Financial Impasse Between Kurdish and Iraqi Governments
Kurdistan Conflict and Crisis Research Center (KCCRC)
* KCCRC is a partner organization of KPRC, and this article originally appeared on the KCCRC's website
Kurdistan Conflict and Crisis Research Center (KCCRC) hosted Ahmed Haji Rasheed, Iraqi MP and Head of Parliament financial Committee on 8th November 2017. Below you will find the transcript and the summary of an interview with him and the most important questions and answers as it is prepared by KCCRC.
There is ambiguity regarding the nature of the financial relationships between Kurdistan Region of Iraq (KR-I) and Baghdad. In the past few years both KR-I and Baghdad have agreed to resolve their financial relations through a reciprocal and mutual agreement. Yet, the financial issues remain unsettled.
Now, there are efforts to resolve the unsettled financial relations between the Kurdistan Regional Government (KRG) and Baghdad through dialogue. Unlike the past, Baghdad has slashed KRG allocated budget to 12.7% for 2017. Due to the consequences of the referendum, a new era has begun and the future of KR-I and Iraq financial relations remain ambiguous and unresolved. It is still unclear, for instance, who will pay the civil servant salaries in KR-I.
Against this background, three issues will be discussed in the interview with Iraqi MP and Head of Parliament financial Committee Ahmed Haji Rasheed in the following order:
1. First issue: The nature of financial concerns involving KR-I and Baghdad in the past.
2. Second issue: The factors behind KR-I and Baghdad financial disagreement.
3. Third issue: The future of KR-I and Baghdad financial relations.
What are the financial problems between KR-I and Baghdad?
The financial relations between KR-I and Baghdad have troubled all the people and politicians in the past several years. These financial issues are not new and their root causes are directly associated with the previous administration of Iraqi governments. Historically the Kurdish people had an age-old- rivalry and animosity with the successive central governments of Iraq. The first issue is related to land and borders, the second issue is related to participation and partnership in political power and the third issue is related to financial disputes.
To better understand the nature of these financial relations involving KR-I and Baghdad, we need to focus on financial policies and financial guarantees. With the course of time and the deteriorations of regional relations, the nature of the financial relations has also changed. For instance, the main dispute between KR-I and Iraq before 2003 was the issue of land and borders. But after 2003 and the removal of the regime of Saddam Hussein, the Kurdish issue has changed from dispute over land and borders to the issues of real participation in political power in Iraq. The reason behind this is threefold: First, the Kurds lacked financial and economic experts, second, Kurdish leadership was short of financial policies of successive Iraqi governments and third financial issues have not been integrated with political mentality except for the communists who lead Kurdish movement in Kurdistan region.
The real factors that have created the current crisis of financial relations between KR-I and Baghdad started when KRG opted for an independent economy, far from the intrusion of central authority of Baghdad and exporting and selling its own oil and gas independently and autonomously from Baghdad.
KRG does not have monetary policy problems with Baghdad, as in the federal system of governance the KRG does not have the authority to print its own currency. By this we mean the authority of monetary policy and the amount of currency need to be printed and dealt with in the local market. The size and capacity of Iraqi government monetary policy is 60 trillion Iraqi dinars and out of this, 39 trillion Iraqi dinars are dealt with in local market. KRG does not have any problems with why Iraqi government only prints 60 trillion Iraqi dinars. Erbil has not bothered itself why Baghdad only sends 39 trillion Iraqi dinars to local market out of that amount. Therefore we can argue that Erbil does not have any dispute regarding monetary policy with Baghdad. The only issue the Kurds have with Baghdad is that the Kurdish language has only been printed in 50,000 Iraqi dinars and that their language does not appear on all the other currency notes.
The KRG have not yet concerned itself with loans, mechanisms to receive government loans and how to pay them back either. This also comprises the policy of issuing and printing Iraqi dinar currency notes. However, issues arise and get complicated when we talk about financial policies. Several question emerge and these are: Where does money and revenues come from? How are they received? How are they spent?
These become major issues in KR-I and Baghdad financial relations. Both articles of 117 and 121 have granted the KR-I some sort of autonomy and as per these two articles, the KRG has the right to practice a financial policy of decentralization. The political and administrative system of Iraq is decentralized and due to this, KR-I has some independence. For example no Iraqi citizen has the right to ask why the political parties within KR-I behave the way they do and no one asks why the structure of KRG is the way it is. Contrary to KRG, Iraqi federal government is a centralized system and article 110 of the Iraqi constitution refers to the centralized financial system of Iraq. Even though the financial system of Iraq is centralized, the Iraqi government has granted some sort of a decentralized financial system to KRG. As a result of granting this semi-autonomous financial system to KRG, the region has been able to formulate its own financial policy and even generating revenue and income for itself independently from Baghdad and central authority.
What are the dynamic causes behind the financial predicament between KR-I and Baghdad?
There are several causes for the currently existing financial predicament between Erbil and Baghdad and these predicaments are not natural byproduct. We will highlight the main causes for the financial predicament affecting the Kurdistan region and Iraq.
First, the Iraqi federal system is an exceptional system different from the federal systems of Canada and the United States of America. The existence of one federal region of Kurdistan within Iraq has made the Iraqi system on the one hand distinctive and on the other hand has reduced the numbers of supporters of such a federal system mainly in the Arabic populated regions of Iraq. For instance, if the Basra region of southern Iraq was to become an autonomous and federal region then the Kurdish region in the north and Basra in the south could have had a better coordination to add more pressure on Baghdad. As a result of this, federalism as a governing system could have been more established in Iraq.
Second, in article 111 of Iraqi constitution, it is stated that all oil revenues of Iraq belong to the federal government and not to the KRG. As a result of this, all oil and gas revenues should be handed over to the capital in Baghdad. Article 122 number (1) states that all pre-2003 oil fields and their revenues belong to the federal authorities in Baghdad. According to this article the drilling of oil, marketing and their revenues of all those fields should be controlled by Baghdad. Similarly, Article 122 number (2) of the constitution says that all other oil fields to be explored by KRG should be in coordination with Baghdad especially the explorations, drillings, producing, and marketing of such oil fields should be handled together with Baghdad authorities. However, KRG authorities have explored oil and exported it without coordination with Baghdad. Furthermore, KRG authorities have not returned revenues generated from such oil fields to the federal government in Baghdad.
Third, the oil contracts in KR-I are another cause of the financial predicament between Erbil and Baghdad. Even though KR-I was successful in inviting major oil companies to invest in their region and have signed many contracts with IOCs, however, due to the lack of transparency and “illegality” of such contracts, the financial relations between Erbil and Baghdad have aggravated. All the KRG oil contracts, due to their “unconstitutionality”, are product-sharing contracts. Product-sharing contracts are considered the worst kind of oil contracts because out of 100 Barrel of oil 56 barrels go the contracting company and only 46 go to the KRG.
What are the impact and implications of financial quandary involving Erbil and Baghdad?
If the financial standoff between the KRG and Baghdad does not end soon, there will be some costs and below we will briefly tackle them:
First, due to the lack of statistics, the KR-I and Iraqi governments have always disagreed about the exact number of Kurdish population within Iraq since 2005. The Kurdish authorities claim that the Kurds comprise 25% of Iraqi population but the Iraqi authorities say that they only constitute 12% of all of Iraqi population. Ultimately both sides agreed that the Kurds comprise 17% of the whole Iraqi population. Based on this agreement the KR-I allocated budged has been 17% of Iraqi national budget. It is expected that due to the latest political and financial standoff in Iraq, the Iraqi authorities might reduce the allocated KR-I budget form 17% to only 12%. Now, we witness that Baghdad has withdrawn from the previous arrangement in a step toward reducing the Kurd’s share from 17% to 12%.
Second, Iraqi authorities intend to control all oil, border, and airport revenues. The Iraqi authorities claim that as per the constitution, all these revenues should be controlled by Baghdad.
Third, as the KRG revenues decline, it is expected that the KRG falls short of paying its civil servant and teacher salaries and this will affect the livelihood of all the people residing in KR-I, particularly civil servants who are only relying on public payroll.
Fourth, Iraqi federal authorities diminish the powers of KRG and limit its sovereign powers over (Airports, Border crossing points, granting visa as an example) in all over Kurdistan region.
Fifth, the amount of the overdue KRG international debts will be greater than before because:
1. The KRG will neither be able to pay nor remain committed to the entire amount it currently owes as a result of the financial crisis afflicted on the region.
2. The central government in Baghdad will not shoulder the responsibility for such debts because Baghdad argues that the KRG acted against the constitution and Baghdad was not consulted, therefore Baghdad will not be reliable to pay back the loans the KRG had borrowed.
3. The KRG will be forced to deal with its own financial problems. The KRG has to repay not only the international loans it had received but also the cost of borrowing them, which is nearly 8% of the amount. If the KRG is in arrears and cannot afford paying back its debts, these debts will accordingly keep increasing day by day.
Solutions and Scenarios
The solutions and scenarios for the future of the financial relations involving Erbil and Baghdad are not primarily about money, as between 2005 to 2015 Baghdad sent 100 Trillion Iraqi Dinars to the KRG. The main cause for the current financial crisis affecting Kurdish region was not a lack of money but rather a lack of a sustainable management and administration of the budget. In order to resolve its current financial crisis, the KRG should follow these steps below:
First, the KRG should cut off the salary of all ghost employees.
Second, the KRG should hold dialogue with Baghdad immediately.
Third, the KRG should make financial reforms, especially reviewing and modifying its oversized civil servant and public employees. Only by doing so and preparing a transparent list of all the civil servants to Baghdad, the Iraqi government can check, revise and then finally pay public employees of Kurdistan.
It is expected that the federal authority in Baghdad will follow and respect the constitution of Iraq. Iraq will only follow the constitution of 2005, for which the majority Iraqis had voted. And it is in the light of this constitution that Iraqi government permits and grants the KRG to exercise its limited power.
There are only two possible scenarios for the Iraq government to pay KR-I civil servants:
First, after reviewing the final draft of the list of all public employees and civil servants in KR-I, Baghdad approves sending and distributing salaries not through the KRG authorities but through the governorates within KR-I.
Second, the other scenario is that the KRG will be split into two autonomous and decentralized administrative regions and Baghdad deals with Erbil and Sulaimani separately.
The underlying reasons for the current financial impasse involving KR-I and Baghdad dates back to the period in which the KRG authorities decided to opt for an independent economy. And in order to do that, the KRG authorities resorted to exporting oil independently from Baghdad. KRG authorities exported oil without transferring the revenues they generated from independent oil sale to Baghdad.
If the KRG does not attempt to immediately sort out its financial relations with Baghdad, the KRG will face more serious and damaging financial crisis in the future. This is because the KRG has lost the control of its major oil field in Kirkuk and other disputed areas. This will weaken the KRG, which consequently leads to its inability to pay its civil servants and public employees. In the past few years, the KRG did not have any financial problems. Its real problem was not a lack of money and cash, but rather a lack of a sustainable and successful administrative and management system of its own budget.
To overcome the current financial and political problems afflicting the region, the KR-I must engage in a constructive dialogue with Baghdad, make financial and political reforms, and coordinate with Baghdad so that they together afford to pay civil servants and public employees. If there is no change taking place in neighboring countries – and if a war is not waged between the proxies of Iran and Saudi Arabia – the most possible outcome and scenario is that Baghdad will pay civil servants in KR-I separately and that process will be through each of the governorates of Kurdistan and not through the KRG.