Iraq has asked its finance ministry to halt payments to the Kurdistan Regional Government (KRG) and to recover those made since the start of the year in the absence of KRG crude transfers.
Secretary general of the council of ministers Hamid al-Ghazi said in a letter dated 16 April that the finance ministry is "obligated to stop" payments to finance salaries in the semi-autonomous Kurdistan region. The ministry must also "recover the amounts disbursed" since the beginning of 2020.
Under Iraq's yet-unsigned 2020 budget, the KRG must hand over 250,000 b/d of Kirkuk blend to state-owned marketer Somo in exchange for funding, but transfers have not taken place.
This differs from the 2019 budget, in which the federal government agreed to pay KRG civil servants' wages and fund Kurdish Peshmerga forces, despite the KRG failing to hand over 250,000 b/d of crude to Iraqi marketer Somo as agreed.
Halting payments to the KRG will increase pressure on the already cash-strapped provincial government, which is struggling in the low oil price environment. The KRG has proposed deferring overdue payments to oil companies for November 2019 to February 2020 for at least nine months.
A delegation from the Kurdistan region met with officials in Baghdad on 19-21 April to discuss their financial agreement, and discussions are ongoing.
During the meeting, the KRG agreed to reduce oil output to help Iraq meet its quota under the new Opec+ deal.
But details have yet to be finalised as they make up part of ongoing discussions between Baghdad and Erbil regarding the budget and government formation, a KRG source said.
Iraq is due to reduce production by 1.06mn b/d for two months from 1 May from an October 2018 baseline of 4.65mn b/d. It produced around 4.59mn b/d in March, Argus estimates.
Historically, Baghdad has had little control over the Kurdish region's production, and it has long hidden behind this lack of control to explain part of its non-compliance with previous Opec+ restraint deals. But the KRG may have little choice but to comply if Baghdad withholds payments.
Funding KRG salaries has long been a point of contention for politicians in Baghdad. And on 23 April, a number of MPs lodged a complaint with the federal commission of integrity against finance minister Fuad Hussein, who is Kurdish. They accused him of "deliberately wasting public money" by disbursing over 6 trillion Iraqi dinars ($5bn) to the KRG "in violation of article 10 of the federal budget law of 2019… and the financial management law".
This is creating challenges for Iraq's third prime minister-designate Mustafa al-Kadhimi in passing his cabinet, as the KRG have pushed to overcome political opposition and keep Fuad Hussein in place.
