Australian Financial Review May 7, 2002

Dili's bubble to burst as foreigners pull out

Tim Dodd in Jakarta

As East Timor prepares for a monumental independence party on May 20, the bill for the hangover - the new country's budget gap which will be paid by the international community - is looking more manageable.

Last year, international donors estimated that East Timor would need between $US154million ($286million) and $US184million to prop up its budget in the first three years of independence.

Now, the figure that will be presented to donor countries and international organisations - when they meet in Dili in 10 days to make their aid commitment - is much less.

"We expect this [the funding gap] to decrease quite substantially," said Sarah Cliff, the World Bank's East Timor country director.

The lower funding estimate has come about as calculations of the spending needs have been refined and because of increased optimism about the revenue the new government will be able to garner. The three-year funding level that the donors will be asked to commit to is expected to see the country through until it gains substantial revenue from planned Timor Gap gas fields.

But still, the first few years as an independent country will be economically tough as East Timor adjusts to the loss of the "bubble economy" driven by the thousands of foreigners who came to rebuild the country but are now mostly leaving.

Dili became an economic magnet because of the foreign spending, which was concentrated in the capital as UN staff and aid workers spent up in restaurants, bars and other service industries. The massive rebuilding program has also powered the economic bubble in Dili and the other major city of Baucau.

Now the World Bank anticipates an economic shock in these two cities with the loss of employment. "There could be a movement back to rural areas," Ms Cliff said.

The downturn is reflected in IMF projections of a 0.5 per cent contraction in East Timor's GDP this year after rampant growth of an estimated 18 per cent last year.

But over the medium term, the IMF's senior resident representative in Dili, Kadhim Al-Eyd considers growth of 4 to 6 per cent sustainable, if the legal system and government service delivery are strengthened.

see For a Debt-Free East Timor

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