By Mohammed Hadi and Hemin Asaf
There is good will on the sides of both Erbil and Baghdad to resolve problems, said Dr. Mazhar Mohammed Saleh, economic advisor to Iraq’s Prime Minister Haider al-Abadi and former deputy governor of the country’s central bank. He is among those who make key economic decisions in Iraq, including playing a role in drafting the Iraqi annual budget. In this interview with Rudaw, Dr. Mohammed Saleh expresses optimism about the relationship between Erbil and Baghdad.
Rudaw: Relations between Erbil and Baghdad are about to improve. Do you think Baghdad will send Erbil its fair share of Iraq’s budget if it lets Baghdad control its oil revenues?
Dr. Mohammed Saleh: I want to reassure you that Erbil’s budget will be enshrined in the Iraqi budget law. The federal government cannot deprive the Kurdistan Regional Government (KRG) of its budget, because the International Monetary Fund (IMF) will be participating in drafting the Iraqi budget legislation. The problem we have now is the lack of an appropriate mechanism through which Erbil sends all its income to Baghdad, so that the federal government enshrines Erbil’s budget in its budget law. In other words, Erbil’s income should all be clear and settled before the Iraqi budget is legislated.
For example, the city of Basra sends all its income to the federal government, and then its budget will be determined in Iraq’s budget. There is now good will between officials of Erbil and Baghdad to understand these problems and resolve them, which is why I am optimistic that they will be solved. I am very close to Haider al-Abadi, who is truly honest. He in no way resorts to chaos and trouble. He wants to resolve these problems through dialogue. The prosperity of Erbil is closely related to that of Baghdad’s, and vice versa. Baghdad is not going to sit idle if Erbil runs into crisis. I am well aware that the Kurdistan Region is under a lot of pressure from a large number of refugees and IDPs. I understand Erbil’s financial pressure, and I understand how much they need internal and external assistance.
Haider al-Abadi has stressed that he has the will to resolve the problems between Erbil and Baghdad. I am sure the KRG is working to further enhance transparency regarding its oil revenues, which matters to the federal government. The will to embrace democracy is strong in the Kurdistan Region.
I am even aware that the people of Kurdistan are eager to see these problems resolved. They want to know how much their revenue is and how it is spent. They want to understand the root cause of the current economic crisis in the region.
The Kurdistan Region is entitled to have knowledge of Baghdad’s entire revenue as well, which is why they both should be transparent with each other so there is common ground between the two. Coordination with the IMF guarantees transparency in revenues of both Iraq and the Kurdistan Region, which is intrinsically crucial to resolving these outstanding issues.
This high coordination between Iraqi forces in the offensive to recapture Mosul is clearly a positive indication of good will on both sides, and I think there will be more coordination between Erbil and Baghdad after the offensive.
Iraq is benefiting from the reserves of the Central Bank. Why is Kurdistan not given its share?
The Iraqi Central Bank is an independent establishment with its own rules and authority. The bank faced many problems due to its being independent when I was its deputy governor. There were some deep crises at the time due to the pressure the federal government was putting on the bank.
The Kurdistan Region is entitled to get its 17 percent of the Iraqi overall budget. Depriving the region of this right has been due to a lack of understanding between the two. Mutual understanding should enhance in order for the Kurdistan Region to regain this entitlement. The KRG authorities should disclose the income of Ibrahim Khalil Customs to the federal government so that they, in return, facilitate things for them.
How much are the Iraqi Central Bank’s reserves at the moment? What are these reserves comprised of?
We call it foreign reserves, which consist of gold and other currencies which are in total worth nearly 50 billion USD. The Central Bank doesn’t place too much focus on gold reserves, for you either profit a lot or lose a lot in its dealings due to its high price. In addition to this, the Central Bank ratified an agreement with the IMF regarding dollars. It placed more weight on the dollar due to the Middle East being a ‘dollar zone’ in the world. Gold reserves make up 6 percent of Central Bank’s reserves, as does the euro. All in all, the Central Bank is doing well now.
What do you think will be Iraq’s stance if the Kurdistan Region were to borrow directly from the IMF or the World Bank?
The KRG should have Baghdad’s approval in order to do so, for borrowing from these international establishments is based on the sovereignty of a given state. This is the IMF’s main condition to lend money. The IMF stressed a state’s sovereignty as a condition to lend money when we met them to discuss financial matters. The KRG’s Minister of Planning, Ali Sindi, was aware of the discussions we had with the IMF where they told us that they would only deal with the federal government. There is an article in the IMF’s charter which entitles regions and cities to borrow money from them, but only upon approval from the central government.
If the KRG couldn’t pay off its debt, the Central Bank would be obligated to do so. And this is a problem between Erbil and Baghdad which still remains unresolved.
How much do you think the war on ISIS will cost Iraq?
The overall cost of the war, including all the destruction and damage to the country’s infrastructure, has so far been 35 billion USD. Iraq currently spends at least 27 percent of its overall budget on its military capacities, whereas its expenditure was only 17 percent before the war on ISIS. This is at a time when oil prices have been plummeting, putting pressure on the Iraqi government. According to the IMF, the deficit of Iraq’s overall budget for 2017 will be 21 percent of its overall expenditure. This gap should be filled with internal or external debts, or by reducing expenditure. This is while we are in a situation where we have to increase our defense expenditure.
Iraq and the Kurdistan Region are both fighting ISIS, but your support to the Peshmerga is little. Are there any plans to support the Peshmerga in the future?
The Iraqi central government signed an agreement with the United States to deliver military services to our forces, including the Peshmerga who are now getting their share. It was signed when Hoshyar Zebari was Iraqi finance minister. The pact gives Iraq a 2.7 billion USD debt of which 400 million USD has been dedicated to cover the salaries of the Peshmerga. In addition to this, the Iraqi central government has already provided the Peshmerga with 10 billion Iraqi dinars. I am certain that they will help them more, due to the existing high coordination between Erbil and Baghdad.
Why is Kurdistan not given its share of the money the Iraqi central government has borrowed from international banks?
Every loan Iraq is getting is part of its overall budget of which the Kurdistan Region is entitled to get 17 percent. The Kurdistan Region should be given its share, no matter the amount of the loan Iraq is getting from these international banks. There should be a problem, if they have not yet been given the share they are entitled to get. The IMF cannot obligate the central government to give 17 percent of the loan they get from them to the Kurdistan Region. No international banking institutions can impose this condition on the central government, for this would be meddling in Iraq’s internal affairs. They can advise and recommend things, but cannot impose these conditions on us. This era is the era of all Iraqis. The KRG officials should disclose the region’s income and expenditure to its citizens, rather than obfuscating it.
As an advisor to Haider al-Abadi, what do you think the KRG should do to overcome this economic crisis?
The Iraqi PM has devised a reform program for the country. The state sector now runs 67 percent of the country’s services, which is a big mistake and should not be allowed to continue. The central government and the KRG should try to build free markets in partnership with the government, creating more job opportunities and diminishing peoples’ desire to get employment in state sectors.
This way, the desire to work in the private sector will increase. I suggest that the [KRG] establish a box for the region’s entire income to cover emergency expenses, using it to keep the balance of markets. This box can also entitle private corporations to borrow money, providing they are legal and have not evaded paying their taxes. This way there will always be some available cash for use with commission by people of the region.
Germany has a very successful track record in this area. It relied on this kind of income for a while, with its private sector making good use of it. They would reach out through TV stations encouraging people to borrow money from them in a bid to vitalize their markets, and would then get the money back according to proper mechanisms.
In Iraq, employees are supposed to work for 8 hours a day, yet their daily output takes only 17 minutes, wasting the rest of 7 hours and 43 minutes for which they also get paid. This is dissipation of human capacities and a waste of money too.