The Dilemma of Kurdistan’s Black Gold

By Dr. Bayad Jamal Ali:

As we all know, oil prices have reached a record low, trading below forty dollars per barrel and this situation raises questions about how the oil-dependent economies can cope and what will be these governments’ new fiscal policies. For three decades the Gulf countries, Iran, Saudi Arabia, Iraq and all the other oil countries have not had to face such big budget deficits. Adding to this, Saudi Arabia and Iraq plan to overcome the crisis by increasing their oil production to full capacity, and many analysts and economists are agreed on what a strategic mistake that is.

The decrease in the petro economies’ revenues creates many difficulties for the finances of each county, and will damage stability for some. The above chart from the International Monetary Fund (IMF), published in July 2015, makes this issue particularly clear. It shows the forecasted fiscal deficit of the Gulf (GCC) countries, Saudi Arabia, UAE, Oman, Kuwait and Qatar, which are highly oil-dependent economies, showing the effect of the drop in oil prices from $100 per barrel to $40 dollar per barrel, and its negative impact of these countries’ GDPs.

On the other hand it would be interesting to know, what is the cost of one barrel of oil in Kurdistan? As for the countries that provide data to the IMF, there is clearly a huge challenge posed by the drop in oil prices which makes it hopeless for their governments to depend on oil revenues to cover their expenses.

In order to have a better comprehension of the severity of the fiscal status of our country, let’s observe the below chart from the IMF illustrating the break-even oil prices required by different oil-dependent countries. With the current $40 dollar per barrel price, there is no petro economy that can balance its budget, because the lowest cost of oil production is in Kuwait, which is around $50, and the cost of oil production in Iraq is around $70. Actually, all petroleum-producing countries are at a loss in the current situation, and they all face the challenge of generating enough revenue to cover their operating expenses.

Break even

The fall in revenues of these oil dependent governments leaves them with two options. The first option is to choose austerity measures by cutting spending, which means the government may then face social unrest, which is indigestible after seeing the consequences of the Arab Spring. To add to that, youth unemployment is a challenging issue in the Middle East in general, and in Kurdistan in particular; the government has to be sure to provide government jobs for the local population to maintain stability — its inability to keep doing so leads to increased immigration to Europe and the threat of instability.

The second option is money borrowing. Saudi Arabia has taken this option and, as we have heard from different sources, the Kurdistan Regional Government (KRG) has tried to do so by getting investment banks to issue sovereign bonds, although no official information has been shared with the public. But the difference between Saudi Arabia and Kurdistan is that Saudi Arabia has a foreign currency reserve of $660 billion in case anything goes wrong. And it is important to clarify that borrowing from such sources by the KRG with high interest rates of 10% – 15% is very dangerous, with no clear prospect of paying it back, just putting Kurdistan’s oil as collateral, and leading to a scenario worse than Greece.

So here we have a question for the KRG. Will the government keep borrowing and spending — hoping oil price increases are just around the corner — or will they bite the bullet, tighten their belts and risk social unrest?

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