Understanding the Political Economy of the KRI: The way forward toward better governance

By Dr. Nesreen Barwari. 2018.

Structural issues and recent multiple crises

As with the rest of Iraq, the KRI economy is characterised by four severe weaknesses:

High dependency on the oil sector. The KRI’s economy is highly dependent on oil that has enabled rapid economic development. Though suspended in 2014, constitutionally-mandated oil revenues from Baghdad constituted about 85 percent of the KRG’s revenue. The sector, however, is only estimated to have a 1 percent share of the region’s employment. High oil dependency has enabled a rentier state.
Excessive role of the public sector. The public sector dominates the KRI economy. The KRG is the main employer with over 50% of total employment, 26% non-military. As in the rest of Iraq, payments for salaries, pensions, social assistance, and subsidies (electricity, fuel, water, and health and education services) consume over 50% of the budget. Taxes are only about 5% of total revenue. At this stage, public expenditure remains a primary driver of economic growth. Despite the strong entrepreneurial spirit, the greatly expanded KRI private sector still has a long way to go to meet its potential.
Dependency on imports. Due to the relatively undiversified Iraqi economy, aside from oil exports, there is a huge gap between the demand for locally produced food and other products and the consumption of imports, a typical feature of a rentier economy. Virtually everything is readily available in the Region. Under the current policy regime, it is hard for local businesses to diversify and grow vis-à-vis imports.
Weak financial system and dependency on a cash-based economy.

These structural challenges have been aggravated by a series of recent shocks:

A conflict with ISIS from mid-2014 that reached to within 20 km of Erbil.
A rapid population increase of 28% as a result of the influx of 2 million displaced people from the rest of Iraq and Syria.
The sharp decline in international oil prices, from $115 per barrel in June 2014 to about $45 in 2017.
The suspension of revenue transfers from the national government, from $12 billion in 2013 to about $1 billion in 2014, to zero in 2015.