved the public from a catastrophic spread of infection, but it has brought the economy to a standstill.

When the new government swore in its cabinet in July 2019, it promised to make tackling corruption its main priority and redirect money that has been disappearing from the country’s revenue back into the Ministry of Finance’s coffers. With more efficient spending, it promised, the money could be apportioned the public’s benefit,and savings could be put away to deal with an emergency — such as the one we are faced with today.

But as the realization sets in that this virus may not be contained for several weeks or even months, the gravity of the lockdown is setting in. The decrease in trade with neighbors and the impact on domestic businesses has deprived the government from 85% of its internal revenue. The quarantine protocol also shaken small businesses. A union deputy representing chicken farmers estimated that in just three weeks of shutdown, domestic poultry businesses have lost more than $4 million.

But the most devastated sectors are tourism, hotels, cafes and restaurants, retail sales and other small businesses which have become the main parts of Kurdistan’s private sector. Market research in late March estimates that 29,530 firms, about 4,000 factories and 1,850 restaurants are closed due to the the lockdown imposed to contain spread of COVID-19 in Kurdistan.

And to make matters worse, the price war between Saudi Arabia and Russia has sent the price of oil to plunge to historic lows. This sea change could have disastrous consequences. Coinciding woefully with the coronavirus crisis, these consecutive shocks lay bare the need for radical, structural forms to the blueprint of Kurdistan’s economy.

Kurdistan, like most oil producers, relies heavily on oil reserves and revenues. More than 85% of Kurdistan’s public budget depends on oil revenues – therefore its susceptibility to price fluctuations is a fundamental economic weaknesses. If the price of oil remains below $50 per barrel, not only will the KRG’s primary revenue source deflate dramatically, but so will it’s share in federal budget.

Salaries for Kurdistan’s public employees, which accounts for 70% of the KRG budget, depend on the allowance from Baghdad, and when they are cut, could face government to social conflicts in the case of any delays or revising it.

Facing a massive deficit, the government will have to decrease its operating expenses, could increase unemployment rate again and affect on Kurdistan’s private sector, which is too weak to uphold the region’s economy in the absence of a developed banking sector. Only swift and efficient reforms can salvage Kurdistan’s economy from total economic disaster.

Public sector finance, the non-oil private sector, and private banking all are in dire need of reform. A smaller and more agile government will be less susceptible to future global crisis. Budget austerity may be necessary to bring Kurdistan out of the predicament. And once it emerges, it will need to take a long look at how this crisis happened and how to build a more resilient economy.

Diversifying public revenue from sustainable sources that are not vulnerable to capricious oil prices. Supporting private sector growth should be the guiding principle of the new public budget system. Kurdish business is barely able to compete with neighbors Turkey and Iran, and major exporters like China and Russia. Import taxes would allow domestic production space to breathe, and generate additional revenue for the public coffers. New laws should protect Kurdish businesses and removing the obstacles to their growth. will bring this sector to a productive role being supported by the government.

Developing the private sector should not be limited to the trade or construction sectors, which are saturated and contribute little to sustainable economic growth. Its scope could be expanded to participating in some public sectors, especially health insurance and electricity distribution, which could facilitate government’s plans for economic growth in sectors which lack dreadfully behind developed countries.

It should also be clear that what the Kurdistan region needs now is not more investment in construction projects. Kurdistan needs change in this mentality and move toward productive investments, and government action may be needed to improve investment law to ensure quality of investments that prioritize a robust economy and ease our reliance on imports from our neighbors.

With these reforms, Kurdistan’s economy may be able to flourish – regardless of the global price of oil. This will enable the government to spend what is needed during a future emergency without needing to borrow into the sovereign debt.

The government has taken swift and effective action to implement a curfew to prevent people becoming infected by COVID-19, and thus averting one kind of disaster. It must now take decisive action again to prevent an impending economic disaster. There is no time to lose in acting. Reforms should begin urgently and be applied immediately to prevent Kurdistan’s economy from collapsing.

The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw English.