Wsj.com | BySam Dagher

Prime Minister Says Region Needs More Weapons From West and More Money From Baghdad

ERBIL, Iraq—The government of Iraq’s semiautonomous Kurdistan region, a crucial front-line partner in the U.S.-led coalition against Islamic State, is confronting a shortage of weapons and growing economic disquiet among its citizens and foreign investors in the oil-rich area.

“After what happened with ISIS, things have become really difficult—it’s not easy,” said Kurdistan Prime Minister Nechirvan Barzani in an interview with The Wall Street Journal, using another name for Islamic State.

Kurdish officials say the local military force known as the Peshmerga hasn’t yet received from the West any of the heavy weapons it needs to fight Islamic State on multiple battle fronts, with the exception of a recent shipment of German antitank missiles.

In the Kurdistan region, foreign investors including Western oil companies are scaling down operations and laying off local staff, according to several officials. Many major construction and infrastructure projects are at a standstill because contractors haven’t been paid, while the regional government scrambles to find new revenue sources and tackle a bloated public-sector payroll estimated to account for about 75% of government expenditures.

Mr. Barzani said contractors working on projects throughout the region are demanding money that is increasingly hard to come by. “It’s a big problem now, we have to pay the companies about $1.5 billion,” he said.

In addition, the government owes about $1.2 billion to energy companies that have production-sharing agreements with the region and have been exporting crude oil since March via a pipeline to neighboring Turkey, officials say. The region now exports about 270,000 barrels a day through this pipeline, a figure Mr. Barzani said is expected to reach 450,000 barrels a day by the start of 2015.

To be sure, the Iraqi Kurds have made some remarkable advances in recent months. They have managed to gain control of oil-rich Kirkuk, long a major objective. They have bolstered their legitimacy with the West and furthered their quest for more autonomy from the Iraqi central government. And they have secured some weapons shipments from the U.S. and other Western countries as well as expanded cooperation on intelligence and military training.

“There are threats but there are a lot of opportunities as well,” said Mr. Barzani, who has been at the helm of the current government since June. He previously held the post from 2006 to 2009 and from 2012 to 2014.

At the heart of the region’s financial woes is Baghdad’s decision to suspend budget remittances to Erbil since February of this year because of a long-standing dispute over the region’s oil contracts and exports. The region is owed about $10.3 billion by the central government, Mr. Barzani said. Baghdad says the region’s direct oil exports are illegal and have to go through the central government’s state marketing group.

Iraq’s Kurds, who waged a decadeslong struggle against Saddam Hussein ’s regime, began running their own affairs in 1992 with protection from the U.S. and West. The 2003 U.S.-led invasion that toppled Mr. Hussein gave Kurds a unique opportunity to bolster their autonomy, effectively creating a state within a state in the north in the north while also maintaining links to Baghdad and participating in the central government there.

The region’s decision to exploit its oil and gas riches on its own and to take over territories that it says are historically Kurdish has been a major source of friction with Baghdad. But those policies have also fueled much of the boom in recent years.

The dispute was at its worse over the summer, when Kurdish ministers withdrew from the government of former Iraqi Premier Nouri al-Maliki. But with Mr. Maliki’s departure and the creation of a new government led by Prime Minister Haidar al-Abadi, Kurds ended their boycott in hopes of resolving their differences with Baghdad.

“We decided not to disappoint our friends, the Americans and Europeans,” said Mr. Barzani about the decision to end the boycott.

But he said there appears to be no shift in Baghdad’s position over the region’s oil exports and he wants Washington to intervene to put pressure on the central government to at least release some of the budgetary funds owed to Erbil. He said his government is ready to work out all issues with Baghdad, but it will never give up its right to export oil directly.

“No way we will give you control after what you did to us,” said Mr. Barzani, referring to officials in Baghdad.

The measures Mr. Barzani’s government is taking to tackle the financial crisis include attempts to raise up to $5 billion from foreign state-owned banks and plans to slash the public sector. About one-fifth of the region’s estimated population of 5.2 million gets a salary from the government.

It isn’t clear how the population would react to any cutbacks in the public sector in light of the continuing confrontation with Islamic State.

Mr. Barzani said the region is committed to being on the forefront of the battle against the extremists but wants more military support from the West in the form of heavy weapons.

“I do not know why they hesitate,” he said.

Questions linger over why more than 1,000 Peshmerga members retreated from the northwestern Iraqi town of Sinjar in early August, leaving residents there—many of them members of the Kurdish-speaking Yazidi minority—to a grim fate at the hands of Islamic State militants.

Mr. Barzani said the lack of heavy weapons was one of the main reasons for the Peshmerga’s retreat from Sinjar, adding that an investigation of the events there is still under way.

Mr. Barzani said he was grateful for President Barack Obama ’s decision to order airstrikes at the time to stop Islamic State militants from further advances on Kurdish areas, including Erbil. But he said that now the U.S. should consider other measures, such as the deployment of special forces on the ground.

“I do not think the current strategy will destroy ISIS,” he said. “It will be impossible.”