Regions and Countries

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Country Strategy and Program Update 2005-2006: Timor-Leste

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II. Current Development Trends and Issues

A. Recent Political and Social Developments

5. The United Nations Mission of Support in East Timor (UNMISET) fielded in 2002 to support the new Government withdrew in May 2004. UNMISET’s mandate was to (i) provide assistance to core administrative structures critical to economic viability and political stability; (ii) provide interim law enforcement and assist in the development of a new police force; and (iii) contribute to the maintenance of the external and internal security of Timor-Leste. The United Nations Security Council has established a successor mission to provide continued support, albeit on a significantly smaller scale. There is continuing concern, shared by the Government and Timor-Leste’s development partners, as to the capacity of the Government to face the challenges ahead with reduced levels of international support.

6. The Government has made good progress in implementing the NDP and Road Map by having all agencies formulate annual action plans linked to the budget process, and by the development of comprehensive sector investment programs (SIPs). The SIPs will assist government decision making by prioritizing expenditures within and across sectors, and will identify investment opportunities for both the Government and development partners. The SIP process (in keeping with the Government’s past practice with the NDP) has been highly consultative, with significant partner involvement and commitment. The Government has demonstrated a strong commitment to planning and monitoring the achievement of these plans. The Government has acknowledged specific concerns raised by the development partners about public sector expenditure management and has committed to address them. A multisector committee in the Prime Minister’s Office is focusing on rectifying slow budget execution, continuing problems with revenue collection in the power sector, and weaknesses in the compliance environment. The Government has called on development partners to support an integrated program to strengthen capacity for public expenditure management and economic management.

7. Other key areas of concern are the development of the judiciary, the legal system, law enforcement, and policing. The Government of Australia has committed to further peacekeeping activities outside any United Nations-sponsored involvement. Other partners have also made significant commitments to continue working with the Government in these areas. Advances have been made with regard to the refugees in West Timor, and with veterans’ issues. Rural poverty is pervasive and food insecurity has required international intervention on several occasions. Unemployment and youth unemployment in particular, remain widespread.

B. Economic Assessment and Outlook

8. The economy contracted by about 3% in 2003, as the international presence was further reduced, reconstruction projects were executed at a slower pace than expected, and substantial flood damage to crops, following a delayed 2002 rainy season, caused a decline in agricultural production.

9. Unemployment increased with rates for urban males estimated at 20%. The number of public servants increased by almost 50% during FY2003, with a further 5% increase during July–October 2003. The capacity of the private sector to create new jobs remained weak because of limited opportunities for investment.

10. Revenue collection exceeded estimates by 12%, as a result of higher Timor Sea oil and gas revenues. However, actual expenditures fell short of budgeted figures due to slow execution of reconstruction projects. In particular, while public sector capacity to execute projects increased from FY2002, the actual execution level of capital development expenditure was only 81% of the budgeted value.

11. The financial sector and the monetary aggregates were marked by significant developments in 2003. In August, a new commercial bank started operations, inducing more local competition and a revision of lending policies by the two existing banks to provide better services to the public. The average interest rate on lending dropped to around 15%, increasing, overall credit availability in the banking system.

12. During 2003, inflation was on a decelerating trend, with the price slowdown mainly attributable to an improvement in food supply following the harvesting of the 2002 crops. The inflation rate, calculated by the Statistics Office as the year-on-year price variation of a Dili consumer goods basket, was 4.2% in December 2003, compared to 9.5% in December 2002.

13. The external current account balance continued to be substantially negative, although fully financed through official transfers. According to International Monetary Fund estimates, the current account deficit was more than $206 million in 2003, or approximately 61% of gross domestic product, including a trade deficit of more than $160 million, while receipts originated from the Timor Sea oil and gas operations were estimated at $27 million. The structural trade deficit for goods not directly related to the foreign presence increased in 2003, as the growth in the value of taxable merchandise imports exceeded that of exports, which continued to be dominated by coffee as the single commodity representing more than 85% of total exports.

14. Due to the volatility of Timor Sea taxation revenues, the estimates of the total budget financing gap for the period FY2004–FY2007 range from a high-case scenario of no gap to a low-case scenario of a shortfall of $138 million.

C. Implications for Country Strategy and Program

15. A key development with implications for ADB’s program of activities is the progress the Government has made in identifying its expenditure priorities through the SIP exercise. In the sectors in which ADB has had involvement, notably transport, energy, finance, and public sector management, there is now a clear link from the NDP to the Combined Sources Budget, resulting in sector programs that the Government determines are high priority and within its financial capability. The Government is now in a position to commit to a longer-term program of activities with ADB.

16. The Government’s capacity to operate effectively and efficiently will be reduced as a direct result of the reduction in international advisory support. The implication of this for ADB’s program is that capacity strengthening should be central to all activities, and specific assistance should be earmarked to support sound economic management and planning.

17. The Government’s no-borrowing policy means that ADB’s program of activities will be for technical assistance only. To optimize the benefits of a relatively small program, it should be incremental and conservative, building on past achievements and tightly focused.

18. ADB will continue to play a catalytic role, complementing and enhancing the efforts of the Government, other development partners, and the private sector in the areas where ADB technical assistance will be applied. ADB will play a key role in development of infrastructure and in microfinance development. ADB will also continue to play a role in supporting the Government’s policy, economic, and financial planning functions.

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