Timor-Leste’s Debt Plan

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Timor-Leste’s Debt Plan

Timor-Leste’s plan to dramatically expand the state’s budget has sparked controversy. Is it money well spent?

With 37 votes in favor, 19 against and 3 abstentions, Timor-Leste’s parliament initially approved on November 11 the general terms of the government’s proposed budget of $1.763 billion for the year 2012.

2012 promises to be an exciting and significant year for this tiny nation. It will celebrate the 10th anniversary of the Restoration of Independence, the 100th anniversary of the Manufahi Revolt and the 500th anniversary of the arrival of the first Portuguese in the country. It will also conduct the third presidential and parliamentary elections since democracy was restored.

During the budget deliberations, civil society groups questioned the abnormal increase in the budget, the country’s continued dependence on oil revenues, and the unusually high number of mega infrastructure projects. But the most controversial issue was the decision of the government to obtain foreign debt next year. Timor-Leste currently has no debt from other countries or international financial institutions.

The Timor-Leste Institute for Development Monitoring and Analysis notes that the increase in the country’s budget is one of the highest in the world. In nominal terms, the 2012 budget is 35 percent higher than 2011. If adjusted to inflation, it’s 25 percent larger than last year, while the budget has grown 273 percent since 2006. The group cited a report from the IMF World Economic Outlook that identified Zimbabwe as the only country in the world whose state budget grew faster during the last four years. Many are concerned about the inflationary impact of rising state expenditures.

Many from the Institute are also concerned that the budget doesn’t reflect the need to develop non-oil industries. Income from oil and gas provides 95 percent of state revenues, making Timor-Leste the most petroleum-export dependent country in the world. “In the medium term, our oil wealth can't even pay for provide half the level of services the government will provide next year. That’s why we need to develop our non-oil economy.”

Meanwhile, some parliamentarians criticized the decreasing budget allocation for the education, health, and agriculture sectors and alleged that the government “prefers investing in mega projects which are beyond its capacity to execute and will end up in misuse of lots of money.” One of these huge infrastructure investments is the Tasi Mane Project, which will involve the development of an integrated petroleum infrastructure in the county’s south coastal zone in the next two decades.

But the most controversial, if not unpopular, budget-related issue is the plan by the government to secure $33 million in loans for the Dili sanitation and construction of national roads. It’s the first time the government has asked parliament to approve a proposal to borrow money from foreign institutions, and it immediately drew opposition from civil society groups who initiated a petition drive signed by more than 137 organizations based in 32 countries urging the government to “keep the nation debt-free and refrain from borrowing money from international lenders to protect its future generations.” The groups warned that “Rather than repeat the mistakes of other developing countries that have struggled with debt during recent decades, Timor-Leste should learn from their experiences, which often inflicted great hardships on their people.”

Despite the criticisms, the government maintained that the budget is service and development oriented, and will stimulate the local economy while addressing the human development needs of the people. The government also boasted that the budget process is one of the most transparent in the world. Indeed, it created a Budget Transparency Portal that allows the public to access budget documents. It also provides a daily summary of budget deliberations in parliament.

For the government, the budget proposal reflects the renewed optimism in the country’s future, but for many civil society groups, the budget could harm the economy in the long run.