As oil prices dive, Iraqi Kurds seek to diversify economy

Mam Rostam (Iraq) (AFP) – Iraq’s Kurdish region has for decades lived off its oil wealth, but plummeting energy prices amid the pandemic and financial mismanagement are forcing locals to return to long abandoned farms.

Civil servants from the northern region’s bloated public sector have gone without pay and many are now turning back to agriculture and other businesses to make ends meet.

On a rugged hillside some 50 kilometres (30 miles) east of Arbil, the booming regional capital, vineyards are ripe for harvesting as a new source of income.

Abdallah Hassan, 51, a civil servant from the nearby village of Mam Rostam, has returned to harvest the grapes, used to produce raisins and vine leaves, for the first time in almost 20 years.

“There is hardly any work left for us and there are no salaries,” he said, complaining that the regional government now “only pays wages every couple of months”.

“It’s better for farmers to tend to their fields than wait for the payday or for charity.”

Hassan recounted how before the 2003 US invasion that toppled ex-dictator Saddam Hussein’s regime, the Kurdish region had survived on farming during years of painful sanctions.

Since then, in its drive to secure lucrative oil revenues, the autonomous Kurdistan Regional Government (KRG) had mostly abandoned agriculture.

Big investments from multinational energy companies have transformed the region, and Arbil has become an urban hub with skyscrapers and luxury hotels.

– Patronage networks –

This year, however, the Covid-19 pandemic and tumbling oil prices have taken a heavy toll, worsened by budget disputes with the central government in Baghdad.

The Iraqi economy, one of the world’s most oil-dependent according to the World Bank, saw its gross domestic product contract by about 10 percent this year.

Mohammed Shukri, chairman of the Kurdistan Board of Investment, said putting all of the regional economy’s eggs into the energy basket had proven costly.

“We’re rich when the oil price is high, and we’re poor when the oil price is low,” he told AFP. “I wouldn’t call this a healthy economy.”

Kurdish economist Bilal Saeed also argued the region’s leaders had made a strategic blunder by letting other sectors fall by the wayside.

“Instead of using that revenue to develop the agriculture, health and tourism sectors, the government of Kurdistan has focused mostly on developing its oil sector and ignored the rest,” he said.

Over-reliance on energy has also had a corrosive effect on Iraq’s state apparatus and fuelled corruption.

A World Bank report this year pointed to Iraq’s “failure to equitably share the benefits of oil wealth” and described a murky patronage system.

“First, the dominant parties use government payrolls to reward political loyalty,” it said. “Second, they use government contracts to enrich business people close to their leaderships. Third, money is simply stolen from the ministerial budgets for both personal gain and party use.”

It is a similar story in the Kurdish region, where lucrative state posts have long been handed out by the two main ruling parties, the Patriotic Union of Kurdistan and the Kurdistan Workers’ Party.

This has created a bloated public sector with over 1.2 million staff, around 40 percent them in the military and security sectors, out of a regional population of five million.

With its budget now bled dry and the KRG facing some $28 billion in debt, it decided in June to slash civil servants’ salaries by 21 percent.

But despite this, it has been unable to pay all of their wages on time, with the outstanding pay, accumulated over years, estimated at $9 billion.

– ‘Hit by cheap imports’ –

Shukri said that despite current woes, his investment board had granted 60 investment licences worth $1.5 billion, mostly in agriculture and manufacturing.

But how many projects will go ahead is uncertain at a time of growing impatience among local entrepreneurs.

Iraqi businesses face tough competition from imports from Iran and Turkey, whose currencies have been devalued while the Iraqi dinar remains indexed to the dollar.

Baarz Rassul, whose company Hend Steel produces 50,000 tonnes of cast steel per month, pleaded for “higher customs duties and better border controls”.

He said when he tried to diversify into agriculture, he found it difficult to compete with cheap imports and has since dismantled his greenhouses.

Saaed, the economist, said Arbil and Baghdad must work out a sustainable economic plan that serves both sides.

But that may be a tall order in the short term as Baghdad grapples with a massive deficit and has given no clear timeline of when it will approve a new budget.