Economic Reforms in the Kurdistan Region of Iraq

On November 17th, 2016, 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. A report on Dr. DeWeaver's research and outcomes of the roundtable was then published in English and Arabic.

Dr. Weaver, an economist specializing in emerging-markets, and principal at Quantrarian Capital Management, which invests on the Iraq Stock Exchange (ISX). He joined IRIS as a non-resident fellow in the fall of 2015, and has since published two instalments of the IRIS Iraq Report focusing on economic issues in Iraq and the KRI.

His current research focuses on the Kurdistan Regional Government’s reform agenda, looking into new civil servant identification policies, subsidies reform, the resolution of overdue state-sector payables, and tax collection.

Representatives of leading companies from the local economy, including oil & gas, capital management and trading, insurance, construction, and medical services  participated in the roundtable discussion. AUIS students and graduates working in the private sector were also in attendance.

Roundtable Participants:
Bayad Jamal- CEO, Bayad Co; Dana Katib- Suli Provincial Council, Head of the Interior Committee (Asaich and Police) and Head of Natural Resources & Energy Committee; Karwan Hamasalih Qadir- CEO, UD Company; Talan Aouny- CEO, Erbil Manpower; Dr. Diar Ahmed- Managing Director, IraqCom Technologies; Alexi M. Azouri- General Manager, BBAC Bank; Ahmed Ameer- Associate, Raabee Securities; Nyaz Najmadin- Head of Economic Department, Komar University; Jamal Ahmed Hassan- Suli Office Amdminstrator, Genel Energy; Meer Ako- Consultant, Inventis; Michel El Amm- Suli Branch Director, Byblos Bank; Fahratin Sumer- Head of Business Dep., AUIS; Dara Khailani- Advisor, Office of the Deputy Prime Minister; Twana Naqshbandi- Operation Manager, MTC Iraq; Jamil Ali- Lecturer, Suli Uni; Sharyn C. Fitzgerald- Economic and Commercial Affairs Officer, US Consulate.

Dr. Mark DeWeaver started the session by establishing the two basic policy objectives the Kurdistan Regional Government (KRG) needs to achieve if it is to reverse, or at best stabilize, the effects of the ongoing economic crisis: reduction of expenditures and an increase revenues. During the ensuing discussion, Dr. DeWeaver and roundtable participants discussed and debated how the KRG might realize those objectives.

Reducing Expenditure: The civil servant biometric identification program
Dr. DeWeaver first discussed the civil servant biometric identification program as a policy instrument used by the KRG to cut public spending. The program, meant to prevent double registration of a civil servant or the registration of fictitious employees to government payroll, has in theory existed for over five years. However, as Dana Katib, Sulaimani Provincial Council member, pointed out, lack of funding and issues with the centralization of data have in the past impeded implementation. With the KRG currently showing more will to seriously register its employees, roundtable participants discussed prospects for success.

Participants also discussed the question of public employment, and claimed that private sector support policy could enable small and medium enterprises (SMEs) to thrive, thereby offering people viable employment alternatives. In that vein, Karwan Hamasalih Qadir, CEO of UD Company, further claimed that the government already supports large companies, and does thus extend and adapt existing policies to SMEs.

Reducing Expenditure: Phasing out energy subsidies
Dr. DeWeaver then addressed the issue of government energy subsidies, discussing more specifically what he called the KRG’s “two main burdens:” electricity and refined oil. For the latter, he argued that decreasing oil prices, as well as the subsidization mechanism used, have allowed the KRG to gradually withdraw subsidies on petrol without end users bearing too much of the cost. Subsidizing refined oil in the KRI in fact happens through a toll exchange between the Ministry of Natural Resources and refiners, whereby no cash is actually exchanged. Crude is channeled to refineries, and refiners are paid for their services by participating in government-led auctioning of refined oil, which they can then sell on local markets. That said, Dr. DeWeaver also highlighted that selling refined oil on international markets instead of using it to pay refiners could importantly increase the KRG’s revenues.

On the other hand, the elimination, or at least the reduction, of electricity subsidies, will be more difficult to implement politically. As Dr. DeWeaver explained, the KRG will face challenges if they try to collect higher tariffs from users in a context where most of those users are government employees who have not received salaries in months. He suggested that a privatization of the electricity sector could allow the KRG to transfer this collection task onto private companies, thereby reducing the political cost associated with phasing out subsidies.

Increasing Revenues: Implementation of taxation measures
The implementation of existing taxation measures has been a topic of interest to those following economic reforms in the KRI. Dr. DeWeaver sought, through his research, to understand the sectors that would be targeted by those measures, as well as the extent to which taxes would be applied by the KRG. While answers to those questions remain unclear, feedback from roundtable participants, points to support for the development and establishment of a tax system in the semi-autonomous region.

Talan Aouny, CEO of Erbil Manpower, as well as Ahmed Amir, associate at Rabee Securities, specifically argued for more transparency, and a general government structure reforms when it comes to private sector regulation, support, and taxation.

Dr. Diar Ahmed, managing director at IraqCom Technologies, further discussed this issue of reforms, highlighting the ways through which the ongoing political crisis has hindered economic reform. “When you have political reform, you have a reform; when you don’t have a political reform, you don’t have anything,” he claimed. A general conclusion was in fact that this political reform must pave the way towards more transparency in the KRI. This, it was argued, will be key to preventing the economic crisis from deepening.