Kurdistan's Declining Influence and the Double-Edged Sword of the New Iraqi Budget
A Dive into Regional Impacts and Future Prospects
The negotiations and approval of the Iraqi budget has adversely affected the image of the Kurdistan Region. The region has been on a slow decline since the 2017 independence referendum, but the new budget offers some redeeming factors. The region managed to avert the worst possible outcome, especially since the budget also extends to 2024 and 2025.
Article 11 of the budget legislation excludes numerous sovereign funds, including those for national infrastructure projects, before calculating the Kurdistan Region's share. This calculation brings the region's share to around 12.7% of the total budget. Comparatively, the sovereign funds were similarly excluded before determining the region's share in the budgets from 2004-2013. However, two critical differences exist:
1. At that time, the region received 17% of the budget officially. When the actual budget amounted to approximately 15% after excluding sovereign funds, KRG officials protested, and indeed one of their key arguments for independent oil exports was that they were receiving less than their rightful share. Now, even though the budget received is significantly lower, they have accepted and voted for it.
2. The funds now included in the sovereign fund have expanded substantially since before 2014. For instance, infrastructure projects such as the Development Project are now included in the sovereign funds, but this project entirely bypasses the Kurdistan Region. In fact this project, designed to undermine the geopolitical importance of the Kurdistan Region, will be partially funded by the region.
Article 12 requires the KRG to repay all funds borrowed from the Iraqi budgets from 2014 to 2023, with repayments structured in monthly installments over a seven-year period. Notably, all Iraqi loans, as laid out in Article 11, are included in the sovereign funds, which the KRG is obliged to contribute to, despite not directly benefiting from them. Furthermore, the responsibility of repayment for all KRG loans falls squarely on the KRG's shoulders. Consequently, the actual allocation that the KRG will receive from the budget is less than the stipulated 12.7%, due to a significant portion of it being allocated to loan repayments.
Regarding KRG oil exports, Article 12 sends mixed signals. It requires the KRG to supply at least 400 barrels per day to the Iraqi storage facilities in the port of Ceyhan in Turkey, indicating that the KRG might retain its own pipeline. Yet, it also states that if oil cannot be exported via Ceyhan or other designated ports, it must be redirected inward towards Iraq for local refining.
Article 13 increases the pressure on the KRG by mandating the opening of a specific bank account by Iraq's central bank to manage the revenues from KRG oil. Although the KRG Prime Minister will possess the authority to withdraw funds, the bank will be under the scrutiny of the Iraqi Financial Supervision Bureaus. The article further specifies that any disagreements between the Iraqi government and the KRG must be resolved within a 30-day window, failing which the Iraqi Prime Minister reserves the right to curtail the KRG's share.
Moreover, the KRG is required to equitably distribute shares amongst all its provinces. If any province protests this distribution, it can independently request Baghdad to facilitate their direct payment. This particular clause, significantly contested for effectively diminishing the KRG's role and further subordinating its authority to Iraq, was emphatically advocated for by the PUK. This can be seen as a strategic victory for the PUK in its power struggle within the Kurdistan Region.
Another crucial element during the approval process of the Iraqi budget was the stark division between the KDP and PUK. These divisions were so profound that Shia leader Hadi al-Amiri had to step in to mediate, assisting the factions in reaching a consensus. This scenario deals a significant blow to the KRG’s standing and its power dynamics with Baghdad, particularly given Hadi al-Amiri's role as a central figure in the recapture of Kirkuk and other contested areas post the 2017 independence referendum. The symbolism of the discord between the KDP and PUK escalating to a point that necessitated mediation by such a significant Shia figure cannot be understated.
Despite the evident downturn in the KRG's influence and stature, the budget law could inadvertently boost transparency in the region's revenues and enhance its income. For instance, the KRG's oil will now be sold at market price, in contrast to previous conditions where it was sold at least $10 per barrel under market value due to legal risks.
Further, the budget substantially improves the KRG's annual financial plan, creating room for the allocation of funds to infrastructure projects and services. In theory, the supervision of the financial bureau should also enhance accountability for revenues. However, considering the inadequacies in Iraq's institutional infrastructure, the role of the financial bureau might be exploited as a political instrument contingent on relations with the KRG. This suggests its use may veer more towards a power lever than an earnest supervisory tool aimed at bolstering accountability and transparency.
In conclusion, the recent Iraqi budget serves as a testament to the ongoing erosion of the KRG’s influence and the divergent interests of the region's two primary parties, the KDP and PUK. As is often the case, many of the budget's articles remain subject to interpretation and could potentially act as pitfalls, causing further complications down the line. We anticipate the trajectory of the region's diminishing influence in Baghdad will persist, as regional, international, and Iraq's internal dynamics seem to disadvantage the KRG.