We are approaching an energy inflection point in the global economy: plentiful oil supply, a demand plateau by 2030, and more competitive renewable-energy options, even as investors and consumers grow leerier of carbon-intensive products. Oil producers’ future in the Gulf is still one in which oil revenues fail to meet growth goals of governments, with a knock-on effect on job expectations for citizens. There are a number of areas where Iraq can draw on the experiences of the GCC to address its economic crisis and implement economic diversification policies; but while the fundamentals are similar, in that Iraq and the GCC states are generally reliant on oil revenues for government spending, demographics, infrastructure, security and savings are all very different in scale and composition. For Iraq, expatriate consumer demand is not an issue, nor is a burgeoning tourism and entertainment sector to attract Foreign Direct Investment (FDI). The most obvious point of difference is the voracious political competition and a tense parliamentary democracy in Iraq that does not exist in the GCC states.
In finance, Iraq’s monetary policy and recent currency devaluation shows more flexibility than the GCC currency pegs, but it also creates an increasing external debt burden at much higher repayment terms than GCC states have to offer. The devaluation also risks lowering domestic consumption, as people will buy less as their incomes become lower relative to the price of goods and services. Devaluations tend to increase the attractiveness of domestically produced goods, but Iraq imports nearly all of its consumer products with the exception of some agriculture. In governance and institutionalization, Iraq faces a larger burden of administering its revenues from oil across the country efficiently and equitably via disparate government deposits in local banks, and particularly in disputes from the distribution of oil revenue to the Kurdistan Regional Government (KRG). Efforts in late 2020 to establish a reform agenda hit the key issues, including: cuts to the public sector wage bill, strengthening the bank sector, legal reforms, advancing digitalization, and improving government services and infrastructure.
Despite the differences, this article delineates and compares economic diversification efforts underway in the GCC that might prove useful in the Iraqi context, for the state as a whole, and measures that might be adopted in the context of the Kurdistan region. As in the GCC, the period between 2015 and 2020 became a reckoning for living with lower oil prices and reduced government revenue, spurring action for governments to seek additional sources of revenue generation. Taxes are the most likely and feasible source for governments. Across the GCC, the implementation of a simple value-added tax has been inconsistent, with Bahrain, Saudi Arabia, and the United Arab Emirates alone enacting the measure by March 2021. Saudi Arabia deviated in its tripling of the tax in July 2020, as an extreme measure to both generate new government revenue and prepare citizens for perhaps more taxes and fees to come. Iraq’s government introduced new taxes in 2015, including new sales taxes. These taxes included a 300% tax on alcohol and tobacco, 15% on travel tickets, 15% on cars, and 20% on mobile recharge cards and internet services. This is in addition to tourism and hospitality service taxes on first class restaurants and hotels subject to a 10% sales tax.
Moreover, as in the GCC, Iraq’s government has actively sought debt finance in the form of loans, including IMF agreements, to meet its fiscal shortfalls. However, access to credit has relied more on internal finance, from the local bank sector and the issuance of treasury bills sold to domestic investors by the Ministry of Finance, along with IMF support, which the GCC states do not have to rely upon given their ready access to credit from bond investors and syndicated loans. Iraq does not enjoy the GCC states’ credit ratings (at least most of them, excluding Bahrain and Oman), with an April 2020 Fitch rating of Iraq in the B- long term (reaffirmed in February 2021), junk status.
Iraq’s burden of debt repayment is also high. Debt payments are expected to average about $5.8 billion state-owned defence contractor in January 2021. The contract has been “deferred” but illustrates the need for access to capital and the vulnerability of countries without strong credit ratings and interest from bond investors. In the GCC states, access to credit from Chinese state entities has also been a factor for Oman’s debt financing, while wealthier GCC states have entered co-investment deals in refineries with Chinese state oil firms and asset sales of pipelines to international investor consortiums to raise capital from their oil sectors. Because oil revenue and asset sales are more contentious in Iraq given the revenue-sharing agreement with the KRG, the market for external investment in its oil sector is more tenuous.
However, some of what has worked in the GCC may have some transferability to the Iraqi case, but in very broad terms. First, women’s economic inclusion can have a dramatic effect on workforce productivity and economic growth. Just as the GCC states have made policy efforts to increase women’s economic inclusion and workforce participation, Iraq could find significant benefit in expanding such opportunity for this demographic. Women’s labour force participation in Iraq is very low, at about 11 percent in 2019, according to ILO data, and women’s unemployment (i.e., women who are actively seeking work and do not find it) is about 30 percent. This tells us that even among the small portion of women trying to work, almost a third of them are having trouble securing a position. Clearly, an even larger number of women have exited the workforce or given up on trying, for any number of reasons, including safety. Given the security nexus, this rate is not necessarily surprising, but represents a key missed opportunity for women and their families.
The UN’s Gender Inequality Index shows that Iraqi Kurdistan is relatively better off than the rest of Iraq. This measures gender inequality based on reproductive health, empowerment, and labour market participation. It ranges from zero to one, where the lower the score the more equality there is between women and men. Iraqi Kurdistan achieves a score of 0.41 compared to the rest of Iraq, which ranks at 0.55. According to the same data, Kuwait, Turkey, and Saudi Arabia have indices of 0.27, 0.36, and 0.68, respectively.
Second, hard and soft infrastructure investments have reaped gains in transport and trade links, educational access, and general mobility for large parts of the GCC over the past few decades. In Iraq, investment in infrastructure has more recently included reconstruction efforts funded by aid. Interestingly, GDP growth has correlated more to oil prices than to official development assistance (ODA) or foreign direct investment (FDI), which has been relatively flat since 2005. The ability to attract foreign direct investment is a challenge and much of it correlated to the business climate, regulatory hurdles, and confidence in the rule of law. Even within the GCC, there is large variance. Saudi Arabia has struggled to increase FDI for a decade, while the neighbouring United Arab Emirates is a regional leader as an FDI destination. For Iraq, there are some obvious weaknesses, but strengthening government institutions and combatting corruption would be first on the agenda. Strengthening the domestic bank sector and the government’s use of domestic banks to conduct its own business through public sector payrolls and contracting are starting points articulated in the government’s own reform initiatives.
In the case of the Kurdistan Regional Government (KRG), there is an autonomous, self-governing region that has the advantage of a smaller population and a comparatively more stable political order, along with the leverage of oil production in negotiations with the Iraqi government. The KRG has been able to attempt some reform initiatives on a smaller scale, including a digitalization strategy that it is currently developing to combine public service delivery policies with the centralization and automation of data, and which could improve transparency, accountability, and efficiency. Frustratingly, Iraq has not benefitted from regional investment flows, particularly investment from the GCC states. One exception to this is the Kurdistan region, where UAE based Dana Gas, part of the Crescent Petroleum, has invested at least $1.6 billion in Kurdistan’s gas resources and plans to invest at least an additional $700 million. There is some renewed effort to expand electricity grid sharing and interest in infrastructure investment from the GCC into Iraq.
Saudi Arabia and Kuwait have led plans to transmit 400 megawatts of power to Iraq via connection to the GCC grid. But without significant investment in Iraq’s own grid system and the ability to use its own national gas for electricity generation (without relying on supply from Iran), its power sector will be a loss-leader rather than a source of savings and a reliable foundation for other sectors to use to operate and grow. New Emirati and Saudi commitments to each invest in Iraq in the form of $3 billion funds for private sector initiatives were agreed upon in April 2021, but details are scarce. In the transition to be energy sector innovators rather than just oil and gas exporters, Iraq is most vulnerable to the lack of investment and opportunity costs. Saudi Aramco’s investments into the LNG business, along with global assets in refineries and petrochemicals are joined with new investment into next generation clean energy like green hydrogen and solar power.As the GCC states and their national oil companies seize market share in these emerging sectors, more traditional oil exporters will more quickly see their products in lower demand. Given the opportunity to build new domestic electricity production, Iraq would be well-positioned to invest in new technologies and encourage innovation for both job creation and cost-saving.
Iraq’s diversification needs are immediate and politically difficult, as are those of the GCC states. For Iraq, however, access to capital to meet immediate government spending needs is acute, and longer-term investment and opportunity for next generation infrastructure and technology is harder to reach. Government policy on job creation and opening opportunities for women and young people could be innovative. Both Iraq and the GCC states are moving in the direction of alternate sources of government revenue through raising taxes, which increases demands on government accountability from citizens and expectations of service provision. Localization efforts to produce more domestically and hire nationals to do the work may actually be easier to achieve in Iraq than in the GCC.
The trajectories of these economies are tied together, but they are also direct competitors in their key source of government revenue. There is no single solution to economic diversification, but there are at least more policy efforts across a wider geography to study and implement, tailored to a domestic context.
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