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KRG shares of international loans to Iraq. By Lana Srdar Qader *

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For the past decade the Kurdistan Regional Government (KRG) had established what ended up being a false sense of financial security.  The KRG economy has been chronically dependent on oil revenues, be it coming from Baghdad or through independent oil sales. The pre-2014 economic boom resulted from high oil prices; however the KRG’s economic security was quickly shaken by the souring of relations with Baghdad, the invasion of the Islamic State (ISIS) and plummeting oil prices. The structural shortcomings of KRG’s economy became evident, as did the need for reforms. International loans to KRG could facilitate some of the economic reforms that the KRG sorely needs.

The KRG is in dire need of a cash injection.  Despite austerity measures, the KRG is still unable to pay salaries to public employees and pensioners regularly – about 1.4 million people.

Need for cash has incentivized KRG senior officials, most notably Deputy Prime Minister Qubad Talabani to seek international loans to alleviate the pressure of the economic crisis. Talabani and his team urged decision makers in Washington to grant the KRG a share of U.S. annual economic aid for Iraq.  Some supporters of the measure, such as senior U.S. representatives Ros-Lehtinen, D-FL. and Brad Sherman, D-Calif., who proposed a resolution on April 14 that requested the Department of State “provide assistance to the Kurdistan Regional Government to assist in meeting the needs of the internally displaced persons and refugee populations.” However Congress and Senate Foreign Relations Committee member Sen. Ben Cardin, D-Md., opposed the proposal, since U.S. law mandates that all aid intended for the KRG be directed through no other entity except Baghdad. Cash flow through the central government would also strengthen Baghdad’s leverage over the KRG, which the latter opposes.

The International Monetary Fund (IMF) is in agreement to grant $15 billion in international assistance over the next three years to Iraq. The loan is granted through a standby agreement, meaning that conditions such as lending terms (for example repayment must take place 3-5 years after the disbursement) and duration (12-24 months) would be imposed. Talabani has asserted that the KRG should get 17% of the IMF loan. Standby Agreements are primarily targeted at structural adjustments of a country, which is a condition for both Iraq and KRG. These structural adjustments target fiscal policies, privatization of the market, eliminating subsidies and incentives to attract foreign investment.

Even though these sound like positive adjustments to both the Iraqi and Kurdish economy, these conditions must be altered and target existing political institutions, which, if stable, ensure the most economic stability and growth. That is, IMF loans are not free money, but come with strings and conditions for the borrower’s ability to repay the loans in the future. For example, the loans cannot be spent on economically inefficient expenditures such as subsidies.

If these conditions are applied in a manner that reforms the KRG economy and boosts long-term standards of living in order to repay loans, it could be the external pressure needed to turn the current crisis into an opportunity for the country’s future.

The current crisis demonstrates that rent-seeking and extractive policies cannot sustain economic growth. Without reforming the economic institutions and diversifying the economy, this crisis will be first of many to come. This is where international pressure and advice could help. The time for reform is now, as head of the IMF’s mission in Iraq, Christian Josz said: “When countries are in financial crisis … it is a good time for reform when [they] have no choice.”

Lana Sardar Qader is a student at the American University of Iraq – Sulaimani.

Source: NRT, 5/15/2016


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