Kurdistan's economic tightrope: Autonomy vs. Baghdad's grip

Shafaq News/ The Kurdistan Region of Iraq’s (KRG) economy, while resilient, is at a juncture as it navigates the delicate balance between its aspirations for greater autonomy and the practical realities of its fiscal relationship with Baghdad. Although the KRG has historically pursued an independent economic strategy, especially regarding oil revenues, its financial stability remains heavily dependent on continued cooperation with the Iraqi federal government.

In recent years, the KRG has faced significant economic challenges, including fluctuating oil prices, unpredictable budget allocations from Baghdad, and ongoing political tensions. Despite these obstacles, the Region has maintained a distinct economic path, relying on oil exports, tourism, agricultural development, and a growing private sector to sustain its economy.

A cornerstone of the KRG’s economic model has been its independent oil sales, primarily through the pipeline to Tukriye. However, these deals have been met with consistent opposition from Baghdad, which claims they violate federal oil legislation. This disagreement has led to prolonged disputes over revenue-sharing and budget allocations, culminating in the 2023 suspension of independent oil exports, further exacerbating the region’s economic difficulties.

Baghdad asserts that the KRG’s direct agreements with foreign oil companies bypass federal authority, while the KRG maintains that it is constitutionally entitled to manage regional resources. Article 112 of the Iraqi Constitution allows regional governments to manage natural resources in cooperation with the federal government, a right the KRG claims in its defense.

A potential turning point occurred in 2024 with the signing of a new agreement aimed at resolving the long-standing financial disputes. Under this arrangement, the KRG committed to remitting a portion of its oil revenues to Baghdad in exchange for a more predictable and stable allocation from the federal budget. However, challenges in implementing this agreement have persisted, and oil exports from the region have not resumed in large quantities.

In a television interview, Kurdistan’s Prime Minister Masrour Barzani revealed that the Region's share of the national budget had been reduced multiple times—from 14% to 12.6%. However, the Region has never received its full share due to the allocation of a large portion of the budget to sovereign expenses, none of which were spent in Kurdistan.

“These sovereign expenses amounted to 40 to 45%, with the region receiving its share only from the remainder of the budget. In the best-case scenario, the region never received more than 6 or 7% of Iraq’s total budget,” he stated. Despite this disparity, Barzani emphasized that the KRG effectively invests the funds it receives into infrastructure projects.

Looking ahead to 2025 and beyond, the KRG faces the critical task of diversifying its economy away from its over-reliance on oil. Official statistics show that the oil sector still accounts for more than 80% of regional revenue. Efforts to develop the tourism sector, which saw a 15% increase in visitors in 2024, are ongoing but face challenges, primarily due to regional instability. Agricultural development, particularly in high-value crops, is also a priority but requires significant investment in modern irrigation and infrastructure.

The economic strain is keenly felt by the people of Kurdistan. Despite budget cuts and delays in public sector salary payments, the KRG continues to invest in infrastructure and attract foreign investment, maintaining a relatively stable business environment compared to other parts of Iraq. However, public dissatisfaction over salary delays and the uncertainty of economic conditions remain a significant political challenge.

Dr. Mohammad Shukri, Head of the Kurdistan Investment Board, discussed the Region’s investment law during a television interview, explaining that it “differs” from those in Iraq and neighboring countries, offering investors greater opportunities and facilities. He pointed out that the law provides foreign investors the right to own property, which has allowed both local and foreign investors to operate more freely. He also highlighted that the ninth cabinet of the KRG is working to eliminate bureaucracy, speed up transactions, and remove obstacles to investment.

Dr. Shukri also noted that the KRG has focused on diversifying income sources away from oil and gas, especially through the development of three key sectors: industry, agriculture, and tourism, with tourism poised to play a significant role in the region’s economic future. Additionally, the KRG is prioritizing the development of other sectors, including education, health services, and the construction of hospitals with international standards.

Over the past five years, the KRG has granted investment licenses for over 412 new projects. Dr. Shukri pointed to a substantial increase in investment, with the annual issuance of licenses rising from 56 in 2019 to 104 this year. In total, approximately USD 20 billion has been invested in the region over the last five years—an impressive increase despite challenges such as federal budget cuts, the COVID-19 pandemic, and falling oil prices. The private sector has made significant strides in the region, he noted.

In line with the KRG’s investment vision announced in June 2024, a unit was established to support foreign investments in the region. “We are working to create a favorable environment for foreign investment, develop an investment map, and provide a comprehensive database on available opportunities,” Dr. Shukri stated.