By Joe Parkinson
ERBIL, Iraq--In this ancient Kurdish city's sprawling bazaar,
Sarbaz Gawhar is in a quandary over the impact of his government's
recent territorial advances.
While the rapid incursions of Sunni jihadists have helped
Kurdish forces cement control of oil-rich Kirkuk province, the
conflict in Iraq has added to pressures on the Kurdistan Regional
Government's oil-rich but poorly developed economy.
Mr. Gawhar is facing a precipitous collapse in his textile
business. Amid severed supply lines, chronic fuel shortages, rising
prices and plunging consumer demand, sales are down 90%, with few
signs of a recovery.
"Yes we've taken control of our lands, but the war is hurting
our economy," Mr. Gawhar said, surrounded by candy-colored fabric
rolls he sells wholesale to stores in dozens of Iraqi cities.
"People are starting to panic and hoard, and if things continue
this way, it could be a disaster."
Since Saddam Hussein's demise a decade ago, Kurds have enjoyed
increasing autonomy from the central government in Baghdad. That
cleared the way for oil and gas deals with wildcatters rushing to
Iraqi Kurdistan for what some describe as the last virgin frontier
on land. As prospectors unearthed large reserves--an estimated 45
billion barrels--major oil companies including Exxon MobilCorp. and
Chevron Corp. followed, bringing billions of dollars of
investment.
Huge structural challenges remain. Businesses and hotels say
that Iraqi Kurdistan lacks a qualified workforce and that the oil
economy discourages the development of other business skills.
Retailers that cater to ordinary Kurds say they tend to shop in the
traditional bazaars or during trips abroad, while the conflict is
also causing panic-buying and shortages.
Last year the KRG began to export oil to world markets by truck
and this year through a newly constructed pipeline to Turkey. On
Friday, the KRG looked set to unload its first cargo of disputed
crude oil from that new pipeline in a sale to Israel after weeks of
seeking an outlet as Iraq's central government has threatened legal
action against any buyer.
Baghdad has also withheld budget payments to Erbil since
January, with a crippling impact on an economy that has an
estimated 70% of its workers on government payrolls. Kurdish
officials say payments have stopped on two of three operational
budgets, with only occasional payments on the third.
KRG officials say the withholding of budget funds amounts to
"economic warfare" from Baghdad; they say they are seeking loans
from international creditors to plug the shortfall.
Ayham Kamel, an analyst at political-risk consultancy Eurasia
Group, said the Kurds recent strategic gains have given its leaders
political momentum, but the economic pressures are becoming
increasingly severe. "Erbil remains financially weak, and the
export strategy hasn't yet proven very successful. They are paying
more money for the armed forces in a time of conflict and borrowing
money is only a patchy solution," he said.
Ashti Hawrami, the KRG minister for natural resources, told a
conference in London this week that oil exports will increase to
200,000 to 250,000 barrels a day in July, and then to 400,000 by
year's end, allowing the KRG to catch up with the shortfall from
Baghdad's withheld payments.
Until that point is reached, economic pressure is likely to
persist in the Kurdish region.
In central Erbil, the most tangible sign of economic weakness is
the long lines, as much as a mile, that have formed outside gas
stations in recent days, as supplies have been cut and jittery
residents stockpile.
"I've been here for eight hours and counting," said Didar Zrar,
a university student in Erbil. "People are panicking because the
refinery at Beiji has been captured by jihadists and we don't know
how much is left."
At the bazaar, the disruption of the supply chain is pushing up
the prices of goods that would have traditionally been delivered
from cities now occupied by Sunni militants or southern cities now
blocked by their advance. Ali, a produce seller, said his prices
doubled as supplies dried up, forcing him to import from
neighboring Iran.
"The prices are rising but sales are up because people are
bulk-buying some goods," he said, as he piled tomatoes on a scale.
"Its like Saddam's time again."
For now, many Kurds have stripped back spending to focus on
essentials, presenting another challenge for businesses that
usually rely on a booming trade during the Ramadan religious
holiday, starting June 28.
"Usually at this time of year there would be lots of trade here,
but it's so quiet," said Omar Ahmed, a gold dealer in the bazaar.
"The declines started with the budget being cut, but the ISIS
advance has made things much worse. My volumes have reduced 60%,"
he said.
Other Kurds take a more philosophical view to the economic
pressure, emphasizing that the region has been through many more
painful situations in previous decades.
"People are panicking and that is making things worse, but the
situation isn't that bad. We've been through Saddam's time and
years of more hardship," said Sanan Maghdid, who sells air
conditioning, as he waited in a fuel line in the baking afternoon
sun. "Soon we will be economically more independent, and then we're
masters of our own future."
Write to Joe Parkinson at joe.parkinson@wsj.com