Money squeeze in Baghdad affects investments in Iraqi Kurdistan

A city of approximately 700,000 inhabitants set in the mountains of the autonomous, northern Kurdish region, Sulaimani was a thriving business hub during the past couple of years. But projects that boomed two years ago have now come to a halt.

Huge construction sites which were used to buzz with activity in every direction seem deserted with bulldozers and cranes dotting the skyline lay idle following Baghdad's decision to cut budget payments to the Kurds in January 2014 over the semi-autonomous region's oil policies.
Engineer Mithal Mazen whose Bareaz Company is building a housing complex in the center of the city explains how the budget plan affected investment projects in various cities.

"Investments in Kurdistan region were very good between 2010 and 2013. I am speaking not only about Erbil but Erbil, Sulaimaniya and Dohuk where construction sites were buzzing with regular activities, but delay in approving the 2014 budget and the subsequently withheld share of Kurdistan's budget (by Baghdad government ) has made it impossible for the region to lay down an investment plan for the year 2014-2015,” Mazen said.
“This in consequence caused a halt of nearly 90 percent of work in investment projects," he added.

Baghdad cut budget payments to the Kurds in January 2014 over the semi-autonomous region's oil policies. They were reinstated in December after Erbil agreed to export an average of 550,000 barrels per day (bpd) via Iraq's State Organization for Marketing of Oil (SOMO) and the Ceyhan pipeline.

The Kurdistan Regional Government (KRG) was promised 17 percent from this year's $105 billion national budget, which averages out to a monthly payment of $1 billion. The payment was missed in February, but on March 19 the region received a $420 million budget payment from Baghdad, a long-awaited transfer of funds that put a bilateral oil export agreement back on track.

Mazen said a liquidity crisis has prompted a number of contractors and investors to stop work in a number of projects due to failure in paying workers salaries or meeting contractual obligations.
Mazen added, "A lack of cash has forced the company to cut down the number of its engineers from 40 engineers to only eight to nine. A liquidity crisis has also caused a reduction in the number of workers. A large number of workers have been laid off, thus affecting the economic and social status of people."

The Kurdish region, which has enjoyed autonomy from Baghdad since U.S. intervention after the 1991 Gulf War, has seen almost none of the insecurity and violence that has plagued the rest of Iraq since Saddam Hussein's overthrow in 2003.
For the past few years, the city has been carefully laying the foundations for growth -- including the local government in Sulaimani changing the law to make all investment tax-free -- and now it is starting to take huge strides forward.
Capital from the Gulf, Turkey, Lebanon and China is flooding in, while the Kurdish regional government, local investors and international donors have also injected funds. According to the spokesperson of the Investors Union of Kurdistan, Yassin Mahmoud Rasheed, financial problems with Baghdad coupled with sharp drop in world oil prices and threats posed by the Islamic State have resulted in a drop in trade exchange.
"Trade exchange has gone down by more than seven billion dollars compared with 2013,” Rasheed said.

“Investments in the Kurdistan region have also gone down by more than eight billion dollars. In Kurdistan now more than 400,000 workers have been laid off by companies and investment projects," he added.
According to Rasheed, in 2013 the region's trade with Turkey was $16 billion, while its trade with Iran ranged between $9-10 billion. In 2014, the bulk of trade with both countries totaled up to $5-6 billion.
Rasheed said that the funding crunch hitting the Kurdish economy, which has boomed since the 2003 U.S.-led Iraq war, has been felt in demands on real estate.

"Commercial activity in the Kurdistan region, which is represented by supply and demand, has shrunk by 80 percent in Kurdistan. This means that business has been halted by 80 percent. Even prices of real estate have dropped down by 40-50 percent," Rasheed said.
The financial squeeze shows how reliant Kurdistan remains on Baghdad for a slice of the multi-billion dollar budget, so long as it cannot export oil in large volumes itself. Kurdish officials often hint they could file for divorce from Iraq – as differences with the central government in Baghdad seem more irreconcilable than ever.