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How can Erbil respond to Baghdad’s budget cuts?

On April 16, Iraq’s caretaker Prime Minister Adil Abdul-Mahdi called on the finance ministry to halt budget transfers to the  Kurdistan Regional Government (KRG) and to take back all transfers made since January 1, 2020, a move that has been described by the KRG Prime Minister Masrour Barzani “a political trump card to punish the people of the Region.”

Baghdad said the KRG has failed to deliver its quota of 250,000 barrels per day (bpd) of oil to the state marketing firm SOMO in exchange for its share of the budget.

The oil-for-budget agreement between the KRG and the Iraqi federal government had been years in the making. The KRG started exporting its oil independently of Baghdad via its own pipeline to the Turkish port of Ceyhan in 2013.

The independent oil sales infuriated the Iraqi government of Nouri al-Maliki, which cut the Kurdistan Region’s share of the federal budget from 17 percent to zero in 2014.

The move coincided with the outbreak of war with the Islamic State group (ISIS), a massive displacement crisis, and the collapse of world oil prices, which coalesced to plunge the Kurdistan Region into financial crisis.

The Region has been steadily recovering since former Iraqi PM Haider al-Abadi reinstated a portion of the KRG’s budget in late 2018 and Abdul-Mahdi secured a bigger lump sum under the 2019 budget.

In return for its 12.67 percent share of the 2019 federal budget, the KRG was supposed to send SOMO 250,000 bpd, but has consistently failed to do so, claiming contractual arrangements and debts owed to foreign oil companies prevented the handover.

The arithmetic behind the December deal has no doubt been shaken in recent months by the ongoing political crisis in Baghdad, the collapse of world oil prices, and the economic slowdown sparked by the pandemic.

Iraq depends on oil sales for 90 percent of its state revenues. Painful austerity measures are expected if Baghdad is to weather the financial storm.

Three Kurdish political and economic experts Rudaw’s Hiwa Jamal on Monday  to analyze motives behind Baghdad’s decision  to cut the Region’s budget share and to present possible solutions to loosen the noose around the KRG.

Dr. Osman Ali, head of the Task Research Center described “unity” as the key factor for Kurdish parties to be able to weather the current economic crisis and political stalemate with Baghdad.

“If Kurds do not put their house in order, we will not be able to capitalize any new developments and eventualities,” he said.

Ali argued that Kurds should capitalize on the current political and economic instability gripping Baghdad and turn the whole situation in their favor.

“Economically Iraq is bankrupt. There is a constitutional crisis. [Shiite] militia groups are in control of the country and the [months-long] protests are still ongoing. It has reached a level making it extremely difficult to control. After coronavirus, all these accumulated issues will explode,” Ali said.

Political reform before economic reform

Kurdish political parties, be them opposition or those that have formed the ninth cabinet of the KRG do not enjoy good relationships in recent months, including the ruling Kurdistan Democratic Party (KDP) and Patriotic Union of Kurdistan (PUK).

A potentially explosive standoff between rival Peshmerga units affiliated with KDP and the PUK in a region of Erbil province called Zini Warte is the latest in a string of escalation between the two parties.

“All political forces in the Kurdistan Region have to be united, especially at this time when there is the corona[virus] issue and an economic crisis in the Kurdistan Region and Iraq,” Kurdistan Region President Nechirvan Barzani told a press conference in Erbil last week.

The two parties and their affiliated security forces dominate their own respective spheres of geographical and economic influence inside the Kurdistan Region – a remnant of the brutal civil war of the 1990s. They have since worked together to govern the autonomous Region.

“We need a political reform in the Kurdistan Region, before any economic reform plans. This is what best serves our interests,” Ali said.

He listed a number of crises that the KRG has failed to tackle,  with  a lack of transparency at the top.

“The four to six months ahead  are very crucial and decisive for us. We must hand over the oil and gas portfolio to an [independent] board as it is the case in many other countries,” Ali said. “Oil revenues should be deposited in a bank. This sector must become transparent and the bank should not belong to any political party.

“This move is very important,” he reiterated.

The time has come for the KRG to collect its debts from companies, Ali added.

“We have plenty of domestic revenues. The KRG must call on the companies, who according to my information owe the KRG more than 800 billion dinars. The companies must repay the debts.”

The Kurdish expert criticized the government for lack of transparency in border-crossing revenues.

“There is massive corruption and embezzlement at the border crossings,” he said, urging the KRG to reorganize this sector.

Why are the Kurds weak in Baghdad?

Dr. Abdulla Aliyawi, a former presidential advisor in Baghdad listed a set of factors contributing to a weak Kurdish presence in Baghdad.

“First, Kurdish parties in Baghdad, particularly the KDP and PUK must build trust among them. In the past we were strong in Baghdad because there was a strong relationship between Mr. Masoud Barzani and Mam Jalal,” Aliyawi said, referring to late Iraqi President Jalal Talabani.

“Second, parliamentarians that we send to Baghdad must speak Arabic and have a strong political background. They must make friends with other parliamentarians. They must have strong friendly relationships with MPs from all sides,” he said.

“Ministers also must have strong political backgrounds. They should be active and fight against some political  decisions that do not favour us,” he added.

“Third, we must have a strong KRG office in Baghdad and be active. The one we have is only exchanging papers back and forth between Erbil and Baghdad,” he lashed out at the KRG representation office in the Iraqi capital.

“Fourth, the KRG must in a very transparent way, hand over its oil and gas papers to Baghdad, our MPs and ministers. Sometimes they criticize that the KRG does not inform them about what it does in oil and gas sector,” he continued.

“We have a strong trump card in our hand, which is water. The KRG can use it. We have to finish the Bekhma dam and make it full of water,” the former presidential adviser added.

The Bekhme Dam is an unfinished multi-purpose rock-fill dam on the Great Zab river, 60 kilometres northeast of Erbil. The main purposes of the dam would be to produce 1,500 MW of hydro-electricity and to manage flooding.

“Fifth, it feels as if the KRG delegation goes to Baghdad for a picnic. They come for one day and immediately return. They make no coordination with Kurdish representatives in Baghdad when they travel there,” he criticized.

Natural gas – a strong weapon in the hands of the KRG

The United States has just granted Iraq another sanctions waiver to import energy from Iran, despite ongoing tensions between Washington and Tehran. The new waiver is scheduled to expire on May 26.

Iraq has suffered chronic power shortages since the 1990s, made worse by decades of war, sanctions, and terrorist attacks, leading to daily blackouts.

To make up for the shortage of domestic power production, Iraq has been importing Iranian electricity and gas to fire its power stations, much to the ire of Washington.

The Kurdistan Region has sought to boost its energy production through largely untapped natural gas reserves.

Dr. Hemin Mohammed, an expert in energy and geopolitics believes the KRG possesses enough gas to meet Iraq’s needs in this sector.

“If Iraq no longer has access to Iran’s gas, then it will have to spend $10 billion and wait for five years to stand on its feet in this sector,” Mohammed said. “But if they import the Kurdistan Region’s gas, they will need just two years to stand on their feet.”

“But Iran never wants the KRG to become a gas alternative to Baghdad,” he added.

Can we give up on Baghdad?

“At this stage, we cannot do it, because our only source of income is oil,” Mohammed said, echoing that Baghdad’s decision to cut the KRG’s budget share is “politically motivated” because “Baghdad does not need the KRG’s 250,000 bpd.”

“Baghdad does not want the KRG to sell its oil and gas because oil, border customs, airports are sovereign matters,” he said, accusing Baghdad of having no  “goodwill” towards the Kurdistan Region.

“Those who wield power in Baghdad are against the KRG entity,” he concluded. Source