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Deputy Prime Minister’s Speech at the Oil and Gas Conference in London

Text of speech by Deputy Prime Minister, Qubad Talabani, at the Oil and Gas Conference in London, 30 November to 2 December 2015:

Good morning ladies and gentlemen.

Thank you for attending this important conference in these difficult times, and for your continued support to our development despite the challenges we face. As you all know, Kurdistan has a lot to offer to international investors and the international community.

At the same time, we are mindful of the fact that business does not occur in a vacuum and doing business with the KRG today is part of something bigger, especially since energy and economy are inseparable from security.

I wish I could tell you that everything is great and Kurdistan is as vibrant and growing as in the past. But your commitment to the place, your investment and our partnership and friendship prevent me from standing before you to tell you everything is alright.

Things are pretty far from being all right at the moment.

But I will tell you today that I am confident that together we can overcome the challenges. And I will outline some of the ways in which we will make things alright – and better – again.

Kurdistan is today being tested by a series of crises. Security, Humanitarian Political and of course Economic.
I must say I am proud that we are turning these crises into opportunities to look at our shortcomings and to address them.

Thanks to the heroic efforts of the Peshmerga forces and vital support of the International Coalition against Daesh, Kurdistan today is a safer place.

Our forces managed to absorb the initial shock caused by Daesh attacks on Kurdistan and today our forces are a lot more efficient, better organised and more determined to face the state of terror that calls itself Daesh.

With the continued support and resolve of the international community and the trust of our partners in this room, we can achieve important progress against the DAESH threat.

As you saw in Paris, Beirut, Sinjar and other areas, the terrorists will stop at nothing to inflict death and terrorise people anywhere.
Our shared values of life, freedom and morality put us all under the duty to eradicate them.

Kurdistan has also risen to the challenge of hosting over 1.8 million Syrian refugees and internally displaced persons (IDPs) from conflict affected regions of Iraq.

Today Kurdistan is a safe haven for all who are fleeing violence because of their identity.

Those seeking safety have been welcomed by the Kurdish people and were provided food, shelter and services by the KRG.

This all despite the insufficient assistance from the international community and almost no assistance by the Federal Government of Iraq.

This humanitarian crisis has caused a 30% increase in the population of our region, and I am proud but not surprised at the tolerance, hospitality and acceptance by the people of Kurdistan of this unprecedented influx in such a short time.

Our police and internal security records show near-zero incidents of hate or racist crimes against the IDPs and refugees.

More recently, Kurdistan has faced an internal political crisis. Disputes amongst the political parties regarding the term and powers of the President, issues surrounding the Parliamentary Speaker and the Cabinet have reached a critical stage.

But I believe that the worst is behind us. These political disputes have been, and will continue to be part of Kurdish political life. All parties have committed to addressing these disputes through dialogue and negotiations.

We must remain true to our commitments and prove to our people and our friends around the world that we can overcome such political challenges in a civilized and democratic way.

But of all of these crises, the one that poses the most significant threat to the long-term future of Kurdistan – and the one that is taking most of our time in government office – is the economic crisis.

Kurdistan’s economic crisis was set off by the ‘triple shock’ of: the inexcusable and unjustifiable cutoff in fiscal transfers by the federal government of Iraq in February 2014,

Which was then followed by the conflict with DAESH in mid-2014, and further compounded by the sustained fall in global oil prices which has continued throughout 2015.

These shocks are responsible for the sharp decline in the economic activity in Kurdistan and has caused us significant difficulty to meet fiscal obligations.

However, the deeper origin of the crisis was already visible in 2013:

At a time when oil prices were over $100/bbl and fiscal transfers, albeit incomplete, still flowed from Baghdad, the KRG ran a budget deficit of some 1.7 trillion Iraqi Dinars. Even back then, Kurdistan was living beyond its means.

Moreover, the Kurdish economy was almost entirely dependent on revenue from Iraqi oil exports, .

Because we failed during the ‘boom years’ of high world oil prices to invest in diversifying the economy through strengthening sectors like agriculture, industry and tourism to increase production and create jobs, Kurdistan was unprepared when the first wave of the triple shock hit in early 2014.

To pay salaries and pensions, and fund the war with DAESH, and service the large number of refugees and IDP’s other government expenditures were slashed.

Public investment in roads, schools and health facilities came to a halt. Despite our government’s best efforts, payments to government employees, pensioners and private contractors fell into arrears.

In 2014, as a direct result of Baghdad cutting our budget payments the KRG registered a budget deficit of nearly IQD 8 trillion ($6.5 billion).

This was funded through advances from the local banking system, bilateral loans, and forward sales of oil and refined petroleum products. As the shock wave continued in 2015, so did the fiscal imbalances.

A new budget agreement with Baghdad raised hopes at the beginning of 2015, but these were soon dashed as the Federal Government did not meet its payment obligations.

Let me be clear on this point: Baghdad may have had financial difficulties of its own, but it was for their own political and financial reasons that they made the choice that was easiest for them and that was to continue to shortchange the KRG while maintaining regular payments to non Kurdish parts of Iraq, including areas under Dash control.

I repeat today what we have stated on numerous occasions: We still prefer to reach an agreement with Baghdad and we are always ready for that.

But Baghdad has left us no other choice but to pursue the course we pursued.

We had to expand our independent oil exports. And thankfully, because of the support of many of you in this room, and of course the efforts of our indefatigable oil minister Ashti Hawrami, our production and export capabilities have increased and our oil has legally found its way to Market.

But despite this progress, global oil prices softened further and our salary arrears have increased.

A budget deficit on the order of IQD 2-3 trillion is projected for 2015, which is better than 2014, but it’s still very large.

Today, it is clear that the KRG’s fiscal situation is unsustainable and that major reforms are needed to restore fiscal balance.
We cannot just borrow our way out of the problem and a further buildup of arrears is unacceptable.

Fiscal sustainability is not only an urgent priority, it also points the way forward to a stronger, more robust economy for Kurdistan in the future.

Economic strength is the ultimate source of long-term peace, prosperity and stability for our people and region.

And so my government has identified three priorities for fiscal reform; these priorities complement action in other areas, such as mobilization of non-oil revenue and further cuts in non-salary operational expenditure.

The first priority area is restructuring expenses. In particular creating a more sustainable salary and pensions scheme .

It is widely known that in Kurdistan, nearly 70% of the region’s budget is spent on salaries of civil servants and on our pensions scheme.

This is unsustainable, therefore our government is considering a range of policy options for reforming public sector spending, in particular restructuring salaries and pensions.

In this, we are keen to ensure adequate protection for those at the bottom of the pay scale and a readjustment of benefits and allowances for those higher up the chain.

We are also analyzing the reform measures announced recently by the Federal Government and if necessary we shall adopt them too.
The second and third priority areas for reform are petroleum products and electricity sector respectively.

These two areas benefit from large subsidies paid for by the KRG. For example, the KRG provides diesel and natural gas free of charge to the independent power producers.

Total subsidies to electricity cost the KRG over $3 billion annually, electricity tariffs are low and billing and collection are weak. Despite the presence of private refineries and power producers, the government plays an overly central role in administering both petroleum products and electricity.

Reform options are under consideration and some underway for reducing subsidies for petroleum products and electricity, while continuing to offer protection to the most vulnerable consumers.

The KRG is also putting in place plans to reduce the role of government in running these sectors in order to focus more on regulation in line with international standards, while encouraging private investment.

Our people have become accustomed to generous government salaries and other payments, benefits and subsidies funded by oil revenues.

But what was feasible at $100/bbl is unsustainable at $40/bbl.

We didn’t introduce any automatic adjustors to government payments to take account of lower oil prices, nor did we save or invest enough, particularly in supporting private investment in non-hydrocarbon sectors. But now is as good a time to act as any, and we will.
Economic reform is necessary but won’t be easy. We know we cannot do it alone. We have asked the governments of the UK, the US and other European countries for technical assistance as we begin to finalize and implement our reform agenda.

Reform is essential in order to preserve our stability and ensure our success.

Despite the size of the challenges we face, I am optimistic that with the resolve we have, we will overcome our fiscal challenges; balance our budget; begin to operate a fiscal surplus and resume timely payments to our reformed public sector and to our partners in the private sector, both domestic and international.

At the same time we are increasing our non oil related revenues.

We are seeking ways to monetize assets, including our oil infrastructure assets. We are reviewing our tax regime as well as restructuring electricity tariffs for the big factories and those in industry who have high electricity demands to come more in line with industry standards.

We will continue to make our arrears payments to the IOC’s so that they continue investing in the infrastructure thus increasing our production and export capabilities.

We truly appreciate the patience of our IOC partners, and we will repay that faith with continued determination to meet our financial obligations.

We never forget those who helped through our bad times. We will improve the delivery of services to our citizens and business by reducing red tape and by making our transactions more transparent.

We have already begun to make governmental transactions e-ready in Kurdistan and in early 2016 we will announce our government services portal to the people of Kurdistan and to the business community.

Through this portal,citizens and businesses alike will know exactly the steps necessary to receive government services and by making such transactions and services clear and transparent, we will begin to weed out corruption and make processes faster and easier.

We will continue to make advances against Daesh, and preserve the safety and stability of Kurdistan, and with our partners in Iraq and the international coalition, we will eradicate this threat and make Kurdistan and Iraq a safer place for business.

They say it’s darkest before dawn. Even if everyone doesn’t see it yet, I can sincerely say that we’re starting to see those rays of sunlight appearing on the horizon.

The path forward will not be easy.

Here, I would like to remind the people of Kurdistan that the generations of our parents fathers and grandparents grandfathers faced greater challenges than those we face today, and overcame them often with no friends but the mountains.

Today, I can confidently say that we have more friends than the mountains. So we have no option but to succeed, and United we will.

Thank you for your attention.

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