Reduced International Support to Hit Timor-Leste Economy in Short-Term

News Release | 6 April 2005

DILI, TIMOR-LESTE (6 April 2005) - Reduced financial support from the international community is likely to hurt Timor-Leste's fragile economy in the short term, according to a major ADB report released today.

While the Government has the capacity to replace much of the existing grants through the considerable petroleum revenues coming in from the Bayu-Undan field, such revenues have to be well-managed, says the Asian Development Outlook 2005 (ADO), the annual ADB flagship publication that forecasts economic trends in the region.

The Government has proposed saving petroleum revenues in a petroleum fund that would invest abroad in low-risk assets and be subject to accountability and transparency measures. A public discussion paper was released in late 2004 and enabling legislation is to be passed in time for the fund to be operational from FY2006. The new policy will lead to lower annual expenditures and is projected to result in about $4.5 billion being accumulated in the investment fund by 2030 compared to the Government's previous policy which would have increased annual expenditures by about $500 million within 10 years and savings accumulate to only $1.5 billion by 2030.

During the fiscal year that ended 30 June 2004 (FY2004), Timor-Leste received an estimated $77 million in UN expenditures, and $30 million to $35 million of budgetary support from the Transitional Support Program.

"The UN presence was to have ceased in May 2004. A further extension beyond May 2005 is unlikely, and the pullout will in itself have a negative effect on economic activity in the short term," ADO says.

At the same time, several bilateral agencies are slowing down their aid programs. It is projected that bilateral and multilateral aid programs will decline by almost half to
$81 million by FY2008.

"These negative factors are projected to outweigh an expected improvement in the agriculture sector, underpinned by better weather conditions and ongoing rehabilitation of the sector," the report states.

The ability of the Government to secure donor funding will play a major role in determining the GDP outcome over the medium term. Timor-Leste is expected to become eligible for US Government-financed Millennium Challenge Accounts in 2006, if not earlier, which could provide as much as $30 million a year in grants.

Timor-Leste needs to develop its private sector, ADO says. Wages are substantially higher than in neighboring countries, and the state of infrastructure is poor in general. Low productivity of key sectors and gaps in the regulatory environment have made it difficult for new private companies to emerge.

With local financing provided by domestic deposits now largely committed, the private sector will increasingly need to rely on foreign investment to grow.

At present, draft laws on domestic and foreign investment, insurance, and bankruptcy have been prepared. However, the draft investment legislation carries the downside of a potential loss of substantial revenues through the provision of incentives and concessions.