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Iraq and the Kurds Are Going Broke January 15, 2016 | Iraqi and American officials leading the military campaign against the Islamic State now have to wrestle with a challenge that has the potential to change battlefield fortunes: the slumping price of oil. The semi-autonomous Kurdistan Regional Government in northern Iraq, an oil-producing region, has racked up $18 billion in debt, which has imperiled its ability to pay state workers and security forces. This is especially worrisome since Kurdish security forces have been instrumental in rolling back the Islamic State’s advances. The government in Baghdad, meanwhile, is scrambling to avoid a budget shortfall this year. Iraqi officials last year obtained a $1.7 billion loan from the World Bank and reached an agreement with the International Monetary Fund that will allow it to obtain additional loans. Baghdad is seeking to renegotiate with international energy companies new terms for oil contracts, which have become less advantageous for Iraq as the price of oil has crashed. And it is seeking a $2.7 billion loan from the United States to acquire military equipment. Photo Unemployed men on the outskirts of Erbil, Iraq. CreditAlice Martins/Associated PressIraq’s budget problems have rightly alarmed officials in Washington. While there is little appetite to bankroll a country where so much American money has been wasted and pilfered since the ill-conceived 2003 invasion, Iraq’s economic problems must be addressed. If they are to worsen, more Iraqis will almost certainly join the tide of refugees leaving the Middle East and the government will have a harder time rebuilding areas that Iraqi security forces have wrested back from Islamic State control. “We’re asking our partners and allies to increase their military aid,” Lukman Faily, Iraq’s ambassador to the United States, said in an email. “Iraqis are willing to do the fighting on the ground, so it would not be unreasonable to expect the international community to provide us with the military and logistics support to effectively wage this war.” Cash handouts like those America has provided over the years in Iraq and Afghanistan should be out of the question. But the United States could well offer the Iraqis technical advice and help the government secure access to credit from international institutions. The International Monetary Fund agreement forces Iraq to adopt reforms that will be healthy in the long run. These include measures and policies intended to wean the country from its near-absolute reliance on oil, and slashing wasteful spending by senior government officials. Iraq is also contemplating sensible measures it has long resisted, including fighting corruption, thinning its bloated state payroll and overhauling its taxation system. “In some ways, our economic challenges are an opportunity for us to get our house in order,” Mr. Faily said. Baghdad also must address the financial strains on the Kurdistan Regional Government. The Kurdish region, which includes three provinces, received a percentage of Iraq’s national budget until 2014, when Baghdad cut it off as part of a long-running dispute over oil revenue from fields in the north. Desperate to pay salaries, officials in Iraqi Kurdistan have seized deposits at two branches of Iraq’s central bank, a problematic and unsustainable course. Still, the government has been unable to pay state workers on time. Brokering a compromise to the budget dispute between the Kurdish region and Baghdad won’t be easy, because a broader fight over oil revenue in the north remains unresolved. But the United States and the international organizations that are stepping in to ease the budget crunch have significant leverage over the parties now. Allowing the dispute to drag on will make it harder to solve and give Islamic State militants breathing room.
