Economic reform and transparency

The Kurdistan Regional Government Economic Reform Program

The Kurdistan Regional Government (KRG) has responded aggressively to the economic crisis triggered in 2014 by the quadruple shocks of revenue cuts by Bagdad, war with ISIS, influx of Iraqi internally displaced people and Syrian refugees and the sharp fall in global oil prices. As a regional government lacking access to fiscal transfers or significant external financing that are available to sovereign states, the KRG has relied on the limited crisis-response instruments available to it: primarily, fiscal adjustment (austerity) and structural reform.

The KRG is currently enacting reforms to overcome the crisis and build a more robust economy in the future. Urgent austerity measures and a shift to direct oil exports have improved the Government’s immediate cash balance, while structural reforms have begun to tackle the longer-term challenge of transforming the public sector and promoting diversification of the economy.

Structural Reform Priorities

In cooperation with the World Bank, the KRG has adopted a comprehensive roadmap for structural reform in the Kurdistan Region.  Within that framework, the KRG has focused on priority areas that include:

1. Institutional Modernization of the Ministry of Economy & Finance (MOEF) to equip the ministry to lead fiscal policymaking and become a driver for reform.
2. Biometric Registration of government employees, pensioners and citizens receiving monthly stipends or benefits (for example, war widows, welfare payments for disability). The registration helps identify the possibility of ghost workers or double payments to welfare recipients.
3. Electricity Sector Reform aimed at improving the quality of service and achieving financial sustainability.
4. Enhanced Government Transparency and Citizen Engagement to strengthen credibility and build public support for the KRG’s programs.
5. Development of a Social Protection Strategy that will promote shared prosperity, more equity in living standards, and reduce vulnerability over time.

MOEF Institutional Modernization: The program covers five reform streams: macro-fiscal, customs, tax, public financial management, and IT infrastructure and services. 

• In the macro-fiscal area, the reform aims to establish a macro-fiscal framework to guide the formulation of annual budgets for the KRG.
• For customs, the immediate objective is to connect customs posts across the KRG to improve service standards and provide real-time information on revenue collection.
• In taxation, the priority is to improve tax administration and collection.
• The immediate goal of public financial management reform is to strengthen control over public expenditure, while improving management of government liabilities.
• Improvements in IT infrastructure and services within MOEF will drive the transition to automation and away from outdated manual procedures.

Biometric Registration: Rightsizing government stands out as a long-term goal of the KRG’s reform program. Biometric registration represents a first step down this road, and will open the door to more complex questions of ‘why and to do what’ under subsequent civil service reforms. 

The result will be an Identity Management System that drives broader government payroll reform.  The KRG will be able to identify double-payment situations and address those that are not allowed.  It will also be able to identify ghost employees.  This will pave the way to subsequent e-payroll and e-payment systems that will further enhance administrative performance and transparency, as part of the ultimate objective of transitioning to modern e-government services in Kurdistan.

Electricity Reform: The KRG has initiated electricity reforms to tackle the financial imbalances and structural weaknesses that have resulted in huge quasi-fiscal losses and poor quality of service to consumers, despite near universal access to electricity and an impressive increase in private power generation by independent power producers (IPPs). The government is pursuing a two-pronged strategy.  The immediate goal is to cut costs and improve financial sustainability, while developing a medium-term reform plan in cooperation with the World Bank.  

Starting in 2015, the KRG has undertaken steps to curtail costs for electricity generation, including: (i) a shift in towards natural gas in place of diesel fuel, (ii) the introduction of more fuel efficient combined-cycle technology, and (iii) voluntary renegotiations with IPPs to lower take-or-pay penalties in light of excess generation capacity.  As a result, total annual costs have been cut by as much as $1.5 billion in 2016.

Government Transparency and Citizen Engagement: The KRG recognizes that enhancing government transparency and citizen engagement are key to building and sustaining popular support for its programs. Governance is never a popularity contest, and this is particularly true in situations of crisis. Popular support has to be earned through actions that strengthen credibility and promote participation.  The KRG is working to step up its citizen engagement and public communications efforts. A cornerstone is the introduction of international audit of Kurdistan’s oil and gas operations. Contracts with international auditors have now been signed and initial work is underway.  The audits will cover oil exports, international oil companies, and domestic operations (e.g., local sales of crude and refined products). To promote public engagement and awareness, an observatory encompassing key representatives of civil society will be established to follow the audit process and disseminate the results.

Social Protection Strategy.  Reform of the social protection system aims to deliver on the KRG 2020 Vision to ‘put people first’.  It encompasses plans to: (i) strengthen the labor market, including accelerating private sector job creation, (ii) expand pensions and social insurance, including pensions for private sector workers and creation of unemployment insurance, and (iii) improve the (non-contributory) social safety net, including using poverty as a main determinant of eligibility.