We hope leaders in Erbil realize the calculations have changed, and today isn’t like yesterday
— Yousef Al-Kalabi
The importance of Iraq’s new three-year budget law cannot be overstated, with its potential to impact the country’s fiscal standing for years to come. The most consequential development, however, is the new outline of the Kurdistan Region’s relationship with Baghdad it draws.
The budget law now grants Baghdad unprecedented control over Kurdistan’s economy, especially the oil and gas sector. This change is the result of numerous factors, each compounding the other.
Kurdistan revenues 2022 (billions USD)
Projected Kurdistan revenues 2023 (billions)
Gross oil revenue
See footnote for more information*
Firstly, years of economic mismanagement have left the Kurdistan Region in a precarious state. Secondly, escalating disputes between the Region’s ruling parties have further exacerbated the situation. In addition, there has been a rise in anti-Kurdish sentiments among some Shia political parties. The International Chamber of Commerce’s decision has served as the proverbial final nail in the coffin. All these factors together have resulted in Baghdad’s increased dominance over Kurdistan’s economic landscape.
Though political dynamics are ever-changing, and shifts in alliances, strategies, and the balance of power make predicting events in the Iraqi context especially difficult, there are key questions that need answers: How equitable is Kurdistan’s share this time? Will the current arrangements last?
Budget Impact on Kurdistan
Judging the long-term impact of Iraq’s budget on the Kurdistan Region is extremely difficult, and the short-term impact is also unclear. While many Iraq observers assume the short-term impact will at least be net positive due to cash infusions as Kurdistan Region oil will no longer be sold at a steep discount, 2022 figures and early estimates of Kurdistan’s share in the 2023 budget portray a different image:
Due to the absence of an annual budget, a lack of transparency, and disputes between the Kurdistan Democratic Party (KDP) and Patriotic Union of Kurdistan (PUK), it is difficult to reliably reproduce the region’s revenues. However, by relying on the latest statements from Kurdistan Regional Government (KRG) officials and data from the auditing firm Deloitte, we can come up with a reasonable approximation for revenue data for 2022.
Comparing this to Kurdistan’s 2023 estimated revenue, produced by The American University of Iraq – Sulaymaniyah, we only see marginal changes: Accounting for changes in the official exchange rate, Kurdistan’s estimated revenues stand at around $17b in 2023, compared to an estimated $16.3b in 2022. This falls massively short of the Kurdistan Region public’s expectations for the upcoming budget.
These figures, nevertheless, hide significant uncertainty stemming from the lack of details on KRG’s deal with Baghdad. Depending on how these details are ironed out, it could be a significantly better deal for Kurdistan.
Iraq’s fiscal health
According to preliminary calculations by Ahmed Tabaqchali, senior fellow at IRIS, the Kurdistan Region’s contribution to the Federal budget stands at 11.6% while its share of the budget is only 10.1%. In raw numbers, however, due to deficit spending, its contribution is $11.9b while its share of the budget is $15.3b. According to the International Monetary Fund and most Iraqi observers, this level of deficit spending is unsustainable. What happens when maintaining this deficit level becomes impossible? Will they renegotiate Kurdistan Region’s share? Will Kurdistan Region officials stomach the steep cuts? Do they have enough leverage to pressure Baghdad for a larger share?
Sources put Kurdistan Region’s debt to oil traders between $3b to $6b. According to Deloitte reports, Kurdistan repaid $468m of that debt in 2022. Oil traders were part of the initial negotiations between Baghdad and Erbil, and local and international outlets have reported a deal has been reached, though details are scant, and this was a sticking point of negotiations between both sides. Who ultimately bears the burden of these debts will have a substantial impact on KRG’s medium-term fiscal health.
Tariff Payments to the Turkish Energy Company (TEC)
In 2022, Kurdistan gave TEC $616m as tariff payments as it exported its oil through Ceyhan. Now that SOMO will assume responsibility for exports, it also needs to pay the tariffs. Turkey, due to its leverage vis-à-vis the Kurdistan Region, had managed to charge it 2-3 times the costs outlined in the pipeline agreement signed between Iraq and Turkey, as confirmed by the ICC ruling. Baghdad, in theory, will need to pay substantially less than Kurdistan. It is unclear whether it will take full responsibility for the costs until now or Kurdistan Region will be liable for it one way or another. A final agreement between Turkey and Iraq to restart oil flow hasn’t been reached until now, further complicating the picture.
Kurdistan Region’s debt to Trade Bank of Iraq (TBI)
According to the KRG, its debts to TBI stand at around $4b. According to article 12.2 of Iraq’s 2023 Budget Law, this amount needs to be repaid over the next seven years and will be automatically deducted from Kurdistan Region’s share of the budget. At around 3% of its yearly revenues, this is a considerable fiscal burden that risks wiping out a large portion of the benefits it might see from the 2023 budget.
Lack of a unified oil and gas law
Though this budget law details Kurdistan Region’s economic relationship with Baghdad, the provisions related to oil and gas are temporary, as is stated in Article 13, Clause 6, only in effect until a Federal oil and gas law is passed. But, until the writing of this report, even an early draft of theoil and gas law hasn’t been produced (barring an outdated 2007 draft), and there’s doubt Iraqi factions will manage to produce the necessary consensus to pass the law anytime soon. This adds another dimension of uncertainty to Kurdistan Region’s future, especially as that law will finally codify Baghdad and KRG’s relationship with international oil companies (IOCs), both currently operating and those willing to invest, in Kurdistan Region.
Article 12, Clause 2 stipulates that KRG needs to hand over all its non-oil revenues to the Federal Government, without any qualifiers. However, as KRG and Baghdad don’t use the same definition for non-oil revenues, it is unclear if some local taxes and fees are exempt. Excluding border tariffs, KRG non-oil revenues still topped over a billion dollars in 2022, and its fate will impact KRG’s fiscal balance. As for border revenues, not only are they murky, but they act as enablers of vast patronage networks for both KDP and PUK, and disagreements about total revenues might come to a head with Baghdad (as has happened between KDP and PUK themselves).
These are just some of the uncertainties that prevent a proper assessment of the impact of the Iraqi Budget Law on the Kurdistan region. Initial figures indicate that the budget will not create significant fiscal space for the Region, but much about how the KRG-Baghdad agreement will play out remains unknown.
Is the current arrangement sustainable?
Beyond the immediate impact of the budget on the Kurdistan Region, the question of sustainability of current arrangements has hung over all dealings between KRG and Baghdad. Here, three significant fault lines have made themselves apparent over the last three years:
Disputes between Kurdish factions
Kurdistan’s fiscal and economic health doesn’t seem to be a priority to both Kurdish ruling and opposition factions in Baghdad. Beyond tit-for-tat brinkmanship between the Kurdish political parties themselves, you can’t even create a coherent outline of a the Kurdistan Region policy towards Baghdad.
Most importantly, KDP and PUK, who rule their respective zones in Kurdistan via control over security forces, are increasingly at odds with each other. Many policies and tactics considered ‘red lines’ between the two just a decade ago are regularly employed in their power struggle. Things are at a stage that even members of these two parties themselves refer to the existence of a ‘cold war.’
Legal recognition of the Kurdistan Region in Baghdad and the existence of shallow KRG institutions masks the fact the region is two separate institutionally- and militarily-separate regions that are increasingly in competition with each other and whose relationships with Baghdad are governed by balance-of-power considerations.
With PUK-KDP relations increasingly fraught, this necessarily reflects on any arrangements Kurdistan Region as a legal entity has with Baghdad. The increased control by Baghdad over Kurdistan’s economy is already visible. A new provision allows the federal prime minister to directly finance provinces in the Kurdistan Region in cases of disagreement with the KRG. This could be a canary in the coal mine.
Iraq’s ever-shifting balance of power
The deal signed in April is a reflection of an understanding between Iraqi PM Mohammed Shia Al-Sudani, some factions within thegoverning Shia Coordination Framework (SCF), and KDP — in essence, a “political agreement.” This quickly showed as factions with other agendas quickly criticized the Sudani government and ultimately managed to successfully change key aspects of the agreement with the Budget Law.
Hardline factions that can be broadly characterized as pro-Iran and anti-Kurdistan Region have gained unprecedented power within both Parliament and the Iraqi state, but despite calling Iraq a democracy being controversial among analysts and watchers, the political scene is ultimately very competitive.
The current balance of power, itself, was reached after influential Shia cleric Moqtada Al-Sadr ordered his 70+ MPs to resign from parliament in a surprise move, with many considering it an own-goal Sadr is still trying to recover from. This uncertainty in Iraq’s political scene makes most Kurdistan Region’s agreements with Baghdad temporary.
Federal provincial elections currently slated for November, for example, might solidify “anti-Kurdistan Region” factions control over Baghdad. Sadr is reportedly gearing up to take part in the elections, adding more complexity to the country’s political dynamics. On the other hand, early parliamentary elections, which is currently not on the agenda, would likely see “anti-Kurdistan Region” factions lose support in parliament, especially if Sadr decides to run again. The understanding reached with Sudani, however, will likely not carry over to the next prime minister.
Hardline factions in Baghdad smelling blood
Exemplified by the last-minute changes to articles concerning Kurdistan Region’s share of the budget, hardline factions in Baghdad such as Asaib Ahl-al-Haq and Kataib Hizbollah realize how weak Kurdistan Region’s position is currently, and they’re not shy about voicing their dissatisfaction as what they characterize as a “preferential treatment” they enjoy from Sudani and some forces within the SCF.
These hardliners not only have access to vast resources, but they also have considerable weight within the SCF and Iraqi State apparatus itself. Whether it is pressuring Sudani through SCF, using their members and affiliates in the federal parliament,leveraging their relationship with the Federal Supreme Court, or even resorting to military might, they can impact current arrangements between Baghdad and Kurdistan Region.
Ultimately, it is hard to predict how the balance of power will shift in Iraq nor how sentiments of specific parties regarding Kurdistan Region will evolve. Sadrists, for example, have made very few comments on KRG’s deal with Baghdad. While these might not be concerns in the short-term, they will mark their impact in the medium to long term.
*Notes on figures:
Due to the limited availability of 2022 revenue data and the preliminary nature of 2023 figures, along with the undisclosed details of the deal between the Kurdistan Regional Government (KRG) and Baghdad, the statistics presented in this article are an approximate representation. The actual figures can vary significantly based on how certain key factors are accounted for, which we’ve discussed in detail within the article.
Each year, the KRG is obligated to pay around $5 billion to IOCs and the Kurdistan Petroleum Company (KPC), a figure largely unchanged in 2023. Federal Iraq has committed to covering $2b of the IOC costs in 2023, and this amount has been included in the KRG’s total projected revenue for 2023.
However, the reality of 2023’s revenues may diverge significantly from these estimates. The situation has been further complicated by Turkey’s decision to close the pipeline in response to the ICC decision, which happened midway through 2023. Despite these factors, the budget bill, set for three years, and the indicative KRG-Baghdad agreement signal a broader shift in the relationship between the two regions. Hence, these theoretical figures, although possibly different from the actual numbers, remain relevant and insightful.