Opinion: The economic case for a unified Iraq

Opinion: The economic case for a unified Iraq

With ethno-sectarian tensions at a high, observers, stakeholders, and policymakers of Iraq are calling increasingly for a break-up of the country along ethnic and sectarian lines. But a break-up would be economically debilitating.

Islamic State’s (IS) entrance into Iraq has all but exposed Iraq’s fragility. Weaknesses in the country’s central political and bureaucratic institutions and security apparatus—already well-known in the years leading up to IS’ takeover of Mosul—have rarely been clearer. More significant, however, is the fragility shown of the state of Iraq.

Nationalism and frustration with Baghdad have long contributed to Iraq’s Kurdish Region’s yearning for independence. The Kurdistan Regional Government (KRG) popularly view the instability at its southern border, and Baghdad’s inability to address the problem, as fuel for a push towards independence.

Disagreements over oil exports, which have led Baghdad to withhold Kurdistan’s share of the public budget since early 2014, are leading many in the KRG to believe they would be better off on their own.

In the country’s Sunni-dominated west and center, areas under IS control have already declared themselves as independent from Iraq as part of the Islamic State. While this has been brought about and enforced through violence and coercion, many in Mosul and elsewhere seem indifferent – if not supportive – of IS control of the region and freedom from Baghdad’s Shia-dominated control.

The country, then, appears on the verge of break-up. This is particularly true in Kurdistan, where economic growth and foreign investment have spurred remarkable development over the past decade. Among the biggest losers in an independent Kurdistan would be the business community—and with them, most other stakeholders in Kurdish economic growth.

All budgetary roads lead to Basra

Why would a break-up be economically damaging? The first reason relates to the budgetary structure of Iraq and its regions. Iraq’s public budget flows almost solely from the country’s southern oil fields around Basra. Revenues are sent to Baghdad, from which they are sent to the regions as part of the federal budget.

The oil-poor Sunni provinces Anbar and Ninewa, now under control of IS, are entirely dependent on their budget allocation for all public spending (which, in Iraq, comprises a substantial part of the economy as a whole). Without their federal budget allocation, further economic collapse is imminent in the region.

In Kurdistan, oil production is beginning to contribute to the KRG’s public budget, but is still not nearly high enough to replace what the KRG receives from Baghdad. Oil production, still roughly 200,000 barrels per day (bpd) in Kurdistan, would have to more than double to 400,000 bpd to break even. This also assumes that Kurdish oil can find buyers—something the KRG is still struggling with.

Additionally, instability created by IS has led to a halt in some oil exploration activities, and has led some international oil companies to pull staff out of the Region. By comparison, oil production in Iraq’s south is charging along at 3.15 million bpd.

But the shake-up in Iraq’s leadership is likely to improve Kurdistan’s budgetary situation. With focus in Iraq, as well as international pressure, on a more inclusive approach from Baghdad, it is likely that the new government led by Prime Minister Haider al-Abadi will be less obstinate in its dealings with the KRG.

The business community should hope that this is the case. The budgetary pinch through the first half of 2014 has stalled most public projects and public spending—which, in Kurdistan, make up a sizeable part of overall GDP.

As public banks are dominant in Kurdistan’s financial system, the pinch has led to contractions in already limited bank lending. This has led to fewer government contracts to foreign and local contractors across several sectors, and stalling private investment in new projects and developments.

In order for Kurdistan to keep growing at the pace it has come to enjoy over the past decade, it would need its budget restored and ties with Baghdad mended.

Baghdad and Basra are big markets

Second, Kurdistan has, quite effectively, branded itself the ‘gateway to Iraq’ for foreign and Iraqi businesses. Erbil, with its security, stability, business-friendly policies and consistent supply of electricity, has become a base for which companies can reach the rest of Iraq.

While Kurdistan attracts an outsize portion of Iraq’s total investment, its population, at 4-5 million people, is dwarfed by the rest of Iraq. The Baghdad market alone holds over 7 million people. Kurdistan could not attract nearly the amount of investment it does without the benefit of being attached to 30 million additional consumers.

Companies like Asiacell, a major mobile operator, and North Bank, a major Iraqi bank, both headquartered in the Kurdish city of Sulaimani, would be a fraction of their size without consumers across Iraq. They would probably be forced to relocate or split in the case of independence.

Asiacell alone has over 10 million subscribers—more than double the entire population of Kurdistan, and competes in Kurdistan with Korek Telecom, which is stronger in the Erbil market. An independent Kurdistan would create major challenges to these, and many other, Iraqi and foreign companies that have based themselves in Kurdistan.

Additionally, Kurdistan’s tourism market is dominated by domestic tourists from southern and central Iraq, who seeking the peace and cool climate of Kurdistan’s mountains and the safe, western-style malls and hotels of Erbil. To make the short trip north from southern Iraqi cities an international venture would alienate many of Kurdistan’s tourists, and decimate Kurdistan’s nascent tourism industry.

An independent Kurdistan (and, for that matter, an independent Sunni region) might someday become reality. However, the immediate consequences could be economically catastrophic for the newly independent states.

The new government in Baghdad could provide a window for reconciliation between Kurdistan and Baghdad—which might even lead to a cooperative strategy to counter IS and prevent a break-up.

About Author

Brady Jewett

Brady has spent the past two years in the Kurdistan Region of Iraq, analyzing investment and business in the region, and is currently based in Washington, DC. Brady holds a BA from UC Santa Barbara and an MSc from the London School of Economics.