Regions and Countries

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p. 2 of 5 BACK | NEXT I. Country Strategy II. Current Development Trends and Issues III. Implementation of the Country Strategy and Program IV. Portfolio Management Issues V. Country Performance and Assistance Levels

Country Strategy and Program Update 2006-2008: Democratic Republic of Timor-Leste

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II. Current Development Trends and Issues

A. Recent Political and Social Developments

3. The political situation in Timor-Leste is broadly unchanged since the 2005-2006 CSPU. The Government of Prime Minister Mari Alkatiri, which assumed power upon restoration of independence on 20 May 2002, remains committed to the NDP and its two strategic pillars of

1. poverty reduction, and
2. equitable and sustainable economic growth.

No significant policy or program swings have occurred. Consistent, predictable, and transparent government is aided by the leadership’s commitment to the actions matrix agreed with development partners under the Transition Support Program, a budget support mechanism. The Government and development partners recently agreed to 3 more years of the Transition Support Program, renamed and reshaped as the Consolidation Support Program. Additionally, the Government’s Sector Investment Program exercise links the budget process directly to the NDP through transparent whole-of-government planning and 5-year expenditure programming.

4. No effective local government system has been established. District administrators are appointed by the central Government, and district administrations are wholly—and inadequately—funded by the Government. However, elections for village leaders and councils have been successfully completed for 11 of Timor-Leste’s 13 districts.

5. The Government, with the help of the United Nations Mission in Support of East Timor (UNMISET) and external partners, has achieved lasting success in public security, reconciliation, and demobilization and disarmament. The violent demonstrations of December 2002 have not been repeated, and the police successfully handled 20 days of antigovernment protests during April and May 2005. The Government provedor (ombudsman) was appointed in March 2005. Timor-Leste and Indonesia established the Truth and Friendship Commission in March 2005, and the President of Indonesia visited Timor-Leste in April. The two countries have now agreed to 96% of the Timor-Leste and Indonesia land border. The Government and the President have pursued a comprehensive reintegration program, including registration of 36,000 ex-combatants. The United Nations Security Council voted unanimously in April 2005 to extend the UNMISET mandate for 12 months, albeit without peacekeepers and with fewer adviser positions, and renamed the United Nations Office in Timor-Leste.

6. Poverty incidence in Timor-Leste has probably increased in recent years. The 2004 national census reported a total population of about 925,000, an increase of 17.4% since the 2001 survey. The total fertility rate increased from 7.8 in 2001-2003 to 8.3 in 2003, possibly the highest in the world. Against this, non-oil gross domestic product (GDP) fell in 2002 and 2003, and may have grown by only 2% in 2004. Nominal per-capita GDP is currently estimated at $405. Social services delivery is improving only gradually, and social indicators remain among the lowest in the region, including gender-related indicators. Sociocultural factors contribute to low enrolment and high dropout rates of female secondary school (senior) students: high female adult illiteracy; sex segregation in the paid labor force; and an emerging gender gap in wages, high maternal mortality rates, and domestic violence. Almost one third of females are malnourished. Meanwhile, the Government's own affirmative action strategy appears to be effective, with women constituting 25% of parliamentarians and public servants. Environmental management also remains a significant thematic concern. No turnaround in deforestation, land degradation, loss of biodiversity, urban pollution, and indoor air pollution is evident.

B. Economic Assessment and Outlook

7. The major change in Timor-Leste’s macroeconomic situation involves the petroleum royalties and tax windfall to the Government from the Bayu Undan field in the Timor Sea—both are much larger and started earlier than expected. Revenues increased from $41 million in FY2004 to a projected $243 million in FY2005, as compared with a budget of $79 million for FY2005. The Government’s sound fiscal position is now entrenched. At the end of March 2005, net foreign assets reached $284 million, more than 15 months of projected imports for 2005. The Petroleum Law, unanimously passed by Parliament, commits the Government to save most of its petroleum revenues in a Norwegian-style petroleum fund designed to yield a sustainable income in perpetuity. Thus, the GDP receives little short- and medium-term commensurate boost from these revenues.

8. Against a buoyant outlook for the public fiscal position, short- and medium-term private sector prospects are bleak. Non-oil GDP growth turned only marginally positive in 2004, but growth will be difficult to accelerate since the main contributors—improved weather conditions for rural production, and rapid growth of local credit—are unreliable and finite. Timor-Leste’s economy is uncompetitive due to

1. small markets,
2. high costs,
3. low skills base, and
4. poor physical infrastructure and incomplete legal institutions.

Attracting sufficient foreign direct investment to underpin broad-based, sustainable economic development will be challenging. The Government is facing this challenge with an ambitious program to improve the enabling business environment. Parliament has passed laws on domestic and foreign investment, and is discussing the insurance law; the associated regulations have already been drafted. A draft law on bankruptcy was prepared, but is being revised. The decree law on leasing of government property was promulgated, and the draft law on leasing of private property submitted to Parliament. The process for business registration, however, remains complex and unclear. The Investment and Export Promotion Agency will soon offer a one-stop service for information and services relating to private investment.

9. Inflation fell to 1.8% in December 2004, and is expected to remain at around 2.4% on the basis of low international inflation and limited pressure on domestic demand. The trade deficit expanded to $187 million in 2004, amounting to about 56% of GDP. Non-oil exports rose to $8 million in 2004, of which $7 million was coffee. Coffee exports are expected to rise over the medium term in response to higher international prices and improved marketing; other exports are growing rapidly but from a much lower base.

C. Implications for Country Strategy and Program

10. Current trends and issues have clear implications for ADB country programming in Timor-Leste. First, the generally stable and secure political situation means that aid can be effective if it is well designed and well delivered. Unlike most postconflict countries, Timor-Leste is unlikely to fall back into conflict. Secondly, pervasive poverty and slow social development compel a focus on development that will directly benefit the poor. Thirdly, and consistent with ADB’s Pacific Strategy 2005-2009³, turning a stagnant private sector into a dynamic job creator is essential to deliver benefits to the poor. And finally, overcoming the infrastructure backlog represents a potentially high payback strategy since it is an essential precondition for revitalizing the private sector and can directly generate jobs in the short run and improve access to services in rural areas.

11. Enhanced regional cooperation, principally with Indonesia, will also be important for revitalizing the private sector. Timor-Leste is disadvantaged by high cost imports. Freer and more efficient trade with Indonesia would lower domestic costs for the private sector. Bilateral cooperation on managing cross-boundary economic resources would also benefit the Timor-Leste economy, particularly marine resources and watersheds.

12. All development support and expectations should factor in Timor-Leste’s low institutional capability and absorptive capacity. Government managers lack experience, their offices are underresourced and have few technically able staff; in fact, few staff are able to absorb technical training. The Government is unable to fully execute its own budget. Capacity development will underpin Timor-Leste’s development. However, capacity development programs must target only the most essential skills and competencies, and build institutions that are relevant and sustainable. Development results from ADB support will hinge on domestic capability to keep main roads open and to sustain water supply and sanitation services.

13. As the country moves into the consolidation phase 3 years after the restoration of independence, the Government is keen for both external assistance and its own development programs to deliver concrete benefits to ordinary people, particularly outside of the capital city, Dili. This translates into an urgent need to improve services in the districts and to create jobs. The NDP assigns a key role to infrastructure development in the poverty reduction strategy: “for the movement of people and goods, and orderly and efficient functioning of markets, and for a sustainable development of the country”.⁴ The result is converging practical and strategic imperatives for investing to improve infrastructure assets and infrastructure services, particularly roads and other transportation modes, water supply and sanitation, power, and telecommunications. The Government’s FY2006 budget document also sets out budget estimates for FY2007–2009 based on the 15 approved sector investment programs. The medium-term estimates envisage a tripling of the Government’s capital works budget for infrastructure. These factors offer uncommon programming opportunities for ADB in Timor-Leste, to lead and to leverage grant-based infrastructure support in the absence of a lending pipeline.

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