On October 22nd 2015, the Institute of Regional and International Studies (IRIS) at the American University of Iraq, Sulaimani (AUIS) hosted a roundtable discussion on the economic crisis in the Kurdistan Region of Iraq (KRI) led by non-resident IRIS Fellow, Dr. Mark DeWeaver.
Dr. Weaver, an economist specializing in emerging-markets, and principal at Quantrarian Capital Management, which invests on the Iraq Stock Exchange (ISX), conducted fieldwork on the local economy for three weeks in Sulaimani and Erbil with five AUIS student assistants. Their research will culminate in a report on “Kurdistan’s Great Recession: Boom and Bust in a Rentier State” examining the combined impact of the drop in oil prices and KRG budget crisis on all major sectors of the economy.
Representatives of leading companies from the local economy, including oil & gas, capital management and trading, insurance, construction, medical services, and agriculture participated in the roundtable discussion. AUIS students and graduates working in the private sector were also in attendance.
Aaron Daviet, Christine Milner, Lisa Kalajian, Dler Saber Mohammed - U.S. Consulate; Bastien Cabrol, Muhammed Feazi - French Consulate; Kamran Karadagh, M.D.; Bnar Salah - Head of CSR for Sulaimani, Genel Energy; Diyar Kakel - CEO of Vano Group; Tahsin Qader - Chairman of PlanCo; Rami Yassir - Managing Director of Rabee Securities; Choman O. Ibrahim - Managing Director of Sardar Group; Dana Jaza - Member of the Sulaimani Provincial Council, AUIS alumnus; Rebaz Qaradaghi - Business Development Coordinator at Kelkan; Adel Aldeiri - Medical Insurance Manager at Dilnia Insurance; Alan Atoof - Director of Advancement at AUIS; Jared Levy - Director of Research at Iraq Oil Report; Patrick Osgood - Kurdistan Bureau Chief at Iraq Oil Report; Rashid Ressul - Iraq HR Manager at Viking Oilfield Services; Ali Kurdistani - Analyst; Bilal Wahab - Professor and Director of Center for Development and Natural Resources at AUIS; Fahrettin Sumer - Professor of Business Administration at AUIS.
AUIS Student Research Assistants:
Azheen Ifuad; Manesht Saadoon Al-Rubaye; Sarah Jabbar Razooq; Hakar Ghanem; Salam Abdullah Ali.
Dr. Mark DeWeaver opened the session with a discussion of the main aspects of his research findings. He compared multiple types of economies noting that investment cycles in the rentier economy, unlike others, are not so much self-regulating cycles as booms and busts largely dictated by exogenous factors (e.g. oil prices). Dr. DeWeaver provided quantitative examples -- real estate, development project licensing, sharply falling oil production and rig counts, cement and even high-end consumption products -- of the economic recession based on data collected during his trip to demonstrate the extent of the current crisis.
Dr. DeWeaver noted that a mitigating factor unique to the KRG is the large number of middle-income households from war-torn areas in central and southern Iraq relocating to the KRI, creating occupancy for what would be otherwise empty apartments. Local families previously residing in such housing have since moved to higher end places, which they can now afford due to the overall drop in rent. Iraqi Kurdistan’s largely cash-based economy, which has left investors and developers with less debt and fewer bankruptcies than other emerging markets that have experienced recessions, has also mitigated the impact of the crisis.
In conclusion, Dr. DeWeaver presented policy recommendations to address the economic crisis: economic diversification, a KRG bond market and/or sovereign wealth fund, tariff protection for local industry, and an integrated banking system. These recommendations and more will be more comprehensively explained in Dr. DeWeaver’s upcoming IRIS report on the economy.
Following the presentation, attendees provided feedback and insight on their firsthand experiences with the local economy. Bnar Salah, head of CSR at Genel Energy in Sulaimani, stressed the remaining promise in the KRI oil sector despite current challenges. If Genel continues to receive the government payments it has the past two months, the company can restructure spending and adapt operations to the current situation. Dana Katib, member of the Sulaimani Provincial Council and AUIS graduate, stressed that the most important factor in the recession is that the KRG behaves like a rentier state. Its dependency on oil is the main problem that needs to be solved in the long term. To recover from the current crisis, however, the short term plan should be to pay public functionaries in order to quell protests, restore stability, and create a favorable investment climate.
Expanding on the topic of agriculture, Dr. Diyar Kakel, CEO of Vano Group, argued that economic indicators for Iraq should include statistics on the consumption of food and beverages, which offer insight into local production (or lackthereof) and income level. For instance, roughly 800 thousand tons of meat are consumed in Iraq per year. 680 come from Turkey, the United States, and Brazil. In the KRI, per capita consumption used to be 3 kg per year before the economic boom. It then jumped to 45 kg year, but has since dropped to 23 kg since the crisis started. These indicators provide a solid sense of the impact of the economic recession at the household and individual level. Dr. Kakel concluded that in his experience imposing tariffs on agricultural imports does not solve the problem. Instead, the private sector should encourage local production.
Tahsin Qader, Chairman of PlanCo. General Contracting, added that water is key to advancing the agricultural sector. The KRI and Iraq have failed to build dams and irrigation systems to manage their 30 billion cubic meters of water resources. Qader argued that the current crisis was not the failing of average citizens, but of leadership who focused solely on exporting oil, and did not diversify the economy. In addition, decades of work that have been put into building trust between the public and banks has been almost completely destroyed by the current crisis. People now prefer to place their money in foreign banks or in their homes.
Alan Atoof, former spokesman at the Ministry of Natural Resources and recently appointed Director of Advancement at AUIS, cited the bloated public sector as one of the KRG’s main problems. Two major challenges prevent reduction in the government payroll : the lack of political will and lack of legal framework. The KRG should write legislation to create pensions and social security systems in the private sector to incentivize employees to migrate from the public sector.
Elaborating on the point of social safety nets, Adel Aldeiri, a medical insurance manager at Dilnia Insurance, stressed that the private sector fails to offer sufficient employee benefits. If the goal is to encourage the private sector to institute economic reform, sector employees must be empowered. The current means of compensation for the cost of healthcare is to provide a fixed monthly payment that amounts to a fraction of the cost of care should a real medical issue arise. If more people used private hospitals, income would go up and quality of services would improve, removing pressure from government facilities. Aldeiri concluded that illegal insurance companies ruin the market for legitimate service providers like Dilnia, which paid a 10 million USD licensing fee that is not enforced across the board by the government.
Rebaz Qaradaghi, a business development officer at Kelkan Contracting, raised the issue of vague taxation policies as a problem in the KRG’s private sector. Jared Levy, director of research at Iraq Oil Report, built on this point; his research shows that private equity professionals looking to invest in the KRI have two consistent reservations: the perception of a lack of legal protection, and internal political relationships between different branches of the government.
Rami Yassir, managing director of Rabee Securities, ended the discussion arguing that high priority should be given to banking sector reform and educating companies on the benefits of participating on the ISX. The KRI currently lacks a functioning banking sector, required for economic growth in any sector. During the economic boom, there were fifteen reliable banks, but today there are only five.
IRIS will publish a full report with the Dr. DeWeaver’s findings in early December.
For the full report, click here.