Iraqi Kurds look to diversify in face of energy crunch

Tumbling oil prices and the pandemic have taken a heavy toll on Iraq’s Kurdish region, forcing many workers to return to farming. (AFP)
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Updated 22 October 2020

Iraqi Kurds look to diversify in face of energy crunch

  • The Iraqi economy, one of the world’s most oil dependent according to the World Bank

MEER ROSTAM, Iraq: 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 50 km east of Erbil, the regional capital, vineyards are ripe for harvesting as a new source of income.

Abdallah Hassan, 51, a civil servant from the nearby village of Meer 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 Erbil has become an urban hub with skyscrapers and luxury hotels.

This year, however, the coronavirus 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 said. “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 Democratic Party.

This has created a bloated public sector with over 1.2 million staff, around 40 percent of them in the military and security sectors, out of a regional population of 5 million.

With its budget now bled dry and the KRG facing $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 estimated at $9 billion.

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 Erbil 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.

Structural reforms are a permanent need. It never ends: ex-Pakistan PM Shaukat Aziz

Updated 9 min 40 sec ago

Structural reforms are a permanent need. It never ends: ex-Pakistan PM Shaukat Aziz

  • Global financial expert was the first guest on Frankly Speaking, a new Arab News YouTube talkshow on Middle East affairs 
  • Aziz described the technical and leadership skills of people in Saudi Arabia’s Central Bank or Ministry of Finance hierarchy as ‘world class at the top’

DUBAI: “Unless the pain comes, people do not change,” is the blunt verdict of Shaukat Aziz on the economic measures needed by Saudi Arabia to counteract the downturn caused by the COVID-19 pandemic.

He should know. As a global financial expert after his decades in the senior echelons at the giant American bank Citi, and his time as finance minister and prime minister of his native Pakistan, Aziz was responsible for sweeping financial and economic policies through global crises and radical domestic reforms.

“Reform is not a one-time effort. Structural reforms are a permanent need and requirement for any country and any government. It never ends. There is not a reform season, where you do it once and then you sleep for a year,” Aziz said.

Although the Kingdom has pumped billions of riyals into the economy in response to the pandemic, its stimulus packages, as a proportion of GDP, has been lower than other members of the G20 group of leading nations, and have been accompanied by tax rises and government spending cuts.

“You have to consider very carefully how you react to it, and I think Saudi Arabia’s response was more than adequate, more than what was needed. It is not just about giving money to people; it is really about creating an enabling environment to get your businesses back to where it should be,” he said.

Aziz was speaking to Arab News on its new series of televised interviews, Frankly Speaking, in which leading policymakers are questioned on their views about the most important issues of the day.


Saudi economic ‘leadership skills are world class’

Aziz lived and worked in the Kingdom for many years at Citi, and has maintained a close relationship with senior economic decision-makers there ever since. He has no doubt about the quality or the credentials of Saudi Arabia’s economic leadership.

“I would say that the technical and the business skills and the leadership skills of the people who are in the hierarchy of the Central Bank or the Ministry of Finance are world class at the top,” he said. “What is a good finance minister? A good finance minister is about anticipating, and adjusting. He knows which buttons to press when something happens, not to do it too quickly, and make sure you do your homework.”

Those qualities are essential in an economic policymaker, and are needed even more in the big social, cultural and lifestyle changes under way in the Kingdom as part of the Vision 2030 strategy to diversify the country away from oil dependence.

Aziz has first-hand experience of the challenges of such a far-reaching strategy from his time at the center of policy-making in Pakistan. In 1999, after 30 years as a globe-trotting executive at Citi, he answered a call from President Pervez Musharraf to join his new government and sort out the economic mess that had overtaken the country.

Big International debts, low economic growth and runaway inflation were challenges to which Aziz had a three-word response. “Liberalize, deregulate and privatize,” he recalled, a strategy which involved root-and-branch reform of the country’s economy, and some painful choices for entrenched interests in the country’s power structure.

“There were riots, unions went on strike — all these things happened in my time. There would be groups of businessmen and special interests who wanted something done a certain way. But you can’t do that, you have to make tradeoffs,” he said.


Focus on security ‘hand in hand with reforms’

The unrest in Pakistan affected Aziz in a very personal way in 2004, when he was the target of an assassination attempt by terrorists. The threat of violent extremism has not been far below the surface of Pakistan’s political system, and has remained at a disturbingly high level since then.

In contrast, Saudi Arabia has confronted and contained its extremist fringe. What has the Kingdom done right that Pakistan has not been able to do?

“Obviously the security apparatus of Saudi Arabia — and I’ve lived in Saudi Arabia, so I can tell you — is superb,” he said. “They’re very good. On the other hand, their population is also much (smaller) than Pakistan, so there is the issue of the physical machinery of the law enforcement and intelligence.

“They’re excellent also, but they just don’t have the (full) resources that are required to handle a country the size of Pakistan.”

The focus on security in the Kingdom has gone hand in hand with the program of social and cultural reforms of the Vision 2030 strategy, Aziz noted.

“So, in Saudi Arabia I think the best thing which has happened in the last few years, His Royal Highness the Crown Prince and His Majesty the King and all the other leadership of the country, they have done reforms which you could never even consider or think about.

“When I lived there, I couldn’t have expected that they would do that. I think today in the structural reform agenda, I would put Saudi Arabia in the top few countries of the world,” he said.


For ‘any reforms you do, you have to measure the reaction’

But is the sheer pace of reform in Saudi Arabia at risk of alienating more conservative elements in the country?

“I will repeat again: Any reform you do, you have to measure the reaction and impact for various sectors of your society. That’s a judgment call,” he said.

As a former top banker, he has firm views on the wave of reforms and consolidation that have taken place in the Kingdom, of which the merger between banking giants NCB and Samba (the former Citi affiliate) was the most recent. Some analysts have concerns about the effect on competitiveness as banks merge, but Aziz does not see it like that.

“Consolidation doesn’t mean there won’t be competition. It will make those banks much stronger so they’ll bring better products, they’ll have larger balance sheets, they can finance bigger deals, they have more absorptive capacity for any shocks. Any economy can go through shocks in the world, the world goes through it all the time. So, then their shock absorbers become much stronger, too,” he said.

Since he left the Pakistan premiership in 2008, Aziz has taken up non-executive advisory positions for several financial institutions, and become a well-known figure on the international forums circuit, airing his views on global issues at places like Davos and other arenas.


Pakistan has its ‘own sovereignty to protect’

On the big regional issue of the day — the expansionary aggression of Iran — he sees a commonality of interests between Saudi Arabia and Pakistan. “We have a long border with Iran, so our strategy with them is to maintain a relationship which is peaceful and to avoid any tensions,” he said.

“Naturally we have our own sovereignty to protect — that goes without saying — and we also have friends in the world like Saudi Arabia who are considered really very strategic partners for Pakistan.

“With Saudi Arabia it’s different. When I looked at Saudi Arabia as a relationship, it was like looking at your elder brother. You know they care for each other.”

In a reference to policy differences over issues like Yemen, he said: “Sometimes, if we did something which we shouldn’t have done, they’ll say, hey, what did you do that for?”

On another big policy issue of the day — the normalization of relations between some Arab countries and Israel — he was more guarded on the possibility that Pakistani might follow suit. “You have to carry your domestic population with you. If you’re doing something like that, you have to have good sound reasons. This is leadership,” he said.

At the end of the day, Aziz believes, an internationalist approach is preferable to a mindset that focuses on national differences. “You don’t look at your passport every day and say, what does this tell me to do? I think, to me, nationality is less important. It’s your inner self which has to believe in certain things,” he said.


Twitter: @frankkanedubai