I have no doubt that the economy of the Kurdistan Region will experience significant growth as early as next year. There are several reasons why.
After ISIL overtook Mosul in August 2014, the Peshmerga, Kurdistan’s defense forces, showed immense bravery in their fight, preventing the terrorists from taking Erbil and moving deeper into Iraqi Kurdistan territory. The news was all the more devastating considering that the U.S. and its allies had previously trained and equipped hundreds of thousands of Iraqi soldiers and policemen, who fled the 1,500 ISIL fighters, handing over expensive U.S. weaponry, while the Peshmerga defended the Kurdistan Region with decades-old rifles.
Before the emergence of ISIL, the Kurdistan region of Iraq experienced an economic “golden period,” with investments pouring in from all sides. Erbil, Suleimania and Dohuk looked to diversify their local economies, investing in the cement industry, tourism and the real estate industry. The Kurdistan Regional Government-Iraq (KRG) was referred to as the “next Dubai.” In 2011, FDI magazine ranked Erbil fifth in terms of opportunities for direct foreign investment and one of the most business-friendly cities in the entire Middle East.
The ISIL attack on Kurdistan coincided with a dramatic drop in oil prices, forcing a rebalancing of budgets in most of oil revenue-driven economies, including Kurdistan. To make matters worse, 1.8 million refugees, mostly from Iraq and Syria, looked for a safe haven in the Kurdistan Region. The Iraqi central government’s payment of 17 percent of total revenues to the KRG, required by the Iraqi constitution, had not been honored by Baghdad due to internal political rifts. Moreover, the KRG struggled to meet its monthly obligations, which exceeded $1 billion. During the golden period, the KRG hired one out of six Kurds to work for the government, creating a monthly payroll obligation of more than $700 million.
Progressive investment laws
In the midst of it all, the KRG launched a comprehensive set of reforms to modernize its economy.
To bring transparency into its oil sector, the KRG hired Deloitte to audit its oil production, exports and revenues. In partnership with the World Bank, the KRG committed to reforms in the electricity sector, with a goal to privatize electric providers and reduce domestic production costs by 40 percent. It installed meters for electricity usage both to stabilize the system and collect revenue, as many people were exploiting Kurdistan’s electric grid, adding to a significant deficit in the electricity balance sheet.
In an effort to curb corruption and enhance transparency, the KRG, again with the World Bank, introduced an electronic payment system to its employees, accounting for about 65 percent of the labor force in the Kurdistan Region. The process included the registering and issuing of biometric cards for government employees, including the Peshmerga forces. This task was completed recently, creating a fiscal order for about 1.4 million employees while also eliminating so-called “ghost employees” and those that were registered (and paid for) twice. The KRG also began to reduce salaries, remove subsidies on gasoline and eliminate various allowances that were draining the budget.
The investment law that the KRG launched in 2006 was one of the most progressive laws of its kind in the entire Middle East. The law treats foreign and local investors equally, allowing them to buy and own land for investment purposes, accommodating full ownership of capital, the ability to repatriate profits in full, and a 10-year non-custom tax break after the beginning of production, among numerous other incentives.
Abundant natural resources
The Kurdistan Region has been divided in to seven blocks for exploration and investment on the bases of suitable target areas: Blocks 1 and 2 in Duhok governorate; blocks 3 and 4 in Erbil governorate, and blocks 5,6 and 7 in Sulaymania Governorate.
Mineral exploration and development are investments. They hold forth the promise of rewards for private companies, governments and local communities. In June 2016, the Ministry of Natural Resources of the KRG invited expressions of interest from qualified international mining companies for the “Mineral Exploration & Investment in the Kurdistan Region-Iraq.” More than 10 regional and international mineral companies showed their interest to submit a proposal to invest in the mining sector in Kurdistan Region.
Kurdistan’s oil is sold to markets in Europe, the Middle East and Asia. Last month, the KRG signed an agreement with Russian oil giant Rosneft to develop its exploitation and production. They agreed on the monetization of an export oil pipeline along with several production sharing agreements, as a result of Rosneft’s direct purchase of Kurdistan’s crude oil for its refineries in Germany. In 2016, pipeline oil exports from the KRG to Turkey reached 500,000 barrels per day, while truck exports of heavier crude oil to Turkey currently average around 38,000 barrels per day. Kurdistan has proven natural gas reserves of 703 bcm and an estimated 5.6 tcm of unproven reserves. The KRG-Turkey Gas Sales Agreement signed in 2013 foresees plateau export of 10 bcm annually by 2020, with the option of increasing export capacity to 20 bcm per year.
Baghdad’s efforts to undermine Kurdistan’s direct oil exports are proving to be ineffective. Every barrel of oil exported by the KRG has found a buyer. Actions to prevent the Kurdistan Region — which passed its own oil and gas law in 2007 — from selling its oil directly are of pure political nature. Article 115 of the new Iraqi constitution states that “all powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organized in a region. With regard to other powers shared between the federal government and the regional government, priority shall be given to the law of the regions and governorates not organized in a region in case of dispute.”
In an ever-complex and changing Middle East, one thing is clear: nothing will remain the same after Sept. 25, when the Kurds are expected to vote overwhelmingly in favor of independence for the Iraqi Kurdistan Region. Although the time of the actual proclamation of Kurdistan independence is not set yet, the referendum, in spite of internal political rifts, will strengthen KRG’s position, and there is little doubt that investors will take notice. The road to recovery has begun, and with the ongoing reforms, there is a general feeling that Kurdistan has turned the tide.
• Sasha Toperich, Ph.D., is a Senior Fellow and Director of the Mediterranean Basin initiative at the Center for Transatlantic Relations, SAIS, at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University in Washington, D.C. He is also a Fellow at the Soran University Research Center in Iraqi Kurdistan.