94954 March 2015, Number 143 KURDISTAN REGIONAL GOVERNMENT (KRG): ECONOMIC AND SOCIAL IMPACT ASSESSMENT OF THE SYRIAN CONFLICT AND ISIS INSURGENCY Sibel Kulaksiz, et al1 assessment of selected, highly impacted sectors. The study excludes security-related costs. Introduction: The Syrian civil war, which began in 2011 and the ISIS (Islamic State in Iraq and Syria) insurgency which accelerated in June 2014 led to this report. These events caused tens of thousands to flee and many chose the relative safety of the Kurdistan Region of Iraq (KRI). They came as “refugees” from Syria and as Iraqi “internally displaced persons (IDPs).” This happened during a fiscal crisis which led to a 90% drop in fiscal transfers from the central government in Baghdad starting in early 2014. This Quick Note summarizes a report with the same title on the impact and stabilization costs of the influx of refugees and IDPs. Impact refers to the immediate economic and fiscal effects on the KRI economy and budget. Stabilization cost refers to the Photo By Sibel Kulaksiz, The World Bank additional spending needed to restore the welfare of Arbat IDP Camp in Sulaymaniyah, Northern Iraq KRI residents. The Refugee and IDP Influx: Starting in early 2012 This rapid ESIA differs from standard needs with Syrian refugees and the IDPs in 2014, the assessments. First, the crisis is still unfolding, so it is situation is now a full blown humanitarian crisis. In not conducted in a post-conflict condition. Second, early 2015, there were 257,000 Syrian refugees and the duration and magnitude of the crisis is uncertain 1,003,300 Iraqi IDPs in the KRI. Together with the and hence the real impact of the shock will depend 250,000 IDPs from before 2014, the total number of on conditions in Syria and Iraq. Third, there has refugees and IDPs was 1.5 million in 2015.2 This is a been no significant material damage to KRI’s 28% increase in KRI’s population. Dohuk hosts 60% infrastructure, its housing, and human and physical of IDPs and refugees. The IDPs and Syrian refugees capital stocks. As such, the impact of shocks has reside in many of the same host communities, affected flow measures of economic activity such as placing strains on the local economy and on public GDP growth rate, incomes, local and foreign direct services.3 The ESIA provides estimates based on investment as well as the provision and access to three scenarios. The baseline scenario assumes that public goods and services. This ESIA is a rapid assessment that provides a snapshot of a detailed 2 The refugee and IDP numbers are obtained from KRG Ministry of Planning; and KRG and United Nations’ 1 Sibel Kulaksiz, Macro and Fiscal Management Global Immediate Response Plan Phase II (IRP2) for Internally Practice, the World Bank. The full report with the same title Displaced People in the Kurdistan Region of Iraq. will be available in April 2015. Please look for it at 3 In December 2014, there were 2,350,000 refugees and IDPs www.worldbank.org. in overall Iraq. the current population of refugees and IDPs will due to political gridlock in Baghdad. The actual remain unchanged in 2015. The low case scenario amount that has been transferred is about US$1.1 has an added 30,000 refugees and 250,000 IDPs, and billion. Both revenues and expenditures saw large the high scenario has 100,000 refugees and 500,000 declines and the government has large wage arrears. IDPs. Many contractors have not been paid for months and the construction sector has been badly hit with The combination of loss of fiscal transfers and the small companies going bankrupt. refugee and IDP crisis impacted all productive and social sectors. Their impacts are still unfolding and The Ministry of Natural Resources (MONR) steps significantly depressing economic activity. GDP in: MONR assumed wage and salary obligations by growth declined from 8% in 2013 to 3% in 2014. supporting MoF but with lags. MONR borrowed Prices and unemployment have increased. More US$1.5 billion from domestic private sectors and refugees and IDPs entering the labor market are another US$1.5 billion from international oil firms pushing wages down. The ESIA estimates that KRI’s and suppliers by selling future oil outputs. It also poverty rate increased from 3.5% to 8.1%. On public exported US$1.3 billion worth of oil. The Ministry finances this led to sharply lower local revenues, has also provided transfers for displaced people. It is increased borrowing from the private sector and estimated that it directly contributed US$1 billion for quasi-fiscal deficits of about US$3 billion (about 25 basic support to IDPs. MONR injected US$5 billion, % of fiscal transfer entitlement from the central 41% of the budgetary resources not transferred from government) was incurred towards wages and the Baghdad, avoiding a collapse of the economy. salary payments and for public services and goods, However, these are in essence quasi-fiscal activities with loss of quality and reduced access. This of the public sector at about 12% of regional GDP in borrowing supported growth but led to more debt, 2014. Deficits for the year could be 14-15% of GDP. impacting on fiscal sustainability. Other Costs: KRI was obliged to source from All this is unfolding within a policy framework with refineries much further south, leading to increases in long-standing distortions. For example, electricity fuel prices—from 14% in Sulaymaniyah to 15% in demand has sharply increased, but the government Erbil and 23% in Dohuk, increasing electricity and remains committed to fuel purchased from private transport costs. Foreign direct investment flows refineries to private generators at a fixed price. declined and operations of foreign enterprises have Although KRI socio-economic outcomes are the best been hurt. Investments declined by two thirds 2014. in Iraq, there were limitations in health, education, Erbil Steel, which produced 18,000 tons of steel bars and infrastructure impeding investment and every month, evacuated its workers in June and shut efficiency. down its facility. The cement sector stopped supplying the southern market for months. Overall Stabilization Cost: Overall stabilization cost from the influx is US$1.4 billion for the baseline Trade of goods and services: Iraq’s exports declined scenario for 2015. This is around 5.6% of non-oil by 25% and imports by 45% between May and July GDP, and in the range of major disasters worldwide. 2014. Turkish exports decreased by one third to US$1.3 billion in June and July. Services exports Impact on the economy: The ISIS crises happened declined due to less transit trade and tourism. The during an ongoing KRG budget crisis (since number of trucks entering through the Ibrahim February 2014), and these shocks hit the economy Khalil customs with Turkey declined from over hard. The ISIS crisis presented a direct threat to KRI 3,000 a day to 600. The ISIS crisis led to a dramatic adversely affecting trade routes. The fighting against loss in tourist inflows. These had increased by 33% ISIS has fragmented the local, national and regional in 2013 to 3 million, but declined to less than 800,000 market undermining KRI’s role as a safe trade route in the first six months of 2014. to the larger southern Iraq market. Economic growth contracted 5%. The initial channel for lower growth Costs of stabilizing effects on Human was the loss of transfers from Baghdad. KRG’s share development: This will require US$834 million (3.5 from the federal budget, 17% minus sovereign of GDP) in 2015. The growing influx has put expenses, corresponds to US$12 billion a year, or significant pressures on the KRG severely 80% of KRG’s total revenues. This has been withheld constraining delivery of health, education and social March 2015 · Number 143· 2 protection programs. A noticeable share of the for sheltering the IDPs are estimated at US$111.3 population has fallen into poverty or is vulnerable to million.5 falling into poverty. The Health Impact: Between October 2012 and Impact on Social Protection: Due to these multiple September 2014, due to increased population, the crises, the KRI poverty rate more than doubled, from host communities in KRI saw a decline in health 3.5% to 8.1%. A rough estimate of funds ―on spending. While external donors stepped in, average―to bring poverty down to “without-crisis” significant financial resources are required. The levels are estimated at US$54.2 million to US$87.8 displaced people are at high risk of disease due to million for 2015. The Federal government had environmental factors (e.g., poor water and started the implementation of a new Social sanitation facilities) and nutritional deficiencies. In Protection Law which stipulated an increase in light of this, higher utilization levels of both PHC social allowance to reach on average ID 420,000 per and hospital services would be expected. It is household monthly. Kurdish households below the estimated that the health sector will need additional poverty line will be eligible. The Ministry of Labor & US$317 million to stabilize the situation. Social Affairs (MOLSA) is the main KRG agency to provide social safety net assistance. It manages the The Educational System: It is estimated that there cash-transfer social safety net program for are 325,000 children under 18 among the refugees vulnerable groups. and the IDPs and 70% of IDP and 48% of refugees children are not enrolled in school. While immediate Food Security: The governorates most affected by priorities are infrastructure-related (i.e., school the ISIS crisis, Nineveh and Salahaddin, contribute renovation, classroom expansion/construction), it is nearly 1/3 of Iraq’s wheat production and 38% of its equally important to deploy and pay teachers, barley. Many grain silos have been captured by provide textbooks, address language barriers, and insurgents. Increased food demand is being met by insure security and safety of children. It is also imports. Domestic agriculture, already declining, important to inform refugees and IDPs of has been further disrupted by decreased educational opportunities and improve access to government contracts. The cost of Public services. It is estimated that under the baseline Distribution System (PDS), agricultural budget scenario, there is a need for US$34 million for the support to farmers, as well as food assistance to refugees and US$161.5 million for the IDPs to refugees and IDPs dominates government stabilize the sector. expenditures. While food security in KRI was sustained during the Syrian influx, the recent IDP Domestic Energy Demand and Prices: Gasoline surge is leading to food insecurity. The PDS for prices have increased to ID 900/liter, while diesel subsidizing food staples is not functioning prices doubled to ID 950/liter in June 2014 with optimally. The estimate for sufficient food supplies predictable impact on the economy. The electricity is US$155.4 million under the baseline scenario for sector is heavily dependent on the government with 2015. the Ministry of Finance transferring ID 80 billion monthly in 2013. Tariff levels and collection rates are Housing Needs: Adequate shelter needs to be insufficient to cover operating cost and capital provided immediately to over 243,000 vulnerable expenditures. Demand is increasing: for example, IDPs. The government has built 26 IDP camps across the demand load in Erbil reached its peak in August the three governorates of the KRI with a combined 2014, increasing 22% in one year. In Sulaymaniyah capacity for 223,790 IDPs. The KRG has committed additional capacity of 125MW is needed. Systemic to funding three of these camps. The international problems remain. The 2015 stabilization cost is community is expected to fund 20 camps with three estimated to be between US$275 million and US$517 camps remaining unfunded.4 The stabilization costs million across the baseline and high scenarios. 5 This is based on the assumption of a cost of providing shelter of US$833 per person. This does not include the cost of providing security on camps. There are inevitable costs 4The 2012 SEINA report; and the KRG Immediate Response associated to the securitization of the camp, but that is it Plan. beyond the scope of this assessment. March 2015 · Number 143· 3 The Water Sector: Water supply and sanitation stretched to their limits, resulting in high air systems were already facing challenges prior to the pollution loads. crisis. The additional demand for water for refugees and IDPs is estimated at 11%. As a result of the Conclusion: This summary of the ESIA provides a crisis, KRG now needs to meet an additional technical assessment of the impact of the crises and demand of 17.1 million m3 annually. Sanitation is a stabilization needs to inform the dialogue between concern and major gaps for the sewerage sector the regional and central governments as well as relate to the lack of physical facilities: no wastewater provide input for international efforts to address treatment plants, no sewage collection networks socio-economic issues. In the short-term, much of except in Sulaymaniyah Governorate. It is estimated the solutions for averting the humanitarian crisis are that the cost of sectoral stabilization is around beyond KRG’s control, and requires national and US$214.3 million for 2015. international response. Should the refugees and IDPs remain in the KRI, the ESIA could be used as a Solid Waste Management: The additional gauge of the financial resources needed (in addition population produced over 1,690 tons of solid waste to KRG’s share from annual budget) to address the per day, an increase of 26% on KRI’s 2014 daily per needs of displaced people and host communities. capita generated solid waste. Only Dohuk City will The stabilization needs of specific sectors can be continue to accept additional solid waste due to a used to inform KRG budget allocation decisions. new sanitary landfill, and its current capacity for recycling. It is expected that from 2015 onward, the In the medium-term, structural reforms are following interventions would be required: 1) the required. While it is a priority to provide necessary closure and rehabilitation of open and uncontrolled relief to deal with economic and social issues caused municipal solid waste dumps, especially in Erbil and by the crisis, it is also important for the government Sulaymaniyah; 2) establishing composting, to develop longer-term strategies to address separating and landfilling facilities, especially in structural development issues. As refugees and IDPs Erbil where there is no waste recycling; and 3) are likely to remain in the KRI for an extended identifying appropriate land and construction of a period of time, they will be seeking employment new sanitary landfill for greater Sulaymaniyah City. opportunities. The crisis highlighted KRG’s strong dependence and vulnerability on transfers from The Road Network: The crisis has resulted in the Baghdad and the insufficient direct contribution of closure of one of the main trade routes between other sectors to KRI’s economy. This underlines the North and South from Dohuk to Erbil via Mosul. recognized need for private sector led economic The IDPs who fled using their vehicles also caused a diversification. Indeed, according to the 2020 KRG sudden increase in traffic by 20% and humanitarian Vision, with its natural resources and labor force, the relief effort with heavy trucks also strained roads. KRI has the potential to accelerate economic growth. Eight bridges in the KRI have been fully or partially A dynamic private sector would provide job destroyed. The crisis has also strained the municipal opportunities to the population, as well as to road network. refugees and IDPs. The World Bank’s upcoming growth diagnostics study will refine and implement Environmental Impacts: Environmental concerns in this vision while proposing specific policies. the first instance include those with a direct impact on human health in displaced and host communities. These include, low-quality potable water in and outside of camps; increases in raw, undirected sewage outflows, (KRI has no wastewater treatment infrastructure); and increased solid waste dumping without proper disposal. During winter time, increased demand for cooking and heating fuel lead to increases in illegal firewood harvesting as well as in the health impact of indoor air pollution, especially on children and the aged. Also, power and transport infrastructure are March 2015 · Number 143· 4