The Economic Crisis; Lessons learnt? MERI Forum 16, S1

Date: 25th October 2016

MERI Forum 2016

In this Panel

Mahdi Hafiz, Member of Parliament, Former Minister of Planning
Muzhir Mohammed Salih, Advisor to the Prime Minister of Iraq
Ashti Hawrami, Minister of Natural Resources, KRG
Patrick Simmonet, Ambassador/Head, EU Delegation to Iraq (Chair)

This is a summary of the panel discussion, please see the full video of the debates and Q&A above.

For the last two years, Iraq and the Kurdistan Region of Iraq (KRI) has been facing a dire macro-economic and financial environment. Both the public and private sectors are under huge stress. According to the World Bank, the Kurdistan Regional Government’s debt is estimated at around 17 billion dollars. Furthermore, around 3500 projects of public investment have been frozen for at least one year, while the projected operational budget deficit of the KRG for 2016 will range between 1-2 billion dollars. Similarly, the private sector, especially construction and real estate, have lost their dynamism as a result of dropping consumption.

It is estimated that consumption per capita has contracted by 14% in 2014 and 24% in 2015. So far, the KRG has been trying to balance its budget through measures of fiscal consolidation equivalent to 37% of GDP. The KRG economy is still experiencing a great degree of uncertainty. Accordingly, this panel focused on the current state of the economy in both Iraq and the KRI. It further discussed what the lessons from the economic crisis and its response to it are, and how the public and private sectors can contribute to economic prosperity.

All speakers agreed that political and economic reforms are necessary. Patrick Simmonet suggested that economic and political reforms must progress at the same pace in both Baghdad and Erbil, suggesting that the EU could help facilitate this. Mahdi Hafiz agreed that “Iraq needs comprehensive reforms”, both political and economic. Ashti Hawrami concurred that the political and economic elements of the crisis cannot be separated: “This financial crisis is mixed with political life. Every person in this country is responsible”.

There were a range of suggestions as to what caused the crisis, and to what extent the current situation can be solely attributed to lower oil prices. Ashti Hawrami claimed that “in 2014 the KRI faced three shocks: the budget cut, ISIS crisis and IDPs coming to the KRI”.  He referred to the dispute between Baghdad and Erbil over the regional budget, as well as to the financial burden that both the fight against IS and the IDPs crisis caused. Although he acknowledged the role of oil as a factor determining the economic crisis, he maintained that “the crisis cannot be saved by the rise in the oil price, there is a big gap between expenses and income”. Instead he suggested that expenses and income need to be aligned: the operational budget for public employment salaries and subsidies is unsustainable over the long-term.

Following on from this point, Muzhir Mohammed Salih stated that in the KRI “there is a big state and a fragile market” as demonstrated by the fact that “the number of state employees increased 5 times while the oil prices fell”. He also discussed the problem of unemployment and humanitarian issues and suggested that a sovereign fund needs to be created for everyone as “the oil is for all Iraqis”.

Mahdi Hafiz focused his presentation on the private sector, stating that “it is in a very bad situation. The Iraqi private sector should be producing wealth” and advocating for an application of “the principles of federalism properly”.

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