The ‘financial gap’ in East Timor is not a gap but a budget deficit over the next four years currently estimated at US$126.3 million until oil and gas revenues come on stream in 2007. This means that the government won’t have enough money to cover its expenses over this period. The most important and immediate consequence is that the government may not be able to afford basic services, which can lead to instability.
Why is there a budget deficit?
A budget deficit is a worrying situation for East Timor, particularly bearing in mind the following factors: the international community has spent a massive amount of money in East Timor since 1999; international experts from the United Nations, aid agencies and international finance institutions ran the country until 2002 and continue to maintain a significant advisory presence; East Timor will soon have access to very lucrative natural resources in the Timor Sea. The two questions are: How can this country bridge the budget shortfall? and Why, at this point, is this country unable to finance its own, modest national budget?
Donors and the East Timorese government identified the budget shortfall more than a year ago. La’o Hamutuk reported on future problems for the national budget due to technical problems in the Bayu-Undan field in August last year (See LH Bulletin Vol. 4, Nos. 3-4). However, the real reason for the budget shortfall is that East Timor has been prevented from receiving revenues from the Laminaria-Corallina oil field, which belongs to East Timor under the United Nations Convention on the Law of the Sea principles. Australia has taken in more than $1 billion in revenues from Laminaria-Corallina, enough to cover the budget shortfall eight times over. Moreover, as East Timor’s oil revenue will come primarily from one field, Bayu-Undan, the country will remain vulnerable to scheduling or production problems with that field.
Some fault needs to be apportioned to the international planners who based East Timor’s long term revenue projections on the planned schedule of ConocoPhillips. Oil company schedules are not firm projections. If international advisors understood more about oil industry practice, perhaps East Timor’s government could have prepared for the budgetary difficulties and asked donors to extend their support three years ago. In the meantime, the world has undergone enormous changes, particularly the tragic events of 11 September 2001 and the subsequent U.S.-led wars in Afghanistan and Iraq. East Timor is fading in urgency and awareness, and donor priorities now lie elsewhere.
The approximately $3 billion spent by the international community for the reconstruction of East Timor since 1999 has had a negligible effect on the local economy. A large proportion of the money was not actually spent in East Timor, but instead paid for international Peacekeeping Forces and UN police. Foreign consultants, wages for international staff, foreign contractors and supplies procured from outside of East Timor account for much of the rest.
The upper graph shows East Timor’s government’s actual and projected annual income and expenses and Australia’s revenues from the Laminaria-Corallina oil field. For each year, the difference between left bar (income) and middle bar (expense) represents the deficit -- if expenses are higher than income, the government needs more money. The expense budget increases slightly for each year, as is normal, but the income budget drops from 2004 for the next three, as donor money decreases and revenues from Bayu-Undan construction taxes decline. From 2006 onward, income increases from Bayu-Undan oil production.
The third (striped) bar represents what the Australian government receives from Laminaria-Corallina, in disputed territory but closer to East Timor than to Australia. This declines each year as most of Laminaria’s oil has already been sold. Australia received $638 million between 1999 and 2002, not shown on the graph. East Timor has not received one cent.
The lower graph shows the total budget deficit and Laminaria income, with each year added to the accumulated number from previous years. It is clear that the $1.266 billion Australia will have stolen from Laminaria by 2007 could pay East Timor’s $129 million budget gap many times over.
The Proposed Options
In this article, we will attempt to analyze the seven methods for closing the gap which have been proposed for discussion by the government and the international financial institutions. No single option is a solution. It is not possible to choose one and leave the rest, and a combination must be applied.
The first suggestion is for the government to reduce the current expenditure budget. Remembering that living costs in East Timor are high, cutting spending would mean reducing the number of civil servants or cutting salaries; the government spends $27.25 million on 17,150 civil servants, making an average monthly salary of $132. Further cuts could be made in services like heath and education, or by reducing transportation costs. There is not a lot of room to cut government spending without a very negative impact on essential services.
Selling vehicles donated by the UN is the second idea. The government is currently trying to sell 600 Tata Sumos in East Timor for $1,000-$3,000 each. It has 400 Land Rovers for sale outside for approximately $6,000 each. Although the government estimates a revenue of $4.2 million from vehicle sales, IMF predictions are much lower at $1 million.
The third possibility is for donors to continue or increase their budgetary support through the World Bank-monitored Transition Support Program (TSP) which commenced in 2002. At the international donors meeting in December 2003, the government urged donors to extend their support for the TSP beyond the initial three year time frame (2002-2005) to 2008. If donors continue at the requested level of support ($25 million 2004-5 and $18 million 2005-6), it will reduce the deficit by $43 million.
Realigning bilateral and multilateral support according to government priorities as defined in the Sectoral Expenditure Program (SEP) (also called the Sector Investment Program (SIP)) is the fourth option. According to the Register of External Assistance, ongoing and planned bilateral and multilateral projects amounted to over $230 million.
SEP is a breakdown of necessary investment and expenditure by sector. SEP covers education and training; health; agriculture and livestock; natural resources and the environment; communications; power; transportation; water supply and sanitation; and private sector development. By coordinating bilateral and multilateral donor projects more closely with priorities outlined in the National Development Plan, the government hopes to use donor funds to substitute for some of the expenses currently in the national budget.
The fifth idea is to increase internally generated revenues, currently approximately $20 million per year. While this might be possible, it is unlikely to have a large impact. The current tax base is small and the government must balance the pros and cons of raising import and export tariffs with the economic impact. Importantly, most highly-paid people who could contribute the most to the national budget through income tax are wage tax-exempt, including UN staff, UN contractors, consultants, diplomats, or international employees of international institutions.
The sixth option is to use oil money from the Timor Sea reserve account, which currently contains $13.8 million and could increase to $90 million by 2007. Taxes on Timor Sea operations are already used as part of the government budget, but royalties (rent paid to East Timor for oil and gas extracted and sold) are planned to be saved to provide for future generations. At present, there are no regulations for this reserve, and the money is kept in a separate account in the Banking and Payments Authority, to be transferred into the future oil reserve fund. It is possible to use this money to make up the budget shortfall, but it would be a dangerous precedent, contradicting the government’s stated commitment to save and invest East Timor’s petroleum entitlement for a time after all the oil has been sold. Without legal protection, the long-term future of East Timor could be squandered to solve a short-term problem.
The seventh possibility is to borrow money, probably from the World Bank or Asian Development Bank (ADB). The IMF can also make loans to cover temporary budget deficits. All loans to poorer developing countries like East Timor have conditions which have to be incorporated into development plans like the World Bank’s Poverty Reduction Strategy Paper (PRSP), or ADB’s Country Assistance Program.
The World Bank has stated that East Timor would not need a PRSP, since it already has the National Development Plan. However, if East Timor borrows, the World Bank would have much greater influence in the design and implementation of policy to meet priorities in the National Development Plan.
Each year the government defines targets for its actions. The World Bank monitors the government’s progress in meeting its targets, as part of the Transition Support Program. Borrowing money would essentially extend this process for the duration of the loan and give the World Bank a much greater say in how the government designs and implements its national budget.
The international community has a responsibility to support East Timor over the long term. For 24 years, the international community enabled Indonesia’s brutal occupation — and nations such as Indonesia, Australia and the United States actively supported it. The community of nations has not condemned Australia’s bullying tactics in the Timor Sea or intransigence in negotiations on the maritime boundary. The Laminaria-Corallina oil field, East Timorese under international principles, is nearing the end of its productive life. It has already paid over $1 billion dollars into the Australian national treasury. This is East Timor’s money and would eliminate the financial gap. If it were available, East Timor would not be facing decisions about cutting essential services or going into debt less than two years after independence.
On Australia’s national day, East Timor’s supporters contacted the Australian government to encourage it to respect East Timor’s sovereignty. Australia often replied, explaining their views and distorting the facts. One example is below.
The text of this letter is accurate and complete, the layout is a simulation.
As La’o Hamutuk has written before (see, for example, LH Bulletin Vol. 4, No. 3-4), the majority of oil and gas resources that should belong to East Timor under international legal principles are under Australian occupation pending agreement on a permanent maritime boundary, and Australia has taken in substantial revenue from them since 1999.
Nearly two years ago, Australia withdrew from participation in legal processes for resolving maritime boundaries, and in October 2002 East Timor’s new government asked to begin negotiations. Australia delayed responding until both countries had ratified the interim Timor Sea Treaty and signed an agreement to divide revenues from the Greater Sunrise gas fields 82% in favor of Australia.
The first round of boundary talks took place in Darwin last November 12, more than a year later. East Timor asked for monthly meetings until boundaries are settled, but Australia will only meet every six months, claiming they don’t have enough people or money to meet more often. See previous page for Australia’s position, and the distortions they tell to defend it.
In December 2003, La’o Hamutuk told the Development Partners (Donor’s) Meeting:
… the economic stability of Timor Leste requires that we receive full legal entitlement to our resources. We continue to be discouraged by Australia’s eagerness to steal our oil and gas, as symbolized by the rapid depletion of the Laminaria-Corallina oil field. This field would belong to Timor-Leste under UNCLOS principles, but Australia has received approximately one billion U.S. dollars from it since 1999, making Timor-Leste the largest foreign contributor to Australia’s national budget.
Since Australia’s uncooperative approach to the talks, East Timor’s government has been encouraging a multi-faceted campaign, as La’o Hamutuk and others have urged for several years. Prime Minister Mari Alkatiri has asked Australia to refrain from exploiting petroleum resources or signing new contracts in disputed areas (a request Australia has ignored); East Timorese officials and diplomats are publicly challenging Australia’s intransigence; the Prime Minister’s Timor Sea Office is reaching out to media and has set up a web site (www.timorseaoffice.gov.tp).
Together with solidarity activists in Australia, the United States and around the world, La’o Hamutuk has been encouraging and facilitating a worldwide campaign to pressure and shame Australia into respecting East Timor’s nationhood. Just before the November talks, more than 100 organizations from 19 countries wrote to Australian Prime Minister John Howard, urging his government to set a firm timetable for establishing a permanent maritime boundary within three years, and to treat East Timor “fairly and as a sovereign nation, with the same rights as Australia.”
The Australian government replied that “the process [of delimiting maritime boundaries] is long and complex. Based on this experience, the Australian Government does not think it sensible to set an end-date for the process.” Australia also “has no plans to revisit its decision in March 2002 to no longer accept the jurisdiction of the International Court of Justice and other dispute settlement mechanisms…”
Many Australian people feel otherwise, and have launched a Timor Sea Justice Campaign, initially in Melbourne. The group is calling on the Australian Government to:
Immediately negotiate permanent maritime boundaries with East Timor in good faith.
Respect international law by rejoining legal mechanisms for resolving maritime boundary disputes and agreeing to be bound by their decisions.
Place all Australian Government revenue from oil and gas fields which are closer to East Timor than to Australia into trust. When permanent boundaries are finalized the trust funds should be distributed according to the entitlement of each country.
Stop unilateral exploitation of resources in disputed areas.
Thai Supporters of East Timor mark Australia Day outside the Australian Embassy in Bangkok.
Australia celebrated its national day on 26 January, the 216th anniversary of the first British settlement in Australia. In East Timor and around the world, people argued and pleaded with Canberra to treat East Timor seriously.
The Oilwatch Network, headquartered in Ecuador, is supporting East Timor’s efforts to secure our resource birthright, while simultaneously helping us learn about, and hopefully avoid, the “resource curse” which brings poverty, corruption, destruction and conflict to so many oil-rich nations. La’o Hamutuk participated in the Oilwatch biannual general meeting in Colombia last September, and worked with Oilwatch to organize the East Timor-Nigeria exchange in January (full report in next Bulletin). Together with East Timor’s Independent Information Center on the Timor Sea (CIITT), we participated in an organizing meeting for Oilwatch Southeast Asia in Bangkok in February (see report on page 2), and will continue to work closely with this network of the Global South, linking people in petroleum-rich tropical forest countries around the world.
Bayu-Undan, the largest oil and gas field in the Timor Sea’s Joint Development Area, began test production in February, although it will be many months before economically significant oil can be sold (see article on Financial Gap). Over the next few months, La’o Hamutuk will continue to monitor activities there, as well as analyze plans to use and save revenues from East Timor’s oil entitlement.
La’o Hamutuk staff: Cassia Bechara, Simon Foster, Tomas (Ató) Freitas, Selma Hayati, Mericio (Akara) Juvinal, Yasinta Lujina, Inês Martins, Charles Scheiner, João Sarmento
Translation for this Bulletin: Xylia Ingham, Nino Sari, Kylie
Executive board: Sr. Maria Dias, Joseph Nevins, Nuno Rodrigues, Pamela Sexton, Aderito de Jesus Soares
Photographs for this Bulletin: Ató Freitas, CAIN/Thailand, Selma Hayati, Simor Foster, Tom Fawthrop, Charles Scheiner
Drawings for this Bulletin: Cipriano Daus
La’o Hamutuk (Walking Together in English) is an East Timorese non-governmental organization that monitors, analyzes, and reports on the principal international institutions present in Timor Lorosa’e as they relate to the physical, economic, and social reconstruction and development of the country. La’o Hamutuk believes that the people of East Timor must be the ultimate decision-makers in this process and that this process should be democratic and transparent. La’o Hamutuk is an independent organization and works to facilitate effective East Timorese participation. In addition, La’o Hamutuk works to improve communication between the international community and East Timorese society. La’o Hamutuk
La’o Hamutuk welcomes reprinting articles or graphics from our Bulletin without charge, but we would like to be notified and given credit for our work.
In the spirit of encouraging greater transparency,
La'o Hamutuk, The East Timor Institute for Reconstruction Monitoring and Analysis
P.O. Box 340, Dili, East Timor (via Darwin, Australia)
Mobile: +(670)7234330; Land phone: +670-3325-013
Email: email@example.com; Web: http://www.etan.org/lh