By Dr. Mark DeWeaver
Not long ago, the future looked bright for the Kurdistan Region of Iraq (KRI). Long an oasis of peace in an otherwise unstable region, by 2013 the three Kurdish provinces of Erbil, Sulaimaniyah, and Dohuk had become the most prosperous part of the country. Not only were they developing their own oil and gas resources but they were also diversifying into non-oil sectors such as cement, tourism, and real estate. In the major cities consumers were flush with cash—business was booming at shopping malls, car dealerships, gold shops, hotels, and restaurants. Iraq’s tallest apartment and office buildings were under construction. The region’s dream of becoming the “next Dubai” seemed to be fast becoming a reality.
Today the KRI’s multi-year economic boom has turned to bust. Last year’s 50% drop in oil prices, the occupation of neighboring provinces by Islamic State (IS) militants, and the suspension of fiscal transfers from Baghdad to the Kurdistan Regional Government (KRG) have resulted in a government-budget crisis of epic proportions. State-sector salaries have gone unpaid for months at a time, KRG-controlled banks have no cash to fund depositors’ withdrawals, arrears to construction contractors are piling up, and billions of dollars in payments due to foreign oil companies have not been made.
The impact on the private sector has been little short of catastrophic. Consumer spending has collapsed, property prices have crashed, occupancy rates at four and five star hotels have plummeted, and work on many projects has come to a virtual standstill. Capacity utilization at cement plants is falling, car dealerships are struggling, income at banks and insurance companies is down sharply, and sales of big-ticket electronics items are slumping. Businesses that only two years ago were making record profits are now fighting for survival.
Outside of Iraq, Kurdistan’s great recession has attracted surprisingly little attention. While the war against the Islamic State continues to monopolize the headlines, the KRI economy is seldom in the news. This one-sided emphasis on the security situation is unfortunate because it obscures some of the most serious problems the region is facing. The outsider might well be left with the impression that everything in Kurdistan will be fine once enough precision guided munitions have found their targets in the IS-controlled areas south and west of the border. In this report, our objective is to fill in some of the gaps in previous coverage of the KRI by providing a comprehensive account of the region’s current economic downturn. We believe that our findings will be useful not only to those following the KRI economy for practical reasons but also to researchers interested in the business cycle dynamics of commodity exporting countries.