Budget quagmire: The Erbil-Baghdad never-ending problem

ERBIL, Kurdistan Region — Civil servants in the Kurdistan Region who have not received their salaries in full or on time for nearly seven years, had pinned their hopes on Erbil and Baghdad reaching an agreement over the 2021 budget, which was passed in late March. So a Kurdistan Regional Government (KRG) announcement earlier this week that pay cuts would continue came as a shock. 

Under the KRG’s latest decision, employees who make more than 300,000 Iraqi dinars ($251) per month will see their pay cheques cut by 21 percent. This triggered anger among civil servants, opposition lawmakers in Baghdad, and parties in the Kurdistan Region.

“We have not been paid our full salaries two months in a row in the past seven years, and yet the government cuts our salaries despite their so-called agreement with Baghdad,” a teacher in Erbil told Rudaw English. He spoke on condition of anonymity, saying he feared “retribution” from his principal if his name was published.

“This government must be blind. They have never put themselves in the shoes of a civil servant. In the past, before this crisis happened, my salary was 950,000 dinars [nearly $800]. And now they cut 21 percent of my salary, despite the fact that the dinar has crashed,” he said. With the cuts and dinar devaluation, he says he’s only bringing in about $500 a month. 

“This is a shame,” he said.

Shaswar Abdulwahid, leader of the New Generation opposition party, called for a nationwide demonstration to protest the pay cuts.

"Because of this difficult situation that has gripped civil servants and the people of Kurdistan, we are calling on all sides to join a nationwide gathering on May 25 at 11:00 am," Abdulwahid said in a Facebook post on Sunday night.

"Our nation and the people of the Region are openly oppressed. Their rights are openly violated. Many of our youth are jobless. Our women are jobless, at home and disappointed. Despite the fact that the Region's revenues are double what the government should pay its civil servants, they cut the salaries. We carry a moral responsibility to have a stance for our people, for a better future for them," he wrote.

The Iraqi Parliament, after weeks of wrangling, finally passed the 130 trillion Iraqi dinars ($89.65 billion) budget in late March. It has an estimated deficit of 28.7 trillion Iraqi dinars ($19.79 billion). Iraq relies on oil to fund 97 percent of its budget and estimated its 2021 revenues based on an oil price of $45 per barrel and expectations of exporting 3.25 million barrels per day.

Jamal Kochar, member of the parliament’s finance committee, previously told Rudaw that the Kurdistan Region's share of the budget, set out in Article 11, has been fixed at 13.9 percent, up from 12.67 percent in previous budgets. The percentage is based on Kurdistan’s population size. In exchange, Erbil must hand over to Baghdad a share of its oil and non-oil revenues.

KRG Prime Minister Masrour Barzani welcomed the budget as a “compromise.”

"Passing of the bill is an achievement for all Iraq and Kurdistan,” he said in April. “In normal circumstances this should not have been considered as an achievement but rather something normal, however the topic was politicized.”

Is Erbil committed?

The KRG needs to clean up both its revenue streams and expenses if it wants to balance the books and pay its employees, according to lawmakers. 

“The government will have to cut down on the abundant costs of the production of oil. The KRG receives 22 to 25 dollars in profit from the sale of a barrel of oil. This is due to corruption in their oil contracts,” Ali Hama Salih, an outspoken lawmaker in the Kurdistan Region parliament, told Rudaw English.

He also wants the KRG to implement a reform law passed last year.

“The best thing that the Kurdistan government can do to put an end to this economic issue and the problem of the payment of the salaries of its civil servants is they must start implementing the reform law which was passed in its parliament in February 2020. This is the only guarantor to save the government from corruption, misuse of state funds, make reforms at the border crossings, put an end to the countless money that goes to ghost employees,” Salih said.

The reform law dictates sweeping changes to the government’s payroll and pensions, including preventing people from getting duplicate payments and benefits, and institutionalizing the pension program. Full implementation of the law could save the government 100-120 billion dinars annually. 

The Kurdistan Region needs 895 billion dinars a month to cover its payroll, amounting to 10.740 trillion dinars a year, according to Salih, He expects salary cuts will continue as long as the KRG delays implementing the reform law or fails to abide by the budget agreement with Baghdad, both of which he thinks are real possibilities. 

Ahmed Haji Rasheed, a Kurdish lawmaker in Baghdad, believes Erbil will not follow through on its obligations under the budget.

“Erbil is not committed to the Iraqi budget law. The KRG had to start to show its readiness to commit to the 2021 budget in January,” Rasheed told Rudaw English. 

He accused the KRG of “manipulating the budget as a legal defense to sell its oil,” adding “the Region has no interest in handing over its oil to Baghdad.”

“The KRG has a lot of cash that it could spend to pay its employees, but they do not do it. Since the dinar was devalued, in the dollar to dinar exchange rate alone, the KRG gains 80 billion dinars a month. This is in addition to the increased taxations that it receives from businesses,” he said.

Erbil has not yet sent any oil to Baghdad.

What’s in Article 11?

Article 11 of Iraq’s 2021 budget sets out the Kurdistan Region’s share and obligations. 

The Kurdistan Region must produce 460,000 barrels of oil per day, handing 250,000 barrels over to Baghdad. The remaining 210,000 barrels are to cover Erbil’s oil production costs and domestic oil use. Erbil must also send half of its non-oil revenues to the state treasury. Implementation of this will be done jointly by the federal oil ministry and the Kurdistan Region's Natural Resources Ministry.

The Kurdistan Region must pay the salaries of its civil servants and the Peshmerga from their share of the 2021 budget and they must be paid before the government spends money on anything else. 

Erbil commits to paying back money it borrowed from the Iraqi Trade Bank. The Finance Ministry will deduct these loan repayments from the KRG’s budget share over the next seven years. 

The Iraqi government sending the Kurdistan Region its budget share is conditional on Erbil fulfilling these commitments. 

Following a thorough audit jointly done by the federal and Regional finance ministries, the KRG will give Baghdad a list of its civilian and military employees by June 30, 2021.

Iraq's economic crisis

When Iraqi Prime Minister Mustafa al-Kadhimi assumed office in May 2020, he immediately had to tackle a myriad of crises, including deadly protests, rampant corruption, a floundering economy, and lack of very basic services.

Between the resignation of Kadhimi’s predecessor Adil Abdul-Mahdi in November 2019 and Kadhimi’s appointment half a year later, the caretaker government did not have the authority to write a budget. When he became prime minister, Kadhimi’s cabinet spent according to the “1/12 Rule,” which means a government can spend a twelfth of the previous year’s budget per month. But revenues in 2020 were nowhere near 2019’s because of a global decline in oil prices during the coronavirus pandemic. 

With the treasury near empty, the government had to take drastic measures. The parliament passed two laws in June and October 2020, enabling the government to borrow $22.7 billion, though this was still less than it needed.  

Facing the prospect of bankruptcy, Kadhimi created an emergency task force to devise a plan that would prevent an economic crisis and address broader weaknesses in the economy. In December, Iraq devalued the dinar, a move estimated to save the government some 12 trillion dinars (approx. $8.3 billion) this year.

• SHARE ON
• Share on Facebook
• Share on Twitter
• Share on Whatsapp
• Share on Telegram
• Share on Viber
• Share on Messenger