Updated: Jul 23, 2019
The Kurdistan Regional Government (KRG)’s 2017 Independence Referendum has had dramatic consequences on the Kurdish economy. Shortly after 92 percent of Kurds voted to leave Iraq, Baghdad responded by taking back control of the Kurdish territorial gains made in 2014 from the war with ISIS. Here, the Kurdistan Regional Government (KRG) lost almost half its land and oil export capacity as federal forces seized oil fields near Kirkuk and cut in half the oil production controlled by the Kurdistan Regional Government.However, in November 2018, the tension between the Iraqi federal government and the KRG appeared to be simmering down after reaching an initial agreement to restart exports from the oil fields of Kirkuk. Kurdish and Iraqi officials agreed to replace the Popular Mobilization Forces (PMF) that currently guard Kirkuk city with the Peshmerga forces.The improved relations between Bagdad and Erbil could lead to breakthroughs in other ongoing disagreements including energy production and territorial disputes.
More recently, the KRG has had better relations with the Baghdad and Ankara especially after the election of Nechirvan Barzani in May 2019 as a new President of the IKR. Here he has provided that:
‘I am convinced that a new phase will start in relations between [Iraq's] Kurdish region, Turkey and Iraq. I hope my visit will contribute to improving relations’.
While the KRG is unlikely to get all it wants from Baghdad, the status quo leaves enough budget for the government to pay salaries and pensions, with a little left over to restart stalled capital investments.
Investments on the Rise…
The Iraqi Kurdistan Region, which has witnessed ongoing prosperity over the past decades has become a great port for the FDI and many have invested their capital in the region due to its safety and security comparing to other parts of Iraq. From the implementation of the 2006 investment law until 2016, total investment in the region reached USD 47 billion. The law treats foreign and local investors equally. Here, both parties are allowed them to buy and own land for investment purposes, to repatriate profits in full, and are afforded a 10-year non-custom tax break after the beginning of production. With these incentives foreign investment accounted for 13 percent of total investment, the equivalent of USD 6.1 billion, while joint ventures accounted for 8.65percent (USD 4 billion). Among the foreign investors, the United Arab Emirates invested more than USD 3.1 billion, followed by Turkey with USD 1.2 billion.
As for the sectoral distribution, the industrial sector ranked first with 37percentof total FDI (USD 2.3billion), mainly in the cement industry to meet the growing demand for this construction material. The housing sector ranked second with 32percent (USD 2.0 billion) as a result of the increasing need for housing units, both by residents of the province or by residents of other Iraqi provinces who moved to live in the region because of the difficult security conditions in their provinces and the lack of services. The tourism sector came third with 15 percent of the total value of FDI inflows (USD 1.0 billion).
Foreign Direct Investment distributed by Economic sectors in the Kurdistan Region for the period 2006-2016
Despite the disruption caused from the fallout from the Referendum, investment has risen markedly. According to Sarbast Khidr, the director of the Data and Investigation Department at the Investment Board, for the year 2018, there was a dramatic increase in investments from USD 712 million in 2017 to USD 3.6 Billion.
Foreign Investments in the Kurdistan Region (2009-2018 I USD Million)
In October 2018, a year after the Referendum, US companies visited Erbil after being brought to the region by the IKR Chambers of Commerce and Industry and the US Consulate General. The companies have since expressed their interest in investing in promising sectors such as construction, hospitality and tourism, oil and gas, defense and security have a strong interest in the Kurdish region. Moreover, further strategies and initiatives to increase foreign investment and economic growth in the Kurdistan Region were discussed in January 2019 between Kurdistan Region Security Council (KRSC) and representatives of the World Bank.
…However, Structural Reforms and a Well-Functioning Banking System are still lacking
The economic and demographic potential of the Kurdistan Region remain an important factor when evaluating the investment opportunities it holds. For almost a decade now, the region has remained very attractive for international investment especially in the oil and gas sector. Almost all major international oil companies invested either individually or in partnership with others. Through a combination of policies, including favourable contract terms for exploration companies, in addition to policy reforms and tax incentives, the Ministry of Natural Resources has nurtured booming upstream and downstream segments on the oil industry. According to Article 2 of the 2006 Investment law for the Kurdistan Region, the guarantees and the privileges granted by the Law are to be applied to projects in more than 10 sectors including agriculture, manufacturing, tourism, and infrastructure.
All three governorates of the Kurdish Region offer numerous investment opportunities, especially in the three-priority sectors tourism, agriculture and industry. For instance, opportunities in the agriculture sector include the cultivation of olive trees and production of olive oil, fish farming and meat processing. Also, the tourism potential of the region is not fully exploited despite the region’s rich cultural heritage, ranging from music to arts and crafts, clothing and textiles. The religious tourism sector has also developed, attracting a number of tourists from around the world. The partnership of the KRG with the private sector to advance this sector is essential, in particular, to improve transport connections and the supply of hospitality services.
However, for an expanded role of the private sector these opportunities require reforms of the regulatory environment to attract adequate investment and a well-functioning banking system. Despite the presence of a large number of banks, the banking sector in Iraqi Kurdistan region remains underdeveloped and has made a limited contribution to the economy. Although investors were able to fund their projects privately, access to larger pools of capital will be necessary for local and foreign companies to sustain future growth. It is worth noting that private banks’ lending to the private sector accounts for only 6 percent of total assets, while the majority of bank assets (60 percent of private banks’ total assets) are sitting idle in the form of cash and cash equivalents. Also, banking regulation and supervision in the region need to be restored to ensure good governance.
The IKR has survived a difficult period and still facing several medium to longer-term challenges that are intrinsically linked to the overall macroeconomic situation of Iraq as well as the regional environment. It has come a long way in a very short period, but it has much more to do; the government should prove to the business community that the region can offer a stable and long-term investment environment in order to transform the economy into a diversified one that supports private sector-led economic growth and job creation in a sustainable manner. The government should also encourage the participation of microfinance mechanisms while putting in place the conditions necessary for a well-functioning banking sector.