Iraqi Kurdistan’s cash crisis hits banks

BAGHDAD - Reuters

AFP Photo

Iraqi Kurdistan’s cash-strapped government has seized billions of dollars in deposits at two branches of Iraq’s Central Bank since 2014, bankers said, calling into question the region’s image as a business-friendly paradise in the Middle East.

Since Baghdad cut budget payments to the Kurdistan Regional Government (KRG) in January 2014, the KRG has struggled to meet the public payroll and is now several months in arrears.

The fight to drive back Islamic State of Iraq and the Levant (ISIL), which swept across the Syrian border and towards the regional capital Arbil in June of that year, has been an added drain on the budget.

Though initially envisioned as a temporary measure, the KRG finance ministry’s practice of tapping funds that banks had deposited in their current accounts at local branches of Iraq’s Central Bank continued as Kurdistan’s economy, which boomed after the 2003 U.S.-led invasion of Iraq, deteriorated.

Private banks, including institutions from Lebanon, Jordan and the United Arab Emirates (UAE) as well as state-run Iraqi lenders, may sue or threaten to divest from the oil-rich northern region if their funds are not released soon, bankers said.

Bankers and KRG officials said the regional government first tapped into banks’ deposits at local central bank branches in 2014 after then-Prime Minister Nuri al-Maliki cut Kurdistan’s share of the federal budget - its main source of income - in a dispute over the region’s independent oil sales. 

Baghdad, which is also facing a budget crunch due to low oil prices and the fight against ISIL, said direct oil exports violated the constitution, though the KRG is now exporting more than 500,000 barrels per day (bpd) of oil to as many as 10 countries.

“We funded the revenue gap through advances from banks including the Central Bank of Iraq’s branches in Arbil and Sulaimaniyah,” said Qubad Talabani, KRG’s deputy prime minister. “Ultimately it’s a liquidity issue caused by the fiscal crisis in Baghdad.”

That move led to freezing around two dozen banks’ current accounts at central bank branches in the KRG, bankers told Reuters. 

The KRG says it is desperate for funds to finance its Peshmerga fighters, while an influx of more than one million people displaced by violence in the rest of the country has put acute strain on the region’s resources.

It also owes millions of dollars in arrears to international oil companies such as Norway’s DNO and Genel Energy , which have been developing oil fields in the KRG.

It is unclear exactly how much money is at stake, but interviews with nearly a dozen bankers and officials suggest it is in the range of $2-6 billion.