Young, Restless–But Not Failed Yet

January 08, 2010

By Anthony Anderton

According to the World Bank, 75 percent of Timor-Leste’s poor live in rural areas, while the overwhelming dependence of the population on agriculture for a living (a sector where labour productivity is low) is a key factor in the country’s high poverty rate.

This dependence on agriculture means it is farming–not tourism or other new industries–where many people believe the current government should be focusing its spending.

The Asian Development Bank suggests Petroleum Fund earnings be directed toward a broad-based approach to development to help alleviate poverty, saying, ‘Agriculture will likely be the main source of income for most of the population for some decades and further investment is required in this sector.’

Australian National University economist Jennifer Drysdale agrees. ‘If the government could just focus on agriculture and support those people, the country would be fine,’ she says, adding that education, health, food and basic services in rural areas should be a priority.

Improving the productivity of the nation’s farmers would not only raise incomes and living standards, but might also help address Timor-Leste’s dependence on expensive food imports. In 2007 and 2008, drought and other factors triggered a food crisis that prompted international donors, including China, to donate rice. Reducing the nation’s vulnerability to fluctuating global food supplies and market prices would also reduce social hardship and remove a potential source of social instability.

The Resource Curse

But while most of the population toils in agriculture, Timor-Leste has benefited from a revenue stream that could transform the economy–oil and gas. Petroleum wealth has ‘fundamentally changed the economic outlook for what was one of the poorest places in earth,’ the IMF says in a report. With significant new oil and gas resources still waiting to be tapped, the nation’s economic future looks bright.

But the multi-billion dollar question is how will the fledgling nation manage its resource wealth? Will Timor-Leste spend the money effectively? Or will it squander and mismanage its national wealth like so many other resource-rich developing countries? In short, will the ‘resource curse’ strike Timor-Leste?

The national Petroleum Fund was established in 2005 to avoid such an eventuality.

The Fund is an investment vehicle designed to protect national wealth for future generations and maximise long-term and sustainable earnings to allow the government to fund national development.

Essentially, the Fund works as follows: All oil and gas revenue is deposited directly into the Fund, and then at least 90 percent must be invested in international US dollar-denominated cash securities. It’s an extremely conservative investment approach.

Each year the government may withdraw from the Fund an amount called the Estimated Sustainable Income (ESI), or three percent of total Petroleum Wealth. The ESI is calculated based on the amount of money already in the Fund and projected future revenues from oil and gas sales. Withdrawals from the Fund can only be used for state budget purposes, while the management and operation of the Fund is subject to an extensive array of checks and balances designed to ensure transparency, accountability and good governance. The International Monetary Fund, which helped Timor-Leste establish the Fund, says the Petroleum Fund is ‘the cornerstone of the country’s financial management.’ The IMF also says the structure of the Fund and investment approach protects national finances from international economic volatility.

And so far, Timor-Leste’s Petroleum Fund has been widely hailed as a success. By mid-2009, the Fund was worth over $5 billion, and had returned an impressive average of 5.6% per annum on its investments through the end of 2008.

Texeira, while generally critical of the government’s policies, is unequivocally supportive of the Petroleum Fund. ‘I think our Petroleum Fund is the envy of much of the world,’ he says. But he also worries that Timor-Leste has become overly dependent on oil, and has developed unrealistic expectations. ‘People think that the oil and gas money isn’t going to run out. But it will,’ he says. ‘Right now, we’ve only got one well (Bayu Undun) producing. There’s nothing else.’

Texeira says he doesn’t see Greater Sunrise coming online in the near future, and adds that other prospects are years away from production. Bayu Undun is forecast to be tapped out by around 2024 and Texeira says it is therefore critical for Timor-Leste to develop other sectors of the economy, such as agriculture and tourism, to create jobs and growth.