How are these three issues related to one another? What kind of effect does the Kurdistan Regional Government (KRG) and Islamic State (IS) have on the economy? What has been the economic ramifications of the fiscal policy of the KRG regarding taxation and spending?
IS has had a crippling effect on the Iraqi and Kurdish economy both directly and indirectly. Directly, the expense of the war effort has been enormous, estimated at millions of US dollars daily. Indirectly, the threat of IS hindered local and foreign investment in Iraq and the Kurdistan Region.
Security is a prerequisite for economic investment, growth, and development. The fall of IS is now going to bring forth a new economic era. Iraqi Special Forces are quickly recapturing Mosul, and the brave Peshmerga are surrounding the insurgents around the city to prevent their escape into the Kurdish borders. As a result, confidence is restored regarding Iraqi and Kurdish stability. Local and foreigner investors are once again looking at economic opportunities in the region.
For nearly three years, the business community in Iraq and Kurdistan had been waiting for a turn of events. How would the KRG play its cards in a post-IS era? Economic and business success in the Kurdistan Region depends mainly on what actions the KRG takes regarding its fiscal policy. Fiscal policy involves government spending on different sectors of the economy like health, education, defense, and infrastructure. It also requires managing government taxation and tariffs on individuals and businesses but does not include monetary policy, though. The Iraqi government and the Iraqi Central Bank controls the monetary policy of the Iraqi dinar exchange rate and interest rate.
Before IS’ emergence in 2014, the KRG’s fiscal policy was mainly one-sided. A lot of spending, but limited taxation. There was an increase in the Gross Domestic Product as the KRG was spending about USD $600-700 million to pay government employees estimated at 1.2 million Kurds out of nearly five million of the total population. There was a lot of consumer spending on products and services as a result of these wages being paid. In turn, this increased demand for consumer goods and services created economic activity.
What about taxation? Taxation is the primary means of government revenue for most countries. The KRG should have developed a stronger fiscal policy of taxation from the start. The principal source of income for the KRG has been national budgetary payments by the Iraqi government and oil revenues from direct crude oil sales to the international market. The economic depression in Kurdistan has shown that without taxation it is not possible to support government spending–a lesson learned.
What about the lesson that should be acquired from the economic depression in Kurdistan? It appears the KRG is taking action by bolstering its fiscal taxation policy. There are increased corporate taxes and tariffs on foreign goods, value added tax, and so forth. This is starting to generate some revenue for the government, although it is not sufficient to cover national expenditure. Economic recovery is slowly showing signs in the market. If this continues, and economic growth and development are achieved, the lessons of the recent past would not be forgotten.
The boom and bust cycle (economic growth and recession) is inevitable; there will be no permanent boom in Kurdistan. As such, the KRG needs to maintain a stable fiscal policy as a back-up to build a budget surplus, which is extra cash the government keeps instead of spending. This budget surplus would be much needed as an economic plan B in case of another bust.
Swara Kadir is a UK educated business studies lecturer and writer at a leading private school in Erbil.
The views expressed in this article are those of the author and do not necessarily reflect the position of Kurdistan24.
Editing by Karzan Sulaivany