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Monday, April 16, 2007

Iraq economy: Kurdish promise


You would be hard pushed to find an area keener on attracting foreign investors than Iraqi Kurdistan. The region is almost entirely dependent on imports, as the authorities search for ways to rebuild an economic base that was all but destroyed during the Anfal campaign of Saddam Hussein in the late 1980s.

Local industry and, especially, agriculture (once the dominant employer in Kurdistan) were all but annihilated by the time Kurdistan gained its autonomy in late 1991. Large parts of the local population had been forcibly evicted from their razed villages to the towns by Saddam, and subsequently employed in the public sector in an effort to ensure their dependence on Baghdad (even now some 1.1m people out of the Kurdistan population of 5m still work in the public sector). Meanwhile, infrastructure was left to deteriorate, and several universities and schools closed. From such an unpromising beginning, the Kurdistan Regional Government (KRG) was born, comprising the three governorates of Dohuk, Erbil (the regional capital) and Suleimaniyah. A civil war between the two main Iraqi Kurdish parties--the Kurdistan Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK)--between 1994 and 1996 hardly helped matters, and led to a splitting of the administration into their respective strongholds in Erbil and Suleimaniyah. Since that time, however, the region's fortunes have revived, as the toppling of Saddam Hussein in 2003 and the descent into anarchy in Baghdad and much of central Iraq, combined with a rapprochement between the PUK and the KDP (most state ministries are now merged and located in Erbil), has seen the KRG area emerge as a relative haven of stability.


This has allowed the KRG to project itself as a "gateway to Iraq", aiming to draw in foreign companies seeking to take advantage of the reconstruction opportunities in "Arab Iraq", but which are deterred by the lack of security throughout much of the rest of the country. However, even this is proving a challenge. Despite there having being only two bomb attacks in Kurdistan since the fall of Saddam in 2003, the region's image continues to suffer from the headline-grabbing horrors witnessed daily in other parts of the country, and Western officials and businessmen still often prefer to hire private security firms to ferry them around. Such attitudes exasperate some in the KRG--as well as the general public--and it is easy to sympathise with their frustration. At least in the cities, the Peshmerga maintain a reassuring, albeit somewhat pervasive, presence, and the locals are friendly, and, as such, Westerners are often seen walking unaccompanied.

The government has sought to supersede security concerns by passing one of the most foreigner-friendly investment laws in the entire Middle East. Under the investment law of 2006, foreigners not only enjoy some of the advantages on offer in various other Arab states--such as a ten-year tax holiday, and free repatriation of capital—they can also purchase land (for only a "symbolic" fee), which will be theirs for perpetuity. The law has been widely praised by both local and foreign businesses in the area, and, according to the head of the Board of Investment, Herish Muhamad, as of March some 17 firms had already registered. Yet his admission that most of these were connected to property projects highlights the unbalanced nature of the region's current economic recovery.

Real estate boom

The property sector in Kurdistan is booming. The massive US$1bn "Nishtiman" shopping mall is under construction in the centre of the Erbil, and a swathe of housing projects, including notably "Dream City" on the outskirts of the city, are presently in-build. A leading local businessman, Ahmed Rekami, whose US$20m "New City"--which boasts a shopping mall, and 52-room hotel--recently opened in the centre of town, likens the situation to Dubai in the 1990s. Indeed, the bullish Mr Rekami relates that he has turned down the opportunity to move to the emirate because the opportunities in Kurdistan are so vast.

Yet, with this economic upturn has come associated inflationary pressures--according to Professor Almas Heshmati, head of the department of economic and finance at the newly-constructed University of Kurdistan Hawler, house prices have doubled over the past few years--and Mr Rekami says that the price of cement has risen from US$50/tonne in 2003 to US$170/tonne. A new cement plant built by Egypt's Orascom Construction Industries (in partnership with the local Farouk Rasool Group) near Suleimaniyah is set to open in August, but this will provide only partial respite. In addition, not all the blame for inflation can be laid at the door of the property sector--intermittent influxes of budgetary cash from Baghdad cause sudden fluctuations in the money supply, and fuel prices have leapt because of a shortage of refined products (leading to a thriving black market). However, perhaps more importantly, it is not excess cash but the supremacy of cash that is holding back the Kurdistan economy at present.

Cash economy

The banking sector in Kurdistan is severely underdeveloped. Cash dominates, to such an extent that when asked what people buy their houses with, Adham Darwesh, the general manager of the Central Bank of Kurdistan, replied (through a translator): "piles of cash". In interviews, the trade and planning ministers, as well as the head of the investment board, all acknowledged the lack of a developed financial system as a serious hindrance. However, there may well be room for optimism. Although Mr Rekami's complaint that the banks offer little more than a money transference service may be true at present, the arrival of new foreign banks, including Dar Es Salam (80% owned by HSBC) and most recently Lebanon's Byblos Bank, should help increase capacity. The head of the investment board also revealed that another Lebanese bank, Bank Audi, is in negotiations about setting up in the region, and he argued that the banking situation will be "sorted out very soon". Achieving this will be crucial, and not just because of the extra support it will offer to private-sector ventures. The opacity associated with having to deal almost solely in cash can often prove a deterrent to foreign businessmen, and corruption in Kurdistan is a widely-acknowledged problem.

However, for those within Kurdistan, the most urgent need is for substantial foreign investment. The government is seeking foreign money to finance the huge infrastructure upgrades needed—including a proposed road linking all three of Kurdistan's main towns with their borders—and Mr Muhamad floated the intriguing option of "sharing management services" usually associated with the government, such as greater private-sector participation in the education sector, and even potentially PFIs in road and bridge construction. With the constitution confining sovereign debt issuance solely to the federal government, and the KRG allocated just 17% of federal oil revenue (after current spending)--the planning minister, Othman Shwani, among others, has argued that Kurdistan needs more, considering Saddam's legacy in the Kurdish areas—foreign money is desperately needed.

Local businessmen are extremely keen on forming partnerships with foreign firms, with Baz R. Karim, the president of local KAR Group, putting forward the argument that joint ventures are the most successful model for doing business in the country as a whole. His firm's record would seem to support his view, having completed a raft of projects across both the civil and oil sectors. For example, in partnership with USAID, the firm has supplied furniture to over 2,800 schools all over Iraq, successfully installed a fibre-optic cable in Baghdad and further north with Bechtel of the US, and says it is more than halfway through the US$175m Hamrin oilfield project, a joint venture with OGI Group of Canada, located south of Kirkuk. Yet finding sufficient foreign enthusiasm for such joint ventures is perhaps proving the greatest challenge.

Although Turkish firms have poured into Kurdistan over the past ten years, the much sought-after Western firms, with their up-to-date technology and high-quality products, have so far proved more reticent. Legal concerns have deterred the arrival of new oil firms--although five small- and medium-sized companies have signed contracts with the KRG--as the federal oil law awaits approval in Baghdad.

Meanwhile, security concerns also still appear to predominate, and not just among Western companies. Despite the warm words of Western governments towards the KRG, these sentiments do not seem to be shared by their visa offices. Dara Jalil al-Khaymat, the president of the Erbil Chamber of Commerce, highlighted EU countries' regular refusal to issue local businessmen with visas as a major impediment, while Mr Muhamad pointed out that one of his keynote official speakers could not attend a business forum in London because UK immigration had refused his visa request. Meanwhile, direct bilateral aid has been in short supply and often misdirected--a finance official in Suleimaniyah said that the area has received only US$80m from the US in direct aid, most of which was spent on police stations they did not want. A plan to set up two free zones in the region may help, although it is not entirely clear what extra incentives these could provide beyond those included in the Investment Law. As such, the KRG is still struggling to attract the Western firms and finance it so desperately needs. Although the old lament that the Kurds have "no friends but the mountains" may no longer be entirely true, it appears, at the moment at least, that some in Kurdistan still need convincing.

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