Talks that took place between Baghdad and Erbil before and after the recent approval of Iraq’s latest budget could form the basis of a new era in relations between the federal government and the Kurdish Regional Government (KRG).

On 13 March, Iraq’s council of ministers agreed on a draft budget for this year of $152.17bn, with 12.6 per cent of the budget going to the country’s northern semi-autonomous Kurdish region.

For the first time, a multi-year draft budget was agreed upon, covering 2023, 2024 and 2025.

The multi-year agreement has given the country a sense of increased financial certainty after a failure to pass budgets in 2021 and 2022.

The budget announcements were made after a series of high-level meetings between officials from federal Iraq and the KRG.

During a press conference announcing the budget deal, Iraqi Prime Minister Mohammed Shia’ al-Sudani said that an "all-encompassing" agreement has been reached between Baghdad and Erbil.

Areas of contention

While significant progress has been made in talks between Baghdad and Erbil, details around the delivery of the budget funds and the legality of Iraqi Kurdistan’s oil and gas law remain contentious.

The day after the budget approval was announced, Al-Sudani travelled to Erbil for his first official visit to the region since taking office, highlighting the importance of these issues.

After a meeting between Al-Sudani and the Kurdistan Region Prime Minister Masrour Barzani, Al-Sudani’s office issued a statement that said: “The prime minister affirmed that the government possesses the will and serious desire to end these outstanding issues in a radical manner and move to a broad horizon of joint action and economic opportunities, which will benefit our people in Kurdistan and all other provinces.”

Barzani also released a statement saying: “The federal budget bill and progress on oil and gas give us stakes in our finances and lay foundations for deeper ties. Let us build on them.”

While the tone of Barzani’s statement was positive and highlighted progress that has been made in the negotiations, it also underlined the fact that more negotiations are required to reach an agreement in certain areas.

Among the main issues between Erbil and Baghdad is the implementation of Article 140 of the Iraqi constitution.

This article calls for a referendum to be held to decide whether the disputed regions of Kirkuk, Diyala, Nineveh and Salahaddin ought to fall under the authority of the KRG or Baghdad.

It was originally scheduled for 15 November 2007 but has yet to take place.

Kurdish resentment over the government's failure to implement Article 140 was one of the issues that led to the 2017 Kurdistan Region independence referendum.

This referendum posed the question: "Do you want the Kurdistan Region and the Kurdistani areas outside the region to become an independent state?"

This referendum led to clashes between military groups controlled by Baghdad and Erbil and ultimately led to the federal government taking control of Kirkuk.

Speaking to the Kurdish media outlet Rudaw after the meeting with Barzani, Al-Sudani said: “Definitely, the issue of Article 140 is a part of the political agreement and a budget has been assigned for this purpose.”

Deep-rooted challenges

Arabisation policies that were implemented by former Iraqi leader Saddam Hussein in disputed regions like Kirkuk meant that devising a referendum that is perceived by both sides as fair is a complex task.

While the agreement on 12.6 per cent of the country’s budget being delivered to the Kurdish region sounds conclusive, in the past similar agreements have been a long-running source of conflict – with both sides accusing the other of reneging on the agreement terms.

In November 2014, Baghdad and Erbil reached a deal under which the KRG committed to exporting oil through Iraq’s State Oil Marketing Organisation in exchange for a 17 per cent share of the national budget.

In the wake of the deal, Baghdad accused Erbil of failing to provide the promised oil and the KRG accused Baghdad of withholding payments.

Problems with budget payments to Iraqi Kurdistan made headlines as recently as January this year when Iraq's Federal Supreme Court (FSC) ruled that recent federal budget transfers to the region were illegal.

The decision invalidated several orders from the government to authorise payments to the KRG. It is unclear how the FSC’s ruling will impact future budget payments to the regional government.

On 16 March, it was announced that oil revenues from the Kurdistan Region will be transferred to a bank account under federal government supervision for the first time since 2002.

While significant progress has been made between the KRG and Iraq’s federal government, there is still a wide range of emotive, unresolved issues.

Experience has shown that agreements between Erbil and Baghdad can quickly unravel and negotiators will have to tread carefully to continue making progress.

If compromises are made and common ground is found, increased political stability may also lead to better security and increased foreign investment that could benefit the whole country.