The budget crisis between Baghdad and Erbil: Where does the obstacle to a settlement lie?

The budget crisis between Baghdad and Erbil: Where does the obstacle to a settlement lie?

2026-10-28

The budget crisis between Baghdad and Erbil - Where does the obstacle to a settlement lieShafaq News – Baghdad/Erbil
The roots of the financial and oil dispute between the federal government and the Kurdistan Region go back to 2005, while the beginning of 2014 marked a turning point when Baghdad cut off the region’s share of the budget, and the crisis continued due to disagreements over oil and non-oil revenues, salaries, and the mechanism for calculating financial entitlements.

Despite the frequent visits of technical delegations between Baghdad and Erbil, settlements continue to be hampered by differing positions on mutual obligations, amid calls for a legal and institutional mechanism to end the recurrence of the crisis with each annual budget.

Roots of the dispute

The roots of the crisis began with differing interpretations of the articles of the 2005 Iraqi Constitution relating to the management of oil and gas, and then deepened in 2007 after the Kurdistan Region passed a special law for oil and gas and signed contracts with foreign companies, which Baghdad objected to.

The dispute reached a more acute stage in January 2014, when the federal government cut the region’s share of the budget, which amounted to 17%, due to the region’s independent export of oil through Turkey, without coordinating with the Iraqi oil marketing company “SOMO”.

Since then, the crisis has not been limited to the region’s share of public spending, but has extended to the management of oil resources, the delivery of revenues, payments to foreign companies, the financing of employee salaries, and the determination of non-oil revenues that must be transferred to the federal treasury.

In March 2023, an international arbitration ruling concerning oil exports through Türkiye halted exports from the region, further complicating negotiations on resuming exports and settling financial obligations between the two parties.

Accumulation of crises

In this context, Jamal Kojar, a member of the Finance Committee in the Iraqi Parliament, believes that the continuation of the crisis is due to the lack of seriousness in reaching solutions, as well as the failure to adequately adhere to the constitution and laws.

Kujer tells Shafaq News Agency that the roots of the problem go back to the period after 2003, when clear foundations were not laid to regulate the financial and administrative relationship between the federal government and the region, which led to the postponement and accumulation of disputes as resources expanded and laws changed.

He adds that the current disputes have political and administrative dimensions, and that leaving the files to the technicians and administrators away from political and personal interference could have contributed to resolving them.

Kujer points out that agreements reached by the two governments do not necessarily guarantee an end to the dispute, citing the 2023 agreement that was signed in the presence of the prime ministers, the oil ministers and relevant officials, before it was blocked within the House of Representatives, he says.

It is worth noting that Baghdad and Erbil signed a temporary agreement on April 4, 2023 to resume exporting the region’s oil via Turkey, with SOMO (State Oil Marketing Organization) handling its marketing, and the revenues being deposited into an account subject to federal audit.

However, the agreement did not end the disputes regarding the management of oil, revenues, and the region’s entitlements, despite the inclusion of arrangements related to these issues in the tripartite budget law, which was approved on June 12, 2023.

Share equation

Determining the region’s share of the budget stands out as one of the most contentious issues, given the differences regarding the adopted percentage, the method of calculating it, and the deductions that precede the distribution of funds.

In this regard, Erbil-based political analyst Yassin Aziz says that the disputes over the region’s share clearly date back to 2016, when the federal government, headed by Haider al-Abadi, moved to link the share to financial terms and conditions, without establishing a clear and transparent mechanism to ensure its stability.

Aziz explains to Shafaq News Agency that the debate is renewed with every draft budget, especially regarding the extent to which the region’s share is consistent with its population percentage, noting that Iraq’s census for 2024 determined the region’s population percentage to be about 14.14%, while the percentage proposed in the draft budget is 12.70%.

The region rejects this percentage, considering that it does not reflect its actual entitlements, while Aziz believes that the amount it receives may decrease to about 6.1% if the share is calculated after excluding sovereign and governing expenses.

One of the main points of contention revolves around whether the region’s share is calculated from total public spending or after deducting sovereign expenses, as well as the dispute over whether to adopt legal allocations or actual spending as a standard for disbursement.

The expansion of expenses deducted before distribution leads to a reduction in the final amount received by the region, even if the announced percentage remains constant, which makes the dispute related to the basis of calculation as much as it is related to the percentage of the share itself.

Oil and revenues

The oil file is no less complex than the budget, as positions vary regarding the quantities of oil that the region should deliver to SOMO, the actual production volume, local consumption, production and transportation costs, and the dues owed to foreign companies.

According to Aziz, Baghdad is demanding the delivery of 445,000 barrels per day, while the region’s current production does not exceed 265,000 barrels per day, including about 50,000 barrels consumed locally.

He points out that the region proposed delivering 300,000 barrels per day, in exchange for guaranteeing the security of the airspace and oil facilities and addressing the dues of the producing companies, or adopting actual production as the basis for determining the quantities to be delivered.

He goes on to say that the dispute extends to non-oil revenues, including customs duties, taxes and border crossing revenues, with federal demands to hand over a portion of them to the public treasury, versus calls from the region to adopt clear figures and review them according to the size of commercial activity and actual revenues.

Aziz confirms that technical delegations are intensifying their movements between Baghdad and Erbil as the draft budget approaches the House of Representatives, noting the region’s readiness to show flexibility on some issues, provided that its entitlements are guaranteed and its financial share is not turned into a subject of political bickering.

Salaries and settlements

Alongside the oil disputes, the salaries of the region’s employees have become one of the most pressing issues, with their disbursement linked to auditing employee lists, determining financial obligations, and banking localization mechanisms.

On February 21, 2024, the Federal Supreme Court issued a decision regarding the localization of the salaries of the region’s employees according to the mechanism specified therein, and their financing from the region’s share, without resorting to loans to finance them.

However, the regularity of salary payments requires, in addition to judicial decisions, a stable implementation mechanism and accurate and agreed-upon data, in order to prevent monthly entitlements from becoming a tool of pressure in disputes between the two governments.

In this context, financial expert Diaa Mohsen believes that the crisis is deeper than the dispute over the region’s share percentage, because it relates to the rules for managing and distributing revenues, the limits of powers, and ensuring the implementation of mutual obligations.

Speaking to Shafaq News Agency, he believes that technical delegations may succeed in addressing a financial payment or auditing payroll lists, but they cannot end the crisis unless a binding institutional settlement is adopted that is not renegotiated every month.

He adds that some of the files presented to the technical committees exceed their jurisdiction, as experts can audit oil production and payrolls, but determining powers, defining excluded expenses and addressing breaches by one of the parties requires clear political and legal decisions.

Mohsen points out that the continued absence of binding decisions turns joint committees into a means of managing and postponing the crisis, instead of addressing its root causes.

radical solutions

Mohsen proposes establishing a legal formula for budget distribution, specifying the approved percentage, its calculation base, and the excluded expenses, while applying comparable standards between the region and the Iraqi governorates.

It also calls for completing the legislative framework regulating oil and gas and revenue sharing, defining the powers of management, contracting and marketing, and settling the dues of oil companies in accordance with the constitution and applicable judicial rulings.

He emphasizes the need to establish a joint auditable accounting system that links data on production, exports, oil and non-oil revenues and financial transfers, with the publication of periodic settlements approved by both parties.

Among the proposals is also ensuring the funding of audited salaries according to a fixed timetable, and conducting the clearing between the financial claims of the two governments within a clear legal framework, in addition to establishing a binding mechanism for resolving disputes that specifies the dates for auditing, objection, settlement, and the competent authority to resolve disputes.

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