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p. 42 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics The Pacific Cook Islands East Timor Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia

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East Timor

Economic growth continued at a rapid pace in 2001 as the economy maintained its recovery from the devastation that occurred following the referendum on independence in 1999.

A gradual transition to greater self-reliance has begun, although substantial international assistance is expected to continue in the medium term.

Macroeconomic Assessment

Agriculture has been recorded as the main source of income in nearly all of East Timor’s approximately 500 villages, and most of them consume their agricultural production—only a small proportion of them sell a significant amount of their rice or maize harvest. During 2000 and 2001, rebuilding of seed stocks and irrigation systems, improved access to fertilizer and transport, a reduced threat of violence, and high demand resulting from the large international presence contributed to expansion in the agriculture sector. Estimates put GDP growth in 2001 at 18% (Figure 2.28), which compares with 15% growth in 2000 and a contraction of 34% in 1999. The strong growth in the services sector in Dili to meet the needs of international staff and reconstruction activities also helped lift overall output to close to precrisis levels by end-2001.

The large international presence, the reconstruction program, and the ongoing development of a large oil project in the Timor Sea led to a very high level of imports and a large current account deficit in 2001. The deficit was estimated at approximately $470 million that year, and is forecast to rise to about $662 million in 2002. However, the start of oil production in 2004 is expected to improve the current account balance.

Meaningful monetary statistics are not yet available. The annual inflation rate was estimated at only 3% in 2001, compared with 140% in 1999 and 20% in 2000. The finance sector is very small, consisting largely of informal lenders, two operating branch offices of overseas banks, and a limited central bank role played by the Banking and Payments Authority (formerly the Central Payments Office).

A presidential election is scheduled for April 2002. UNTAET, the United Nations Transitional Administration in East Timor, is to complete its term at independence and a much smaller successor mission has been approved by the United Nations Security Council. There is a corresponding downsizing in international staff numbers.

Policy Developments

The future budget position rests heavily on accessing revenues from petroleum projects in the Timor Sea. Production in the first project, a gas recycling project in the Bayu Undan offshore gas field, is expected to begin in fiscal year 2004. There is the prospect of revenues being earned from additional projects once a range of fiscal, legal, and market issues is resolved. By fiscal year 2006, revenues are projected to flow in, but they will begin to fall off by the end of the decade. The Government has announced its intention to save some of the earnings in high-revenue years, and invest the funds. The Government will have to make up the short-run revenue shortfall either through borrowing against future oil income or continued funding from the international donor community.

One consequence of the absence of a financial market and the use of the US dollar is that many poorly educated rural dwellers are required to revise the basis of their trading arrangements. This imposes new transaction costs at a time when the rural economy is generally weak and reestablishing itself after the violence.

A second consequence is that the exchange rate cannot be used as an instrument for increasing the competitiveness of the non-oil private sector. Public sector wages that are well above previous levels may create artificially high reservation wages in the non-oil private sector and cause serious market distortions. At the same time, the essential physical, legal, and social infrastructure is generally in a poor condition. In such an environment, the private sector faces significant hurdles to expansion.

One of the pressing constraints for East Timor’s development effort is its limited human capacity. Many East Timorese worked in the previous administration but, frequently, the more senior positions were held by non-East Timorese and many of the important policy, expenditure, and administrative decisions were made outside East Timor. Consequently, the human resources required to manage all facets of government need to be built up. It is also clear that the development needs, especially in basic social services such as health and education, remain very high.

Outlook for 2002-2003

The gradual reduction in international support is expected to see GDP growth slow considerably to zero and 2% in 2002 and 2003, respectively. There is some risk of recession, depending on the extent to which the private sector can adjust to the decline in the size of the public sector. Domestic revenues are growing, but the need for international support remains substantial and is estimated at $150 million–$170 million over the 3 years to fiscal year 2005. Local revenues are expected to outweigh international funding after fiscal year 2005 as the Timor Sea oil project enters production and this should help establish a stronger fiscal environment. For non-oil exports to be competitive, inflation will have to remain low given that the currency is the US dollar.

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