If the Iraqi Kurdish region manages to reform its oil industry, it could become a model for the whole of Iraq.
Iraq is one of the most corrupt countries in the world and oil has a lot to do with it. With nearly $100bn in annual revenues coming from oil, which constitutes 90 percent of its budget, the country is a great example of what political economists call “the resource curse”.
Over the past two decades, very little of that money has been spent on improving the lives of ordinary Iraqis. Instead, through vast networks of patronage, Iraq’s oil wealth has been distributed among a select few.
Oil has empowered the ruling political elite and allowed it to continue stifling progressive voices in society, undermining the judiciary, weakening the institutions that provide services to the general public and dodging accountability.
It is this corrupt and dysfunctional system of governance that led to the outbreak of mass protests in early October in major cities in Iraq’s centre and south.
Although the semi-autonomous Kurdistan Region of Iraq (KRI) did not experience demonstrations this time around, it has had them in the past. The Kurdistan Regional Government (KRG), like the central government in Baghdad, also suffers from pervasive corruption, cronyism and nepotism.
In July, when Masrour Barzani took up the position of KRG’s prime minister, he announced that one of his top priorities will be to address these issues. In November, speaking at the Middle East Peace and Security Forum at the American University of Kurdistan in Duhok, he said: “We have stopped corruption. Nobody can rely on a friend of a friend to get things done anymore.”
By all accounts, this is a bold statement that offers hope for the future of a region riddled by corruption and misuse of public money for decades.
To Barzani’s credit, people I talked to during my last trip to the KRI in November admitted smoother processing of documents by various government departments and employees abiding by official office hours. It was clear that the screws are being tightened across government institutions to ensure better services.
This is a significant step and makes life easier for common people in the KRI. However, greater discipline for civil servants only scratches the surface of Erbil’s corruption problem. The behaviour of state employees is by far not the main concern of KRI’s population.
They care much more about the lack of transparency in the oil sector, the mismanagement of oil revenues, and the extensive control of the economy by the two main ruling parties – the Kurdistan Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK).
In the absence of strong institutions, laws and regulations, local parties and officials, foreign countries and international oil companies have seized chunks of the KRI’s oil sector, exploiting them to their own benefit, with little trickling down to the general population. This is what the people of the Kurdish region want to stop. This is the type of corruption they want to see combated.
The corrupt and untransparent way in which the oil sector is run in the KRI threatens the stability of the region. It has already fuelled grievances at the grassroots level. People keep asking about oil revenues while the youth is getting increasingly frustrated with the lack of economic opportunities.
The actors in the oil sector have become deeply embedded in the system and will resist any changes to the status quo. This is why, efforts to reform the industry must start with strengthening the rule of law, and the judiciary, and anti-corruption bodies such as the Commission of Integrity of Kurdistan; in order to be effective, these institutions will require political backing and political commitment from the executive branch so they can hold people and companies accountable.
In parallel, the KRG should move to make the oil sector more transparent. Implementing the 2015 oil and gas revenue fund law could be a starting point. It would provide public accounts of the revenue the KRG sells on the domestic, regional and international markets, which would not only help ensure that these funds are properly distributed afterwards, but it would also build the trust of the public and investors in the oil sector.
The KRG must also seek to end its long-standing dispute with Baghdad over oil revenues and budget allocations. Erbil has refused to hand over its oil sector to the federal government, while Baghdad has failed to fulfil its financial obligations towards the KRI. This dispute, to some extent, has also led to lack of transparency in the oil sector in the region since the KRG potentially underreported how much oil it sold and how much it earned to ensure its share of the national budget would not be slashed based on its earnings.
This dispute has been to the detriment of the Kurdish people who have had to suffer a lot due to Baghdad’s decision to cut its transfer of budget allocations to the region. This also encouraged more corruption as it made unreported revenues available for abuse by individuals and companies.
Thus, a comprehensive agreement between the KRG and the federal government could also contribute to fighting corruption in the region.
Reform in the oil sector must also go hand-in-hand with economic diversification, which is also crucial for reducing corruption, creating job opportunities for the people, and stabilising the economy of the region. Currently, there seems to be a confusion in the KRG about how to go about this process.
The diversification of the economy does not mean just encouraging agriculture and manufacturing in the region. Rather, it also needs to ensure that the government receives adequate revenues from these sectors and becomes less dependent on oil for its budget. That is why the KRG needs to strengthen its taxation system and develop a robust administrative body to run it.
Ultimately, developing a tax bureaucracy is a political decision. Taxation is not politically popular but it is necessary to decrease dependence on oil.
All of these reforms, however, will require full political backing not only from the prime minister and his party, the KDP, but also from his partner in government, the PUK. Currently, the PUK faces an internal crisis which started after the death of its leader Jalal Talabani in 2017.
The KRG’s reforms can only proceed if the PUK manages to get over its divisions and puts forward a united leadership. The party members have a chance to do that in December during their party congress.
Reforming the oil sector and promoting economic diversification are two very difficult processes to undertake. Barzani and his partners will have to make some hard political decisions if he wants to set himself apart from their predecessors and deliver results, improve governance, ward off instability and contribute to the happiness and prosperity of KRI’s population.
If the KRG is able to follow through with these reforms, reduce corruption in oil and stabilise its economy, then it can become a model for the rest of Iraq follow in its political and economic transformation.
Yerevan Saeed is a Research Associate at Middle East Research Institute.
Source: Aljezeera, December 1, 2019