Global Policy Forum

By Sonia Jessop

The first democratic election in East Timor went off successfully, bringing East Timorese closer to full independence. They will return to the polls next April to elect a president, after which full independence will be granted. In the meantime, the United Nations will start to gradually turn over the running of the government to the new authorities.

The 88-member Constituent Assembly, which was officially sworn in Saturday, was meeting Monday to decide on a transitional Cabinet. But with no experience of self-government and few immediate funds, East Timor's new government will continue to depend heavily on the United Nations to see it through its first few years.

Though the country is sitting on potential oil revenues worth more than $7 billion over 20 years, East Timor will not see any of this money for some time to come and will remain dependent on financial assistance from the international community.

In July, East Timor and Australia agreed on a treaty governing the sharing of royalties from oil and gas reserves in the Timor Sea, north of Australia, under which East Timor will get 90 percent. However, royalties are not expected to start flowing in until 2004. Moreover, any delay in the oil and gas revenues would force East Timor to undertake substantial borrowing to meet the primary budget.

The United Nations reckons that it will take five to six years of sustained economic growth for the new country to stand on its own feet. Bilateral donors have estimated they will spend $112.8 million in 2001-2002, of which half will be in the form of technical assistance. This compares with an estimated $85 million of bilateral spending for 2000-2001. Estimated revenue in 2001-2002, excluding revenue from oil and gas activities in the Timor Sea, is expected to reach $19 million. Activity in the Timor Sea is estimated to generate $6 million in taxation revenue and $5 million in first-tranche petroleum payments.

About $304 million will be coming into the country during the 2001-2002 period, but only $65 million will relate to actual government operations, said Anne Morant, East Timor's Budget Office director. The rest will come from bilateral donors and the World Bank. "Of the $65 million, there is a $20 million funding gap which donors have agreed to meet," she said.

There are no official economic statistics available since 1997, although officials believe that the East Timor economy has been growing very strongly in 2000-2001, with the gross domestic product possibly increasing by about 50 percent. This growth is expected to continue into 2001-2002, though at a more moderate pace -- maybe 5 percent to 15 percent -- according to the 2001-2002 budget.

The economic recovery has been strong in the first half of the year, driven by high demand for services in Dili and donor-assisted agricultural recovery. The volume of agriculture production is approaching estimated pre-ballot levels. A satisfactory coffee crop, the main agricultural product, is expected, and an increased harvest of rice and maize is expected to reach 80 percent and 100 percent of pre-ballot levels, respectively. Yearly coffee production was last estimated at about 4,000 tons, with the possibility of reaching 9,000 tons, according to Agricultural Affairs Department data.

Over the medium term, the economic prospects of the country rest largely on a few key industries -- agriculture, and oil and gas. Agriculture accounted for about 34 percent of GDP in 1997, apart from rice and maize production, and lenders have been pinning their hopes on organic coffee production, which over the long term could prove fruitful. A viable fishing industry could also expand to about 4 percent of the current GDP over the medium term if appropriate maritime policies are put in place.

The oil and gas extraction industry is expected to contribute about as much to GDP as the whole agricultural sector this year.

Several structural constraints have yet to be addressed, which are likely to mitigate against sustained future growth in the near term. These factors are the lack of legislation on property rights and land claims, and the lack of a sound commercial regulatory framework. The next meeting for East Timor's donors was scheduled for December in Norway.

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