Will the KRG succeed in borrowing money from foreign institutions

Rizgar Khoshnaw | Exclusive to iKurd.net

Recently I read an article on Reuters news agency titled, “Iraqi Kurdistan eyes debt financing” and I felt compelled to give my advice and educated analysis of this article and subject. My main goal here is to bring to the KRG’ s attention the obstacles they will be facing and advice them on how to approach this difficult mission.

The Kurdistan Regional Government (KRG) held the meeting with potential “investors” in London to lend them money in order for the KRG to pay the public-sector salaries and everyday administrative expense. We all know now that the Iraqi central government has been holding back payments of the KRG oil revenue share in the last ten months and there seem no desire for Baghdad to resolve this issue and provide the KRG with their overdue payments. For this reason, the KRG is looking for outside financing in order to survive.

According to the article, the KRG is proposing the following methods of financing:

1- Issuance of Bonds

The simple definition of a “Bond” is a “promissory note” that an entity; government and/or private institutions issue such Bond in order to either expand their operations or in the case of a government issuing a Bond for everyday operational expense and govern the country/state or local municipalities. When a private institution issues a Bond, they always place a “Collateral” in the event that the Bond holders do not get their money back from the borrower. Simply put, the collateral is an insurance policy for the loan. Such collateral can be in a form of tangible assets, account receivables and/or preferred stock of the company.

In the case of a government/state (For example, the US government or any one of the 50 States) that issues bonds, they do not need to place “collateral” since the government is sovereign and has the needed strong credit. It is unquestionable that the investors/lenders will receive their money/investment back at an agreed time and date (maturity of the Bond) and the investors never worry about their investments not being safe.

2- Fixed Income Borrowing

This fix income route is fairly straight forward borrowing and it is treated the same as a Bond.

3- Debt Financing

In this scenario, we often see companies that needs to borrow money for a short-term, they will reach-out to the market place (such as Wall Street investors, financial institutions and/or banks) and try to secure such loans from investors. Debt financing requires the borrower to have collateral (something of value to place against the loan) before money is lend to them. In the event that the borrower is unable to pay back the Bond holders their money at the time of maturity, then the borrowers have the right to place a hold on any assets that the company has placed as collateral on this loan. If the borrower default, then the lender has the right to liquidate the assets of the company and the proceeds will go to the lenders/creditors until the entire loan amount is satisfied.

In any of these cases above, the KRG will not succeed in borrowing money from outside investors. I say that because not only Kurdistan is not perceived as a “sovereign” country/nation by the international community, but has zero credit as well. Furthermore, the KRG does not have liquid, or future, assets to place as collateral to assure the investors that their investments are secure. Investors need to secure their investments and need assurance that there will be no default on their loans or they will not loan any money to anyone.

And, like I said above, usually when a bond or a debt financing is being discussed, the potential funds collected is used to expand the operations of the borrower that will result in money/income being generated as result of this bond. But in the case of Kurdistan, the money that the KRG is looking to borrow is actually to pay the back salaries and expense of the government and the money is not being put to work.

This means, if the KRG succeeds in receiving the money it will not be used, or put to work, but rather, it will be used to pay their debt to their citizens. Knowing this, it will be extremely difficult for international investor to entertain such idea of lending money to Kurdistan acknowledging that the borrowed money will not improve the economic conditions of Kurdistan- It is like a person borrowing money from one credit card in order to pay for the other credit card!

If the KRG is thinking/planning on using their oil (current as well as the reserves) sales/production as collateral, this will not be accepted since the international community is well aware of the conflict between the KRG and Baghdad. This means that neither current nor future oil sales can be used as collateral for any loans that KRG is trying to structure with investors.

The only way that the KRG can succeed in borrowing money, or find international investors, is by working with the Iraqi central government on this issue. Like we say in America, ” Where there is a will, there is a way!” and I firmly believe that there is a way to put this deal together if the KRG is willing to work with Baghdad.

The KRG needs to know that without the blessing/agreement of Baghdad, they will not be able to attract potential investors to go a long with this desperately needed loan. Moreover, the KRG needs to employ/allow a third party entity to handle the negotiations of this loan with International Institutions and Baghdad on their behalf. I do not believe that the KRG finance ministry has the qualified individuals to discuss this very complicated transaction and that is why a third party involvement is surly needed.

There is a way to convince Baghdad to agree with the KRG on this deal, but the KRG needs to be smart and find this avenue! I hope that the KRG will succeed in this mission and entertain all ideas/possibilities in order to put this deal together and must be open-minded about making it happen.

Rizgar Xoshnaw, a senior Kurdish writer based in Washington, a longtime contributing writer and columnist for iKurd.net.

The opinions are those of the writer and do not necessarily represent the views of iKurd.net or its editors.