Subject: FT: Bustle returns to Dili

Bustle returns to Dili

By Joe Leahy in Dili, East Timor

Published: August 20 2001 14:27GMT

Something resembling a commercial bustle has returned to Dili, East Timor's capital. Beaten-up taxis cruise streets frequented by illegal money-changers. Stores here and there have re-opened. New cafes serve Australian steak sandwiches and cappuccinos to thousands of foreigners working for the United Nations and other organisations.

Modest as it is, this is a significant transformation. Little more than 18 months ago, East Timor's towns were blackened shells, destroyed by Jakarta-backed militias after the territory voted in August 1999 in a UN-sponsored referendum to separate from Indonesia.

Yet the economic recovery remains dangerously fragile. Within months of an election scheduled for the end of this month, the territory is expected formally to declare independence. The UN transitional administration and other bodies will then begin scaling down their missions.

The resulting economic vacuum will leave East Timor, a drought-prone land with limited skills and resources and few industries, more dependent than ever on foreign grants.

East Timor's best hope of achieving financial independence is a block of ocean on its southern sea border with Australia. Oil and gas fields in this block, most notably one called Bayu Undan, are believed to contain enough resources to provide East Timor with between US$3.5bn and US$5bn in revenues over 20 years starting in 2004.

Just how badly East Timor needs these resources was highlighted this month when Phillips Petroleum, one of the developers of Bayu Undan, threatened to stall the project because of a dispute with the transitional government over taxes. The issue is expected to be resolved but the brinkmanship is hair-raising for tiny Timor.

"It's a bit like a game of Russian roulette," says Michael Francino, cabinet member for finance in the territory's transitional government. "If these projects don't go ahead there will be no significant revenues here for at least a decade."

However, he adds, "East Timor is not like a Dubai or a Saudi Arabia. You can't just stick a drill in the ground and hope to make money."

East Timor's government budget expenditure is forecast at US$65m in 20001/2002, rising to US$103.3m by 2004/2005. Currently, most of this budget is funded by foreign aid. Even in the future, the government will be hard-pressed to raise more than US$50m domestically from sources other than oil and gas, says Mr Francino.

The territory's economy has had a rocky time over the past few years. Gross domestic product fell 40 per cent with the violence in 1999 before rebounding about 15 per cent in 2000, helped by the influx of more than 10,000 UN troops and civilians, according to a report by ANZ, the Australian bank. GDP per capita is now estimated at US$325, about a third of its levels in 1997.

Coffee is the main export, accounting for a tenth of GDP. It is a premium product - about a quarter of the crop is certified organic. However, warehouses and trucks remain in short supply and world coffee prices are low.

East Timor also has tourism potential. Its landscapes are ruggedly beautiful, culture unique and beaches untouched. But there are plenty of similar places in Asia that are easier to reach - and cheaper.

Mr Francino expects East Timor's economic growth to be incremental rather than revolutionary. This means the oil money, and the question of how to spend it, will remain central to the territory's future for years. Saving too much would mean wasting development opportunities and would increase the risk of corruption while saving too little would be risky given the uncertain nature of oil and gas revenues.

"You don't want to put yourself in a position where you're forced to make cuts if oil and gas revenues are delayed or come in later than expected," says Sarah Cliffe, head of the World Bank in Dili.

Mari Alkatiri, a senior official with Fretilin, the biggest party, says the country should save at least 50 per cent of the money in a trust fund abroad. "The policy is to use the less the better for the recurrent budget," Mr Alkatiri says.

Donors have expressed their willingness to help East Timor through the next few years of deficits. But they are hoping the onset of oil revenues in 2004 will provide them with an exit strategy. Any subversion of these resources through corruption would jeopardise this and would be an embarrassment for all concerned.

After all, the world has staked a lot on this tiny half-island. "Everyone wants to be associated with a success story," says Ms Cliffe.

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