Kurdistan Region of Iraq Reforming the Economy for Shared Prosperity and Protecting the Vulnerable
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Public Disclosure Authorized KURDISTAN REGION OF IRAQ REFORMING THE ECONOMY FOR SHARED Public Disclosure Authorized PROSPERITY AND PROTECTING THE VULNERABLE Public Disclosure Authorized Public Disclosure Authorized KURDISTAN REGION OF IRAQ REFORMING THE ECONOMY FOR SHARED PROSPERITY AND PROTECTING THE VULNERABLE TABLE OF CONTENTS ACKNOWLEDGEMENTS ................................................................................................................................... V ABBREVIATIONS AND ACRONYMS ............................................................................................................. VI EXECUTIVE SUMMARY .................................................................................................................................. IX 1. MACROECONOMIC BACKGROUND ....................................................................................................... 1 2. FISCAL CONSOLIDATION ...................................................................................................................... 14 3. STRUCTURAL REFORMS TO LAY THE FOUNDATIONS FOR SUSTAINABLE AND INCLUSIVE PRIVATE SECTOR-LED GROWTH ......................................................................................................... 24 4. SOCIAL SECTOR REFORMS AND MITIGATION MEASURES ......................................................... 110 5. ACCOUNTABILITY ................................................................................................................................ 138 6. INSTITUTIONAL FRAMEWORK AND JUDICIAL OVERSIGHT....................................................... 149 7. IMPLEMENTATION MODALITIES ....................................................................................................... 152 KRG ECONOMIC REFORM ROADMAP – POLICY MATRIX..................................................................... 156 REFERENCES ................................................................................................................................................... 197 TABLES TABLE 1.1: KRG: GOVERNMENT FINANCES, 2012 – 2015 ................................................................................... 10 TABLE 2.1: EMPLOYMENT BY SECTORS ................................................................................................................ 16 TABLE 2.2: PUBLIC SERVICE REFORM: A THREE-PRONGED APPROACH ............................................................... 19 TABLE 3.1: WATER FEE COLLECTION REVENUES AS A PROPORTION OF O&M IN 2011 ....................................... 37 TABLE 3.2: RECOMMENDED ACTIONS FOR ADDRESSING WATER SCARCITY ........................................................ 39 TABLE 3.3: MAJOR CONSTRAINTS FOR PRIVATE SECTOR INVESTMENT IN TOURISM IN KRI ................................ 55 TABLE 3.4: ELECTRICITY SECTOR CHALLENGES IN KRI ...................................................................................... 59 TABLE 3.5: ELECTRICITY SECTOR REFORMS AND PERFORMANCE IMPROVEMENT ............................................... 61 TABLE 3.6: GOVERNMENT ACCOUNTS: PRELIMINARY RESULTS OF CGE SIMULATION, 2015 .............................. 68 TABLE 3.7: PROPOSED PRIORITIZATION OF REFORM ACTIONS: LABOR MARKET PROGRAMS ............................ 107 TABLE 4.1: PUBLIC AND PRIVATE SECTOR PENSION SCHEMES IN KRI AND THE REST OF IRAQ ......................... 112 TABLE 4.2: PROPOSED PRIORITIZATION OF REFORM ACTIONS: SOCIAL INSURANCE AND PENSIONS .................. 115 TABLE 4.3: PUBLIC DISTRIBUTION SYSTEM: COVERAGE, TARGETING, AND LEAKAGES ..................................... 117 TABLE 4.4: SOCIAL CARE PROVIDED BY KRG MOLSA .................................................................................... 118 TABLE 4.5: PERCENT OF RECIPIENTS OF NON-LABOR INCOME IN KRG, 2007 AND 2012 ................................... 119 TABLE 4.6: PROPOSED PRIORITIZATION OF REFORM ACTIONS: SOCIAL SAFETY NET REFORM .......................... 124 TABLE 4.7: PRIORITIZATION OF EDUCATION SECTOR REFORM ACTIONS ........................................................... 132 ii FIGURES FIGURE 1.1: KRI: LICENSED INVESTMENT PROJECTS ......................................................................................... 3 FIGURE 1.2: KRI: TOTAL CPI AND FOOD PRICES (AVERAGE ANNUAL % CHANGE) ............................................ 4 FIGURE 1.3: KRI CPI: ELECTRICITY PRICES (AVERAGE ANNUAL % CHANGE) .................................................... 4 FIGURE 1.4: CPI IN SELECTED IRAQI GOVERNORATES ....................................................................................... 5 FIGURE 1.5: SHARE OF ECONOMIC SECTORS IN GDP, 2012 ............................................................................... 6 FIGURE 1.6: SHARE OF ECONOMIC SECTORS IN GDP, 2014 ............................................................................... 6 FIGURE 1.7: PUBLIC SECTOR EMPLOYMENT, 2014 ............................................................................................. 7 FIGURE 1.8: KRI: EMPLOYMENT BY ECONOMIC ACTIVITIES (% OF TOTAL EMPLOYMENT) ................................ 7 FIGURE 1.9: DISTRIBUTION OF THE ADDITIONAL ............................................................................................... 9 FIGURE 1.10: POVERTY HEADCOUNT RATE ......................................................................................................... 9 FIGURE 1.11: CHANGE IN CONSUMPTION PER CAPITA INCOME, 2014 CRISIS IMPACT .......................................... 9 FIGURE 1.12: KRG GOVERNMENT DEBT............................................................................................................ 11 FIGURE 2.1: KRG PUBLIC SECTOR SALARIES AND WAGES, 2010 - 2014 ......................................................... 17 FIGURE 2.2: KRG: TAX REVENUES AND TOTAL REVENUES ............................................................................. 21 FIGURE 3.1: CREDIT TO THE PRIVATE SECTOR ................................................................................................. 25 FIGURE 3.2: OIL AND GRAIN PRICES ................................................................................................................ 29 FIGURE 3.3: TRADE IN SERVICES (% OF GDP), 2012 ........................................................................................ 44 FIGURE 3.4: VICIOUS CIRCLE: DEPENDENCY ON PUBLIC SECTOR .................................................................... 46 FIGURE 3.5: NUMBER OF TOURISTS VISITING THE KURDISTAN REGION OF IRAQ ............................................. 52 FIGURE 3.6: ORIGIN OF THE TOURISTS VISITING THE KRI IN 2013 AND 2015 .................................................. 52 FIGURE 3.7: TOURIST ARRIVALS IN THE KRI BY REGION, 2015 ....................................................................... 53 FIGURE 3.8: KRI OIL PRODUCTION .................................................................................................................. 65 FIGURE 3.9: SERVICES PROVIDED TO THE OIL AND GAS INDUSTRY IN KRI ..................................................... 69 FIGURE 3.10: COMPARISON OF MOBILE BROADBAND PENETRATION OF KRI WITH IRAQ AND THE MENA REGION ......................................................................................................................................... 80 FIGURE 3.11: COMPARISON OF FIXED BROADBAND PENETRATION OF KRI WITH IRAQ AND THE MENA .............. REGION ......................................................................................................................................... 81 FIGURE 3.12: FIRMS THAT IDENTIFY “ACCESS TO FINANCE” AS A MAJOR OR VERY SEVERE OBSTACLE (%) .... 88 FIGURE 3.13: PERCENT OF FIRMS EXPORTING AT LEAST 1% OF PRODUCTION ................................................... 91 FIGURE 3.14: STARTING A BUSINESS: DISTANCE TO THE FRONTIER, 2016 ......................................................... 94 FIGURE 3.15: FIRMS IDENTIFYING PRACTICES OF COMPETITORS IN THE INFORMAL SECTOR AS A MAJOR ............. CONSTRAINT (PERCENT) ............................................................................................................... 95 FIGURE 3.16: DAYS TO CLEAR IMPORTS THROUGH CUSTOMS ............................................................................ 95 FIGURE 3.17: PERCENT OF FIRMS WITH AN INTERNATIONALLY-RECOGNIZED QUALITY CERTIFICATION ........... 96 FIGURE 3.18: NUMBER OF COMMERCIAL BANKS PER 100,000 ADULTS, 2013 ................................................... 97 FIGURE 3.19: PERCENT OF WORKING CAPITAL PROVIDED BY NON-BANKS (%)................................................. 97 FIGURE 3.20: AVERAGE HOUSEHOLD (HH) SIZE (NUMBER) AND ITS COMPOSITION (%).................................. 102 FIGURE 3.21: VERY LOW EMPLOYMENT RATE ................................................................................................ 102 FIGURE 3.22: FEMALE LABOR FORCE PARTICIPATION RATE ............................................................................ 103 FIGURE 3.23: EDUCATION COMPOSITION OF THE LABOR FORCE BY AGE GROUP ............................................. 103 FIGURE 3.24: COMPOSITION OF UNEMPLOYMENT BY EDUCATION, LFS 2012R1 AND LFS 2014R2 ................ 104 FIGURE 3.25: PROJECTED ANNUAL NUMBER OF NEW LABOR MARKET ENTRANTS TILL 2020 ............................ 105 FIGURE 3.26: OUT OF SCHOOL RATES BY AGE AND SEX, 2012 ........................................................................ 106 FIGURE 4.1: PENSIONS SPENDING VS. OLD-AGE POPULATION ......................................................................