22 June 2007
After weeks of haggling and tough bargaining, Iraq’s central government and the northern Kurdish region have agreed a draft revenue-sharing law — opening the way for parliament’s approval of a hydrocarbon law regulating international investments in Iraqi oil and gas fields. The draft revenue law is a compromise that ensures the Kurds get an adequate and timely share of state revenues, but keeps the collection and distribution of those funds in the hands of the government in Baghdad, specifically the Central Bank of Iraq (CBI).
“The draft is balanced, with checks and balances. It has a mechanism that insures the flow of federal revenue levied throughout the country without interruption, while at the same time keeping consolidated data of revenues and expenditures for the whole country,” Thamer al-Ghadban, former oil minister and one of the draft law’s main authors, told Energy Compass Thursday.
The draft stipulates that all state funds from oil and gas should be deposited in a financial resources fund account at the CBI. This embraces oil and gas sales across the country, as well as royalties, production bonuses, direct and indirect taxes, and any other additional revenues resulting from oil and gas contracts with national and international companies, including those in the Kurdish region. Currently, all oil income is deposited at a Development Fund for Iraq (DFI) account at the Federal Reserve Bank of New York, and is monitored and audited by the UN-appointed International Advisory and Monitoring Board. Iraq exports about 1.6 million barrels per day, compared with more than 2 million b/d before the 2003 war.
Other “external” resources — such as grants, aid and international loans — would be deposited in the same account. All other federal revenues would revert to the government, even if levied by regions and governorates, and would be deposited in an “internal” resources account at the central bank. These include taxes and customs at Iraq’s borders and ports. The central government would then allocate funds to regions and governorates in its annual budget.
One divisive point in the negotiations was the Kurds’ demand that they receive their share of revenues directly from the central bank or the DFI in New York, rather than from the federal Ministry of Finance. Another was a Kurdish insistence that any surplus or unspent funds should be divided among the regions according to the agreed percentage shares.
According to the draft bill, the Kurdistan Regional Government (KRG) will have two accounts at the CBI, one in US dollars and the other in Iraqi dinars. Their quota from all revenues, including oil and gas sales, will be deposited automatically in these accounts, according to the relevant currency. This allows the Kurds to receive revenue directly from the CBI, rather than via the Finance Ministry, the route for ministries and governorates. The KRG will receive a quota, currently calculated at 17%, of remaining national revenues once federal government spending has been set aside, including for strategic projects. The remainder will be used for the operational and investment budgets of federal ministries and to fund governorates not officially organized as “regions,” with shares set according to their populations. On surplus funds, the parties agreed a compromise, whereby a share would be deposited in a Future Generations Fund to be set up by a separate law.
In line with Article 106 of the constitution, the draft law says federal revenues will be monitored by an independent commission of experts from the federal government and representatives from the regions and governorates, to be set up by the cabinet and approved by parliament. An international accounting firm will audit the CBI’s financial resources fund.
The draft law is expected to draw criticism from some Iraqis over the concessions and special arrangements agreed for the Kurds. Any other regions set up in the future, particularly a potentially powerful Shiite-controlled government in the south, would likely request the same conditions.
“The revenue-sharing law is badly needed to regulate the important functions of the state. The Kurds have been trying to turn the situation to their benefit, but it is important to safeguard the unity of the state,” said a senior Iraqi official. “Besides, any such law can be amended in the future, subject to the balance of powers.”
Compass Points
• SIGNIFICANCE: The government of Iraqi Prime Minister Nouri al-Maliki is racing to deliver a key package, including hydrocarbon and revenue-sharing laws, to ensure Washington’s continued support. The Kurds have been using the situation to their advantage, extracting maximum concessions for financial autonomy.
• CONNECTION: The division of oil revenues lays the foundations for future relations between Baghdad and the regions. By maintaining centralized management, supporters of a unified Iraq hope the framework will safeguard national cohesion, although, on its own, the law does little to help the current security and political crisis.
• NEXT: The draft revenue-sharing law should be endorsed by cabinet next week, then sent to parliament with the hydrocarbon law and other related bills. Debate is expected to be lengthy. The Kurds will next turn their attention to Kirkuk, where they are pushing for a referendum on the future of the northern oil province late this year.
By Ruba Husari, Dubai
(Published in Energy Compass June 22, 2007)