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Dealing with Kurdistan’s Economic Woes
9/3/15
Domestic politics, strained relations with the Iraqi government, war against the Islamic State (ISIS), a growing budget deficit and low oil prices seem to have stalled Kurdistan Region’s economy and growth. Most notably, the current decline in global oil prices and tensions with Baghdad over Kurdistan’s share of the federal budget have had a dramatic impact on the Kurdistan Regional Government (KRG), which relies heavily on oil revenues.
The recent turmoil in the Middle East suggests that low oil prices are here to stay. The nuclear agreement with Western powers marks Iran’s active re-entry into the energy market. If the US Congress approves the deal, Iran is going to increase its oil production, causing a fierce competition with oil-rich Arab states for market share and further depressing oil prices.
The Kurdistan Region has to then recognize that oil resources alone cannot guarantee economic growth and its current budget can no longer provide for the salaries and expenditures of the ever growing public sector. It must recognize that its oil-centric approach only succeeds if it is accompanied by robust and concrete steps to diversify its economy.
Economic diversification is a complex and demanding task, especially in a rentier state like Iraq. It requires reforms in policies, business structures and education system. Leaders must be prepared to make difficult decisions that might face some resistance.
The first step the government has to take is downsizing its public sector, by shifting a large number of public employees and job seekers to the private sector. This will be challenging since the majority of the working population prefer public employment where working hours are shorter, job security is in place and retirement benefits are steady.
Building a modern and diversified economy requires an active participation of the private sector. The government alone cannot make the transition; a strong contribution from business leaders is a must. Moreover, the public needs to support the initiative from the beginning, because it’s the only way to build and sustain a thriving economy for the next generation.
The government has to take a leading role in guiding the public towards accepting and supporting private sector expansion. However, leaders of public and private sectors have to establish a partnership to draft a strategy to help create a positive attitude towards private sector employment. To that end, they must announce and implement incentives, such as increasing wages for private sector employees and improving employment benefits and working conditions.
Providing incentives for businesses that hire recent college graduates is also important, such as offering tax breaks to companies that employ a certain number of college graduates.
The current fiscal and economic crisis facing Kurdistan Region should be a wake-up call. Kurdistan’s dependency on oil as the principal revenue earner is a risk that causes the slow death of the region’s livelihood, especially at a time when its fiscal deficits start to increase and further decrease with oil prices.
To prevent further economic downturn, Kurdish political and business leaders need to cooperate on introducing and implementing major economic reforms, such as building a diversified economy, downsizing public employment and encouraging private sector growth along with fighting corruption and cronyism.
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9/3/15
Domestic politics, strained relations with the Iraqi government, war against the Islamic State (ISIS), a growing budget deficit and low oil prices seem to have stalled Kurdistan Region’s economy and growth. Most notably, the current decline in global oil prices and tensions with Baghdad over Kurdistan’s share of the federal budget have had a dramatic impact on the Kurdistan Regional Government (KRG), which relies heavily on oil revenues.
The recent turmoil in the Middle East suggests that low oil prices are here to stay. The nuclear agreement with Western powers marks Iran’s active re-entry into the energy market. If the US Congress approves the deal, Iran is going to increase its oil production, causing a fierce competition with oil-rich Arab states for market share and further depressing oil prices.
The Kurdistan Region has to then recognize that oil resources alone cannot guarantee economic growth and its current budget can no longer provide for the salaries and expenditures of the ever growing public sector. It must recognize that its oil-centric approach only succeeds if it is accompanied by robust and concrete steps to diversify its economy.
Economic diversification is a complex and demanding task, especially in a rentier state like Iraq. It requires reforms in policies, business structures and education system. Leaders must be prepared to make difficult decisions that might face some resistance.
The first step the government has to take is downsizing its public sector, by shifting a large number of public employees and job seekers to the private sector. This will be challenging since the majority of the working population prefer public employment where working hours are shorter, job security is in place and retirement benefits are steady.
Building a modern and diversified economy requires an active participation of the private sector. The government alone cannot make the transition; a strong contribution from business leaders is a must. Moreover, the public needs to support the initiative from the beginning, because it’s the only way to build and sustain a thriving economy for the next generation.
The government has to take a leading role in guiding the public towards accepting and supporting private sector expansion. However, leaders of public and private sectors have to establish a partnership to draft a strategy to help create a positive attitude towards private sector employment. To that end, they must announce and implement incentives, such as increasing wages for private sector employees and improving employment benefits and working conditions.
Providing incentives for businesses that hire recent college graduates is also important, such as offering tax breaks to companies that employ a certain number of college graduates.
The current fiscal and economic crisis facing Kurdistan Region should be a wake-up call. Kurdistan’s dependency on oil as the principal revenue earner is a risk that causes the slow death of the region’s livelihood, especially at a time when its fiscal deficits start to increase and further decrease with oil prices.
To prevent further economic downturn, Kurdish political and business leaders need to cooperate on introducing and implementing major economic reforms, such as building a diversified economy, downsizing public employment and encouraging private sector growth along with fighting corruption and cronyism.
[You must be registered and logged in to see this link.]
