By Dr Saman Shali

The Kurdistan Regional Government (KRG) has faced significant challenges in managing its debt, estimated at around $33 billion, including more than $10 billion in KRG employees' salaries, due to political instability, heavy reliance on volatile oil revenues, and economic mismanagement. Effective debt management is critical for the KRG to maintain financial stability, promote economic growth, and ensure sustainable public finances. Below are several strategies the KRG can use to manage its debt more effectively:

1. Diversifying Revenue Sources

One of the primary reasons for the KRG's fiscal challenges is its heavy dependence on oil revenues. Diversifying revenue sources can reduce vulnerability to external shocks and provide a more stable foundation for debt management.

• Enhancing Non-Oil Revenue Generation: The KRG should prioritize developing non-oil sectors such as agriculture, tourism, manufacturing, and services. Encouraging private sector growth and foreign direct investment (FDI) in these areas can help create new revenue streams.
• Improving Tax Collection: Strengthening tax collection mechanisms and expanding the tax base can provide a steady source of revenue. This mechanism could involve modernizing tax administration, reducing tax evasion, and implementing a more efficient system for large corporate and property income taxes. However, the Government must ease up on taxing the small business and general population.

2. Restructuring Existing Debt

To manage existing debt more effectively, the KRG could consider restructuring its debt. Debt restructuring can help alleviate short-term fiscal pressures and create more manageable repayment terms.

• Renegotiating Terms with Creditors: The KRG could negotiate with creditors to extend repayment periods, reduce interest rates, or even partially write down the debt. This extended repayment could help ease immediate fiscal pressures and make debt servicing more sustainable.
• Debt-for-Development Swaps: In some cases, creditors may be willing to swap debt for investments in critical infrastructure, education, or health. This approach could help reduce the debt burden while promoting long-term economic development.
• Employees' debt: The regional Government must pay the employees' debts due to the non-payment of salaries from 2014 to 2024 by opening a bank account in the banks where employees receive their salaries and deposit the total employee debts with the Government. The employee only pays the debts he owes to the Government, such as electricity, water, real estate loans, and other government debts. At the same time, the Government pays employees 10% of their total debts in cash every month from internal revenues. In this process, the debts of the Government and employees will be reduced simultaneously, and the local economy will also recover.

3. Strengthening Fiscal Discipline

Improving fiscal discipline is crucial for sustainable debt management. The KRG must establish sound fiscal policies and practices to control public spending and reduce budget deficits.

• Implementing Medium-Term Fiscal Frameworks (MTFFs): An MTFF can help the KRG align its spending priorities with long-term economic objectives and fiscal sustainability. This framework would involve setting realistic expenditure ceilings, enhancing budget planning, and linking fiscal policies to macroeconomic goals.
• Reducing Public Expenditure: The KRG should prioritize reducing non-essential expenditures, particularly in public sector wages and subsidies, constituting a large portion of the budget. Streamlining the public sector, eliminating wasteful spending, and targeting subsidies more effectively can help reduce the fiscal deficit.
• Private sector: Encouraging the private sector to employ regional employees and transfer their services while maintaining their privileges as government employees, such as obtaining a piece of land and having their services in the private sector counted for retirement purposes. This step will reduce their salaries in the budget and help the Government reduce its expenses.
• Improving Transparency and Accountability: Enhancing transparency in budget processes and strengthening accountability mechanisms can help build public trust and attract international support. This transparency includes publishing regular and accurate financial reports, conducting independent audits, and promoting public participation in fiscal decisions.

4. Developing a Domestic Debt Market

A well-functioning domestic debt market can provide a reliable funding source for the KRG, reduce dependency on external debt, and help manage the overall debt burden more effectively.

• Issuing Guarantee Domestic Bonds: Developing a domestic bond market would allow the KRG to raise capital within the region, potentially at lower costs and with greater flexibility. This could involve issuing government bonds to local banks, businesses, and individuals.
• Strengthening Financial Institutions: Building a more robust and transparent financial sector can help attract investment in domestic debt instruments. Improving regulatory frameworks, enhancing the capacity of financial institutions, and promoting financial literacy will be critical to this effort.

5. Seeking International Support and Aid

International financial institutions (IFIs) and development partners can play a significant role in helping the KRG manage its debt.

• Negotiating with International Financial Institutions: The KRG could engage with institutions like the International Monetary Fund (IMF) and World Bank for technical assistance, capacity-building programs, and concessional financing. These institutions can provide loans with lower interest rates and extended repayment periods, reducing the debt burden.
• Attracting Foreign Aid and Grants: Engaging with bilateral donors and international organizations to secure grants and concessional aid can help reduce the need for commercial borrowing. Aid could be targeted toward specific sectors, such as healthcare, education, or infrastructure, reducing the fiscal burden.

6. Promoting Economic Growth and Stability

Sustained economic growth is essential for effective debt management. By promoting a stable and diversified economy, the KRG can improve its ability to service debt.

• Investing in Infrastructure and Human Capital: Strategic investments in infrastructure (such as roads, electricity, and water) and human capital (such as education and healthcare) can promote economic growth, increase productivity, and create a more conducive environment for private sector development.
• Enhancing the Business Environment: Improving the regulatory environment, reducing bureaucratic red tape, and promoting transparency can attract foreign direct investment (FDI) and encourage local business growth, leading to higher revenues and a more robust economy.

7. Establishing a Debt Management Office (DMO)

A dedicated Debt Management Office can help the KRG develop and implement a comprehensive debt management strategy.

• Functions of the DMO: The DMO monitors and analyzes the debt portfolio, formulates debt management strategies, and ensures that borrowing is conducted cost-effectively and sustainably.
• Capacity Building: Building the capacity of the DMO through training and technical assistance can help the KRG better manage its debt obligations and ensure compliance with international best practices.

8. Building Better Relations with the Federal Government of Iraq

Strengthening political and economic relations with the Federal Government can provide a more stable environment for debt management.

• Ensuring Fair Revenue Sharing: The KRG should negotiate a stable and fair revenue-sharing agreement with the Federal Government to secure a predictable flow of funds, particularly from oil revenues.
• Coordinating Fiscal Policies: Better coordination with the Federal Government on fiscal policies can help mitigate economic shocks and create a more favorable environment for debt management and receiving shares from international loans.

Conclusion

The KRG faces significant challenges in managing its debt. However, strategic fiscal management, debt restructuring, economic diversification, and international cooperation can help the region achieve debt sustainability. By diversifying revenue sources, implementing fiscal discipline, strengthening institutions, strengthening transparency, and fostering economic growth, the KRG can create a more stable economic environment and effectively manage its debt obligations.

Through these efforts; The KRG can work toward reducing its debt burden, ensuring fiscal sustainability, gaining people's trust, and promoting long-term economic development.

Saman Shali has a Ph.D. in Science (1981) from the University of Sussex. Dr. Shali worked as an Assistant Researcher and Assistant Professor at the University of Sussex, King Saud University, and Pennsylvania State University. He is also a senior fellow at the Mediterranean Institute for Regional Studies.