Timor-Leste is one of the countries with the lowest number of COVID-19 cases, largely because the government shut down borders in early 2020 knowing that the fragile health system would not be able to cope with a pandemic. The nation has been in an extended state of emergency since March 28, 2020, a period that was broken only by a brief hiatus in July and August. When COVID-19 fears reached Timor-Leste, the 2020 budget was not in place so to meet its interim funding needs, the country created an emergency COVID-19 fund.
The COVID-19 pandemic hit the country when it was least prepared to deal with it financially, surviving on treasury cash reserves and some domestic revenue. In Timor-Leste, where the financial year is the same as the calendar year, the budget for the upcoming year should ideally be passed by the parliament by the December of the previous year. While the country has a contingency fund, only an average of $20 million is allocated to it each year. By January 2020, the budget for 2020 had been rejected once and withdrawn another time because of a political gridlock.
One of the main reasons for the political gridlock was that National Congress for Timorese Reconstruction, one of the partners of the ruling coalition, had withdrawn its support from the government. However, as COVID-19 hit, politicians put the needs of the nation first and readily introduced and approved the state of emergency in the National Parliament.
Employing something known as a duo-decimal budget, the government used the 2019 budget as the basis for the calculation of essential expenditure, which it then doled out to ministries and agencies on a monthly basis. Even though the historic allocation would have been too small to deal with the pandemic’s needs, this time around there was literally no allocation for contingency.
Like many countries, Timor-Leste does not have specific laws to respond to natural disasters or pandemics. It used the state of emergency to close borders to restrict movement, and amend existing provisions for emergency actions. The Ministry of Interior only received $1.9 million and $1 million for natural disaster financing in 2020 and 2021, respectively. Timor-Leste now has the opportunity to review and introduce laws designed to deal with potential natural and man-made risks and shocks.
Timor-Leste has a sovereign wealth fund called the Petroleum Fund (PF), which is invested in the U.S. stock market. This fund finances the majority of the state budget. With no enacted budget and depleting cash reserves, the government was forced to make extraordinary withdrawals from the PF, something that is usually done only on the basis of an enacted budget law.
At the time of the two withdrawals, the U.S. stock market had fallen and the Central Bank reported that the fund had lost $1.8 billion in value. The delay in enactment of the state budget for 2020 thus necessitated extraordinary withdrawals at the PF’s lowest point. By December 2020, however, the value of the PF had risen to an all-time high of nearly $18.9 billion, following the strong rebound in the U.S. stock market.
While the pandemic was clearly an unforeseen event, the twin effects of the state of emergency and duo-decimal budget hit the economy hard, with a 6 percent economic contraction projected for 2020. Going forward, the government must assess the opportunity cost of extraordinary withdrawals caused by the country’s domestic political gridlock.
In times of crisis, the Timorese opposition often does not want to approve excess expenditure and raise the popularity of the ruling government. While the parliament voted to make an extraordinary withdrawal from the PF in the case of COVID-19, the underlying condition was that all pandemic-related expenditure be channeled through a single consolidated COVID-19 fund. Withdrawals were not made as a lump sum, but in tranches, when the government could demonstrate need.
The parliament approved a total amount of $536.3 million in extraordinary withdrawals from the PF, in two tranches. The first transfer on April 6 allowed the withdrawal of $250 million, and the second on June 30 of $286.3 million.
In total, the treasury received $316.8 million for ensuring business continuity in public administration and the COVID-19 Fund received $219.5 million. The ambit of the fund at the time was the acquisition of medical equipment, construction of quarantine facilities, training, cash transfers to vulnerable households, acquisition of essential supplies such as rice, and social protection measures.
Then, in June 2020, a government restructure saw an alliance between FRETILIN, the People’s Liberation Party and KHUNTO, finally giving the government a majority in parliament. The budget for 2020 was introduced by this new partnership in September. The budget law of $1.48 billion integrated the COVID-19 Fund within the state budget. It included some new measures such as Cesta Basica – a food basket for vulnerable households – and support for employees.
The total health budget allocation in 2020 was 10 percent, a huge jump from previous years in which it has averaged 5-7 percent. The COVID-19 fund received $219.5 million (extraordinary withdrawal from the PF), $113.0 million (approved budget withdrawal) and a $748,000 direct budget transfer from International Labour Organisation (ILO) for a cash transfer program. This represented a total of $333.2 million, a little more than 23 percent of the total annual budget, excluding loans.
By the end of Financial Year (FY) 2020, the fund’s cash execution was 76.1 percent of its allocation, with capital development at 25.7 percent. Though the execution of this appropriation category is low on average, this year was more problematic. The fund was created only mid-year and the piecemeal nature of the tranches received meant that forward planning, procurement, and implementation was difficult.
In FY 2021, the government has broader plans for economic recovery and reconstruction with a big $1.89 billion budget. The August 2020 Economic Recovery Plan of the government discusses measures on a three-year horizon. These include sectors such as education, health, social protection, agriculture, and tourism. Timor-Leste has seen alternating years of duo-decimal budgets in the last few years. It will be important for the budget calendar to be followed as per schedule in the coming years to achieve the stated goals of this ambitious plan.
Following the maxim that the budget should follow function, in 2021, economic recovery and reconstruction measures have been budgeted within the specific ministries and agencies that will implement it rather than through the COVID-19 fund.
As a result, the COVID-19 Fund allocation has dropped to $31 million for measures such as contact tracing, quarantine, social distancing and hygiene, and the isolation and treatment of cases. Other measures are allocated to ministries and agencies, totaling some $123.9 million. The health share of the 2021 budget has fallen to 7 percent. This is also because there was front loading of expenditure in 2020 to prepare and update the health and social protection systems for the pandemic.
Since the government commenced implementation of the fund under a political gridlock, there was all the more reason to be transparent about its implementation. To implement financial controls, the COVID-19 fund allocation and expenditure are recorded electronically in the country’s integrated financial management information system (IFMIS) system. This is a big win compared to many countries where COVID-19 financing is flowing outside the purview of the treasury.
While there are no mandatory reporting or audit provisions, an April 2020 decree law tasks the Management Board of the COVID-19 Fund to provide regular information on the fund. The government reports to parliament every quarter and the Ministry of Finance (MoF) has uploaded COVID-19 related reports on its website. A COVID-19 technical secretariat was formed with MoF technocrats supporting the Management Board to approve the budget and expenditure plans of the COVID-19 Fund.
Since the fund is on budget, its audit is under the purview of the court of accounts. Timor-Leste received low scores on external and internal audit in the 2016 PEFA assessment conducted by the World Bank. One of the stumbling blocks was the independence of the supreme audit institution Câmara de Contas and follow up by the executive arm of the government on same. Going forward, it will be important to ensure to maintain reporting standards and audit of emergency financing and implementation.
Timor-Leste has jumped the obvious financial mismanagement hurdle by keeping the fund on budget. While it is technically only an accounting unit within the MoF, its continuance will need to be inspected in upcoming budget years. It should not take away accountability from ministries and agencies in the health and social sector, who must eventually adapt to managing resources for shocks such as this pandemic. It is an opportunity for the government to assess the institutional readiness of different ministries and agencies to deal with sector specific shocks.
While the government has achieved a high degree of transparency in its COVID-19 financing, development partner funding largely remained off-budget, with the exception of the $748,000 from ILO. Partners tried to speed up and reprogram their spending to COVID-19 needs in early 2020, when the government had not yet set up the COVID-19 Fund.
The key concern is whether the 13.7 percent increase in development partners’ planned disbursements was segmented according to the needs of the government. Towards the beginning of the pandemic, the MoF sent out a survey to map development partner efforts for COVID-19 and shared the results with them in order to reduce potential duplication. This must be a priority in times of pandemic and otherwise.
The use of country systems and direct budget support must be further explored to encourage transparency and country ownership of projects. The European Union has offered direct budget support in the last few years. Partners such as the Australian government have agreed to consider Timor-Leste’s preference for direct budget support subject to a fiduciary assessment.
The government took necessary emergency measures at the onset of the pandemic, providing for vulnerable populations and ensuring business continuity. The duo-decimal budget system in 2020 shows the additional difficulty countries face in spending money when urgency is key. The COVID-19 fund’s inclusion in the state budget and transparency are significant achievements. Going forward the government will need to inspect the longevity of the fund and reassess its purpose. The government must also think about the benefits of prearranging financing mechanisms such as its contingency fund, to better prepare for shocks and keep costs lower.