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RDTL doubles 2008 budget in mid-year
Later ruled unconstitutional

14 November 2008

On 18 June 2008, the Timor-Leste Council of Ministers passed a 122% increase in the State Budget for 2008 and sent it to Parliament for approval. This massive increase, using a mid-year "rectification" process which is usually intended for minor adjustments, incorporates hasty major policy initiatives and goes against the process of managing petroleum revenues sustainably which was enacted into law in 2005. The Government held no public discussion or consultation on this budget; it was a closely guarded secret until Parliament received it on 23 June.

In December 2007, the Government and Parliament enacted a State Budget for 2008 of $347.8 million, to be funded by withdrawing $294 million from the Petroleum Fund. The proposed "rectification" more than doubles this, spending $773.3 during 2008, of which $686.8 million will come from the Petroleum Fund.

To pay for the $425.6 million in additional disbursements, the Government has re-estimated the Sustainable Income (ESI) from the Petroleum Fund to be $396.1 million, 35% more than the $294 million calculated six months ago. But the Government wants to spend more, so they propose to go above the revised ESI by an additional $290.7 million. This is rationalized by high oil revenues -- the kind of thinking which leads countries into the "resource curse" trap, and which the Petroleum Fund is intended to protect against.

The budget increase includes a new $240 million Economic Stabilization Fund to subsidize food, fuel and construction materials, as well as the first payments for a heavy oil power plant and electric distribution system budgeted at $390 million to be paid from 2008 to 2011. It also includes an increase of $1.4 million (on top of $0.9 million approved last December) "to purchase vehicles for the National Parliament," which would be enough to buy a car for each member.

In addition to appropriating nearly $800 million for 2008, this mid-year rectification commits Timor-Leste to spend an additional $560 million between 2009 and 2011. The majority of this is for the electric system, but it also includes patrol boats, tractors, irrigation, food silos, a polytechnic institute, energy and infrastructure studies, and other items.

During the first quarter of 2008, the Government spent only $32.4 million, executing less than 10% of what they had budgeted for the year, and by mid-June, they had spent around $80.2 million. None of the $294 million already authorized for 2008 has been withdrawn from the Petroleum Fund; Government operations have been paid out of unexpended cash from previous years.

After weeks of vigorous debate, Parliament made some changes, increasing the total expenditure to $788.3 million (127% more than the original 2008 budget), and approved the budget rectification on 30 July. On 5 August, President Ramos-Horta announced he is asking the Court of Appeal to rule on the Constitutionality of the Economic Stabilization Fund. Due to errors in the President's office, his staff promulgated the budget immediately even though the President had declared that he would wait for the Court.  The following week, the Ministry of Finance published the budget as promulgated in Portuguese, Tetum and English (although the English version contains several errors).

Although Parliament approved an amendment removing funding for the heavy oil power plant on 23 July, the budget as promulgated still includes this project. Due to a technical error in the amendment, the government is ignoring it, and signed a contract for this project with Chinese Nuclear Industry 22nd Construction Company on 24 October.

On 13 November, the RDTL Court of Appeal ruled that the Economic Stabilization Fund violates the Constitutional ban on secret budgets and that withdrawing money above the Estimated Sustainable Income violates the Petroleum Fund Act. (Decision in Portuguese)

On 24 November, the RDTL Council of Ministers approved the draft General State Budget for 2009 and submitted it to Parliament. The total receipts from all sources are $1,344 million. Expenditures from the State Budget, total $681 million. Most of that will be paid with $589 million taken from the Petroleum Fund, $408 million newly Estimated as the Sustainable Income, plus $181 million more.

La'o Hamutuk is publishing information on the 2008 and 2009 Budgets as we receive it, so that Timorese citizens and others can inform themselves about these critical issues. We will continue to enhance the Government's limited transparency, and these pages will be updated regularly as more information is received. 

Continues in English below

RDTL hadalas orsamentu 2008 iha tinan-klaran

Ikus-mai regula inkonstitusionál

14 Novembru 2008

Iha loron 18 Juñu 2008, Konsellu Ministru Timor-Leste pasa ona Orsamentu Estadu 2008 ho aumenta pursentu 122 no esbosu ne’e haruka ona ba Parlamentu Nasionál hodi aprova. Hasa’e osan ne’e, liu hosi prosesu “rektifikasaun” tinan-klaran ida ne’ebé bai-bain intende ba mudansa ki’ik, lalais hatama mós inisiativa polítika boot no halo la tuir prosesu manajementu sustentavel ba rendimentu petróleu ne’ebé tau ona iha lei iha 2005. Governu la halo diskusaun públiku ka konsultasaun kona-ba orsamentu ne’e; prosesu ne’e hala’o subar-subar de’it too parlamentu simu esbosu dokumentu  ne’e iha 23 Juñu.

Iha Dezembru 2007, Governu no Parlamentu aloka ona tokon (miliaun) $347.8 ba Orsamentu Estadu 2008, osan ne’e sei hasai hosi Fundu Petróleu, tokon $294. Proposta "rektifikasaun" dala rua ne’e, sei gasta tokon $773.3 iha tinan 2008 nia laran, ne’ebé tokon $686.8 sei foti hosi Fundu Petróleu.

Tokon $425.6 sei hodi selu gasta balun tan, Governu Estimatiza ona Rendimentu Sustentavel (ESI) hosi Fundu Petróleu too tokon $396.1, pursentu 35 barak liu tokon $294, kalkulasaun fulan neen liu ba. Maibé Governu hakarak gasta barak liu tan, tantu sira nia proposta fó liu ESI ho aumenta tan tokon $290.7. Ida ne’e haree ba rendimentu mina ne’ebé sa’e aas -- hanoin ida hanesan ne’e bele lori ita-nia nasaun hakat ba rai-kuak "malisan rikusoin", no harii Fundu Petróleu atu hodi proteje kontra malisan rikusoin ne’e.

Aumenta Orsamentu ne’e inklui tokon $240 ba Fundu Estabilizasaun Ekonomia atu fó subsídiu ai-han, mina, material konstrusaun, no mós osan selu ba  Fabrika Eletrisidade heavy-oil (mina todan) ida no nia sistema distribuisaun elétriku ba nasaun Timor Leste, ne’ebé nia orsamentu total hamutuk tokon $390 sei selu hahú hosi tinan 2008 too 2011. Iha orsamentu ne’e inklui mós tokon $1.4 (tau tan ba $0.9 ne’ebé aprova ona iha Dezembru tinan kotuk) "atu sosa kareta ba Parlamentu Nasionál," ne’ebé too atu hodi sosa kareta ba membru Parlamentu ida-idak.

Adisionalmente atu di'ak liu osan tokon $773.3 ba tinan 2008, rektifikasaun tinan-klaran ne'e obriga Timor-Leste atu gasta tan tokon $560 hahu tinan 2009 to'o 2011. Osan ne'e barak liu sei uza ba halo sistema elétriku, maibé inklui mos sosa ro-ahi patrolia, traktor, halo sistema irigasaun, halo armajen ai-han, harii Institutu Politekniku ida, estudu infraestrutura no energia, no buat seluk tan.

Iha relatóriu fulan-tolu primeiru tinan 2008, Governu gasta de’it osan tokon $32.4, hodi eksekuta saida mak sira planu ona ba tinan ne’e, ne’ebé la too pursentu 10, no too fulan Juñu-klaran, sira gasta ona maizu-menus tokon $80.2. Osan tokon $294 ne’ebé hetan ona autorizasaun atu uza ba orsamentu 2008, seidauk foti hosi Fundu Petróleu; Governu nia atividade selu ona uza osan-restu hosi tinan kotuk sira nian.

Depois deskute maka’as iha semana balun, Parlamentu halo alterasaun, aumenta total gastu ba tokon $788.3 (pursentu (%)127 as liu orsamentu orijen 2008) no aprova orsamentu rektifikasaun iha 30 Jullu. Iha 5 Agustu, Presidente Ramos-Horta anuncia katak nia sei husu no hein ba Tribunal Rekursu atu deside kona-ba Konstitusionalidade Fundu Estabilizasaun Ekonomika. Haree ba erru iha Presidente nia fatin, nia membru promulga tiha orsamentu imediatamente maske Presidente deklara ona katak nia sei hein desizaun hosi tribunal. Semana depois, Ministeriu Finansas publika kedas orsamentu promulgadu iha lian Portugues, Tetum no Ingles (maske versaun ingles iha erru balun).

Maske Parlamentu aprova ona  ida atu hasai fundu ba fábrika enérjia óleu pesadu iha 23 Jullu, orsamentu ne’ebé promulga ona sei iha no hala’o nafatin projeitu ne’e. Haree ba erru tekniku iha alterasaun ne’e, governu ignora tiha, no asina kontratu ba projeitu ne’e ho kompaña Chinese Nuclear Industry 22nd Construction Company iha 24 Outobru 2008.

Iha 13 Novembru, Tribunal Rekursu RDTL fó sai ona katak Fundu Estabilizasaun Ekonomia viola konstitusaun kona-ba orsamentu segredu no foti osan aas liu Estimatizasaun Rendementu Sustentavel ne’ebé viola mos Lei Fundu Petróleu. (Desizaun iha Portugues).

Iha loron 24 Novembru, Konsellu Ministru sira aprova ona Orsamentu Jeral Estadu ba 2009, ne’ebé haruka ba Parlamentu Nasionál. Receitas husi fonte hotu ne’ebé tau hamutuk mak miliaun (tokon) $1,344. Despesa total tokon $681 sei foti husi fundu estadu nian. Barak liu mak sei foti husi Fundu Petróleu hamutuk miliaun $589, ne’ebé tokon $181 resin liu tiha tokon $408 tuir Estimatizasaun Rendementu Sustentavel foun.

La'o Hamutuk publika dadaun informasaun ne’ebé ami simu kona-ba Orsamentu 2008 no 2009 atu ajuda sidadaun Timor-oan no ema hotu bele hatene kona ba asuntu importante ne’e. Ami sei kontinua ajuda hadi’a Governu nia limitasaun ba transpárensia, no pájina ne’e sei hadi’a no aumenta nafatin ho informasaun foun ne’ebé ami sei hetan.

Links / Ligasaun

Commentary and analysis

Training materials by La'o Hamutuk

Court rules budget unconstitutional and illegal

Government press releases (a sampling of those which contain substantive information)

Background documents

Contents of the rest of this file, which is from the Mid-Year Budget Document
Conteudu kraik, husi Dokumen
tu Orsamentu Tinan-Klaran Nian (Portuguese iha ne'e)

Budget Review   July 2008
 Prepared by the Ministry of Finance, National Directorate of the Budget

Reformatted, with links added and some typos corrected by La'o Hamutuk

Executive Summary

The Government has made significant progress towards its goals since January 2008. This mid-year budget update continues and extends the achievements of the Government to date, putting the economy on a sound basis for future growth and development.

Budget execution in the Transitional Budget 2007 was very high (90.1 per cent) and in absolute cash terms ($80.2 million) the year to date execution for budget 2008 is higher than for any previous State Budget at the same point in the budget year.

Global commodity prices have risen sharply so far in 2008. These are outside Timor-Leste’s control, but the Government has intervened to mitigate the impact on the economy and the people of Timor-Leste. The recent Food and Agricultural Organisation (FAO) Emergency summit in Rome on the global food situation agreed that food prices would remain around their current levels over the medium term. Similarly, the cost of fuel is expected to remain high with increases beyond previous maximum prices.

Developments in the global economy will impact on Timor-Leste via the slowdown in the United States, the depreciating US dollar, and increasing commodity prices. Although the dollar is now close to its lowest levels in real terms, studies conclude that it still remains relatively overvalued, so further depreciation can be expected relative to the region, which will result in higher prices for imports to Timor-Leste.

Timor-Leste enjoys a net benefit from high oil prices, but high prices for food and oil flow on to the domestic prices of many other goods and services. This has repercussions throughout the economy which may impede or deflect the Government’s program for national development. To reduce the potential expected impact of such large price shocks on the public and economy of Timor-Leste the Government is requesting additional funds, in addition to those for general government services, to establish an Economic Stabilisation Fund (ESF) which will aim to secure the supply of critical commodities at affordable prices to ensure that the continuation of the development process.

The international economic environment during 2008 is expected to be characterised by higher inflation, and will also experience slowing growth, flowing from the downturn in the United States. However, Timor-Leste’s oil revenues are increasing, driven by the sustained higher price for oil. This has led to revising the estimate of sustainable income upwards. The revised estimate still allows a prudent margin for fluctuations in price and production.

The Government proposes a supplementary funding of $185.6 for state supplied services and $240m for The Economic Stabilisation Fund in the mid-year budget update, making a total of $773.3 million for the 2008 budget year.

Part 1 Speech by Prime Minister (in separate file, in Portuguese)

Part 2 Fiscal Overview

The supplementation of the State Budget for 2008 is primarily designed to overcome the current difficulties and external supply shocks emanating from global economic conditions. The Government remains is strongly committed to continue its efforts to put Timor-Leste on a sound foundation for a prolonged phase of economic growth and development.

The Government proposes increases in public expenditure to enable further investment in economic development, bringing forward productivity gains in key sectors such as agriculture and productive infrastructure so as to be able to reap the benefits of economic growth earlier and reduce budget dependency on oil in the medium to long term.

The Supplement also includes an Economic Stabilisation Fund to mitigate the potential domestic shocks from global price increases which are outside Timor-Leste’s control.

The supplementary budget has been formulated by:

  • assessing progress thus far against the Government’s programme;
  • seeking opportunities to advance the programme more aggressively in light of progress to date;
  • moderating the impact of external economic shocks; and
  • responding to unforeseen internal events.

Tables 2.1, 2.2 and 2.3 show the overall Budget Statement for the whole of Government. They provide actual cash expenditure for 2006-07 and the transition period in 2007, the estimate for forecast cash expenditure for 2008 and the projected budgets for 2009 to 2011. Expenditure in the forward years is expected to stay high due to significant increases in public investment in infrastructure from 2009 onwards. It is envisaged that such investment will lead to an improvement in the productive capacity of the economy of Timor-Leste.

Financing from the Petroleum Fund

The Petroleum Fund continues to benefit from the recent increases in oil prices. The balance of the Petroleum Fund was $2,086 million at 31 December 2007. It had increased to $2,630 million by 31 March 2008. By the end of 2008 the balance is expected to be $3,339 million, instead of the amount originally predicted in the 2008 State Budget of $3,116 million. The Fund is expected to increase steadily in the medium term. The current forecast shows the total value of the Fund rising to $4,501 million by the end of 2009 and $7,968 million by the end of 2011. Total Petroleum Wealth on a Net Present Value basis is estimated to be $13,203 million at 1 January 2008, based on current cash holdings and conservative estimates of future quantities of oil and oil prices.

The recent and expected future increases in the price of oil has led to an increase in the estimated net worth of the petroleum fund. Sustainable income has risen correspondingly from $294 million per annum at the time of the formulation of the 2008 State Budget to $396 million per annum in early 2008.

Table 2.1 provides a consolidated picture of the state of Budget from 2006-07 through to 2011. In 2008 the Government will have a non petroleum fiscal deficit of $686.8 million assuming approval of the supplementary budget. This deficit will be totally financed through the petroleum fund. The Government is seeking to withdraw $686.8 million from the Petroleum Fund. Future estimated deficits forecasts in 2009 to 2011 are only indicative and do not imply that the Government will withdraw amounts from the petroleum fund which exceed sustainable income in the years beyond 2008. Details on financing of any future deficits will be provided in the General Budget of State for the actual year in question.

In regard to the estimating sustainable income the Ministry of Finance has used assumptions, which are prudent. For 2008 the oil price assumption is an average $86 per barrel. It should be noted that this is not an expected oil price for 2008 but the oil price used in the calculation of sustainable income. At the time of writing the actual average oil price so far in 2008 has been $107 per barrel.

Table 2.1
General Budget of the State for the Whole of Government 2006-7 to 2011


Table 2.2
Fiscal Position of the General Budget of the State for the Whole of Government 2006-07 to 2011

Table 2.3
Estimated Cash Flows and Financing of the General Budget of State for the Whole of Government 2006-07 to 2011

Part 3 – Economic Overview

International and Regional Economic Overview

The IMF’s World Economic Outlook April 2008 stated that the global economy in the last six months of 2007 was shaped by two opposing forces: robust economic expansion in emerging markets, particularly China and India, and a slowdown in advanced economies particularly the United States where the slowdown has been, exacerbated by the housing market correction. World economic growth is now forecast to slow by over one percentage point from the 4.9 percent experienced in 2007 to 3.7 percent in 2008 and 3.8 percent in 2009.

In recent months rising food and fuel prices have led to higher levels of headline inflation in many countries. Food price increases have accounted for almost 45 per cent of global headline inflation in 2007 in major industrial and emerging economies.

The current commodity boom of which Timor-Leste has been a net beneficiary has been broadly based and includes oil, metals, major food crops as well as some beverages.

Overall the current boom is largely associated with the increased demand for commodities in China and other fast growing economies of Asia which is outpacing current levels of supply the diversion of food crops for the production of bio fuels may have also had some impact. The IMF will prepare an analysis of the real and financial factors behind the surge in oil and commodity prices at the response to a call by the Group of Eight (G8) Industrial Nations.

Food prices are expected to peak in 2008 and forecast to remain at the same levels in the medium term.

The region as a whole grew by 7.4 percent led by China and India with growth of more than 9 percent. However, signs of moderating activity have emerged in line with the global slowdown in the United States. Given its extensive trade and financial linkages with the rest of the world, Asia is unlikely to escape all effects of this downturn. In 2008, growth for the region is expected to decline by 1.25 percent to 6.2 percent which is also the expected growth of Indonesia. Growth in Australia, a major commodity exporter to Asia, is expected to be 4.4 percent in 2008 while Indonesia, is expected to experience growth of 6.2 percent.

Inflation pressures are now strong or rising across most of Asia. While the initial rise in headline inflation in much of the region reflected supply-related food price shocks and higher global commodity prices (where they have been allowed to pass through) price increases are now starting to become more broadly based. Core inflation has begun to rise more rapidly in recent months. Producer price inflation has also picked up sharply across Asia. This reflects higher costs for energy as well as other raw material inputs.

Developments in the global economy will impact on Timor-Leste via the slowdown in the United States, the depreciating US dollar, and increasing commodity prices. Although the dollar is now close to its lowest levels in real terms, studies conclude that it still remains relatively overvalued, so further depreciation can be expected relative to the region, which will result in higher prices for imports to Timor-Leste.

In terms of commodity prices, Timor-Leste is currently benefitting from higher oil prices and the resulting income from oil revenues and will continue to do so. Increases in the price of coffee, Timor-Leste’s major agricultural export, have been more moderate, rising from 123 cents to 149 cents per pound between January 2007 and March 2008.

Any associated rise in export income will therefore also be moderate. By contrast, increases in rice prices from $323 per metric ton in 2007 to around $1,200 per metric ton in May 2008 has and will continue to have a large impact on the cost of living in Timor-Leste.

Domestic Economy

In the short to medium term, the domestic economy of Timor-Leste will continue to be driven by the public sector, with expenditure primarily financed by transfers from the Petroleum Fund. In 2007 it is estimated that domestic non-oil GDP grew by 8% in real terms.

Output in the agricultural sector in 2007 is estimated to have contracted significantly due to bad weather and locust plagues, with an overall decline of around 10% for crops such as coffee and maize. However, this was more than offset by a rebound in industry after the civil unrest in 2006, and increases in government expenditure. Overall government expenditure on a cash basis contributed more than half of non oil domestic GDP. The total government expenditure in 2007 on a cash basis was $156.5 million.

The outlook for the domestic economy in 2008 reflects the commitment of the Government to increasing real rates of economic growth which will lead to increased levels of employment and poverty alleviation.

The Government is acutely aware of the fact that higher economic growth rates are necessary to achieve these objectives and intends to utilize the substantially larger financial resources from oil and gas to achieve these goals.

Provisions have been made in the 2008 supplementary budget to provide rice subsidies, increases in transfer payments for internally dislocated people, pensioner and veteran, as well as more work programmes for the unemployed to alleviate the incidence of poverty.

In the areas of health and education there will be major increases in maternal health and hospital care, and expansion of the school feeding program, teacher training and construction of school facilities.

Greater public investment in infrastructure, human capital and intensified reform of the business environment are also set to increase sustainable growth over the medium term.

Infrastructure projects to be commenced in 2008, such as improvements in electricity supply, road rehabilitation, and improvements to ports and airports will be implemented. Investment in agriculture will also be stepped up substantially particularly with the purchase of tractors and machines as well as irrigation related projects and construction of agricultural facilities. The Government is investing heavily in increased agricultural productivity with the goal of increased food security and import substitution.

Total spending for 2008 is expected to be in the order of $774 million made up of the original budget appropriation of $347 million, and a mid-year supplementary budget of $426 million, including $240 million to establish the Economic Stabilisation Fund. Spending at these levels, which will include the construction of new power plants and other investment in electricity generation, is expected to significantly enhance the living standards of the Timorese people. In addition it will provide a positive impetus for business expansion and further development and investment. Particularly with the envisaged public investment in capital projects , which will lead to a real rate of economic growth of approximately 9-10 percent.

Consumer inflation rate of almost nine percent was recorded in 2007. In 2008 inflation is expected to be in the range of 10-12 percent. Following global developments, food prices have been increasing rapidly, with rice prices in international markets up some 200 percent during the past six months. In addition the costs of building materials have also risen considerably.

The government will be vigilant in monitoring price pressures and the Economic Stabilisation Fund will be used as a major tool for this purpose. Another factor which may mitigate the rise in inflation will stem from the reduction of import duties and sales tax to 2.5 percent and service tax to 5 percent through the recently approved fiscal law. Here the extent to which tax reductions are passed through by producers and retailers is important.

The Government is taking steps through the establishment of a prices surveillance unit in the Ministry of Tourism, Commerce and Industry, increased dialogue with the private sector, and other associations such as co-operatives and veterans associations to ensure there is adequate competition in regards to the prices of goods and services in the economy.

The Government is committed to increased rates of economic growth, together with targeted assistance to the vulnerable and disadvantaged, as essential steps to increased employment and poverty reduction. It intends to utilize the rapidly growing financial resources from oil and gas to achieve these goals.

Petroleum Sector

Currently there is only one field in operation in the Joint Petroleum Development Area (JPDA). The Bayu-Undan field is still in its early stage of production. It is expected that it will continue to generate revenue for the State of Timor-Leste until 2023.

The actual production in 2007 was 58.8 million barrels oil equivalents compared to the estimate of 59.3 million barrels oil equivalents in Budget 2008. Lower actual production in 2007 than assumed in the Budget 2008 was due to a reduction in the production of Liquefied Petroleum Gas (LPG).

To date increases in petroleum revenue have arisen from steadily increasing oil prices. Oil revenue estimates are based only production levels which are nearly certain. In the medium-term, however, significant increases in production are expected. For example, another field in the JPDA, known as Kitan, has been declared commercially viable. This will be included in the petroleum revenue estimates in the near future when it is clear what flows can be expected. Production will also eventually increase as a result of ten drilling expeditions in the Timor Sea between 2009 and 2012.

As outlined in the Budget 2008 the peak production from the Bayu Undan field is expected to occur in 2008. The estimated production schedules are unchanged since the Budget 2008 and are provided in Table 3.4. However, the actual production data is updated on annual basis after the realisation of actual data. The projection estimates are based on the operator’s low production case, in order to take into account the significant risk related to the petroleum sector.

The average oil price of West Texas Intermediate (WTI), in 2007 was $72 per barrel compared to the estimate of $73 per barrel in Budget 2008. However, the actual prices from the production of condensate and LPG from the Bayu-Undan field were higher than assumed in the Budget 2008, due to the fact that the differential between the WTI-price and the actual product prices were less than anticipated.

At the time of writing the actual average oil price so far in 2008 has been $107 per barrel, compared to the forecast of $62 per barrel in 2008 assumed in Budget 2008. Due to the substantial increase in the actual oil price and the forecast for the rest of the year, the Ministry of Finance has increased the oil price assumption in 2008 to $86 per barrel on average. This is not an expected oil price for 2008 but the oil price used in the calculation of sustainable income, reflecting the requirement that all assumptions, according to the Petroleum Fund Law, shall be prudent. Even though the oil price assumption in 2008 is lower than the actual prices so far in 2008, it should be noted that it is significantly higher than the actual oil price only one year ago. Chart 3.1 illustrates the historical nominal changes in the oil price and the assumptions used in calculating future petroleum revenue.

Chart 3.1
Changes in World Oil Price WTI Basis ($ Per Barrel)

Petroleum Fund

The actual petroleum revenue, excluding the returns on petroleum fund investments for 2007 was $1,258.5m. Correspondingly, petroleum revenue for 2008 is estimated to be $1,845.8m, which is an increase of $487.2m from the estimate provided in the Budget 2008, due to the updated oil price estimate for 2008.

Table 3.1
Estimated Petroleum Fund Savings 2006-07 to 2011 ($m)

The actual return on petroleum fund investments in 2007 was $117.0m. Almost 80% of the actual return was received in 3rd and 4th quarter of 2007 because a significant drop in the US Government bond yield during that period caused windfall return on the investments held in that period. Based on the current investment strategy and an US Government bond yield of 3.5%, the return on the investments for 2008 is expected to be $93m.

Chart 3.2 shows the recent changes in the 0-5 years US Government yield curve.

Chart 3.2
US Government 0-5 years yield curve

Source: Federal Reserve (

Table 3.3
Estimated Petroleum Revenue
2006- 07 to 2011 ($m)

The balance of the Petroleum Fund as at 31 December 2007 was $2,086m. It has increased to $2,630m at 31 March 2008. By the end of 2008 the balance is expected to be $3,339 million. The Fund is expected to increase steadily in the medium term. The current forecast shows the total value of the Fund by the end of 2009 to be $4,501 million and by the end of 2011, $6,968 million.

Petroleum Revenues, Wealth and Sustainable Income

Total Petroleum Wealth is estimated to be $13,203 million as of 1 January 2008 on a Net Present Value basis. In addition to the total value of Petroleum Fund as at 1 January 2008, the Petroleum Wealth also consists of a Net Present Value (NPV) of future petroleum revenue of $11,117 million. The estimated Petroleum Wealth has increased by $3,392 million compared to the calculations provided in the Budget 2008. The significant increase in the Petroleum Wealth is due to the revised oil price forecast and the decline in the discount rate from 4.3 % to 3.5 %.

According to the Petroleum Fund Law the Estimated Sustainable Income (ESI) shall be 3% of the Petroleum Wealth. Correspondingly, the Estimated Sustainable Income for the Budget year 2008 is estimated at $396m. This is an increase of $102m compared to the calculation for the preparation period for Budget 2008, where the ESI for 2008 was estimated to be $294m.

Chart 3.3
Timor-Leste Petroleum Revenue and Sustainable Income 2002 to 20
23 (nominal prices)

Chart 3.4 illustrates the long term level of ESI and petroleum revenue to be received up until 2023.

Table 3.4
Sustainable Income from the Petroleum Fund 2006-07 to 2011 ($m)

Oil prices used in this calculation are lower than current market prices. It should be noted that calculations are based on prices that are significantly higher than seen only a few years ago, and oil prices have displayed volatility over time.

Chart 3.4
Historical and Projected Oil Prices in Real Terms (2007 Prices)

Review of Methodology

The Petroleum Fund Act presupposes that the estimated nominal yield on a US Government security averaged over the years, in which the Petroleum Fund receipts are expected, should be used as the discount rate when calculating the present value of the future cash flow from the petroleum sector. At the time when the Sustainable Income calculation was revisited prior to the mid term review of the Budget 2008, the weighted average of the US Government securities was estimated at 3.5%, which has been chosen as the discount rate for the calculations. Furthermore, forecast petroleum revenues are discounted to the start of the calendar year (1 January 2008), assuming revenues are received on average in the middle of the year.

Using a risk free interest rate when calculating the present value of future revenue has implications for the assumptions used, when estimating the cash flow. There should be a substantial likelihood that the cash flow will materialize. The State Budget estimates production on the basis of the operator’s “Low” estimate. The Low estimate is that there is a 90% likelihood that predicted production levels will be achieved.

As mentioned above the Kitan field has been declared commercially viable, and the Government is very actively seeking to progress Greater Sunrise. Furthermore there are ten drilling explorations between 2009 and 2012, all of which have expected positive revenue impacts for the State.

The State Budget uses the “Low Price Case” forecast of the imported crude oil prices of the US Government’s Energy Information Administration (EIA) as the benchmark price for making the price assumptions. In order to obtain the West Texas Intermediate (WTI) price, which is the price used as the basis for the calculation, the imported crude oil prices are adjusted with the expected differential between these two benchmark prices.

The annual forecasts of the imported crude oil prices are usually published by the EIA in February every year, but in 2008 the forecasts are delayed and have not yet been made public. However, EIA has already made public its “2008 revised early release” of the “Reference Oil Price Case” and a “Low Price Case” is thus estimated by the Ministry of Finance based on the same differential between the “Reference Price Case” and the “Low Price Case” as in 2007. This estimated “Low Price Case” is used as the basis for estimating the WTI price forecast in current sustainable income calculation.

As there are several petroleum products (condensate, Liquefied Petroleum Gas (LPG) and Liquefied Natural Gas (LNG)) from Bayu-Undan with various prices, the historical differential between the WTI benchmark price and the various product prices have been used to forecast the product prices. These differentials are unchanged since Budget 2008.

Timor-Leste does not have a range of petroleum fields from which it gains petroleum revenue, as a result there are risks associated with petroleum revenue. The risk, however small, is that an event affecting the Bayu Undan field will cause an interruption of the revenue stream to the State of Timor-Leste. Such a deferral may last for months, years or even indefinitely, depending on the event. Furthermore, oil prices are very volatile, and it should not be ruled out that oil prices fall below the price assumptions used in the calculations of the Petroleum Fund.

In calculating the Petroleum Wealth only fields in production are included. As there is no development plan for the Greater Sunrise field yet, potential Timor-Leste revenues from this field are not included in the Petroleum Wealth, nor are potential revenues from the acreages opened for exploration.

Table 3.5
Sustainable Income Calculations - Oil Price Assumptions ($ per Barrel),
Production and Revenue Forecast 2002 to 2023

The figures represent undiscounted revenues to the Petroleum Fund,
whereas petroleum wealth represents the Net Present Value of the
future revenues and the current balance of the petroleum fund.


There are a range of risks and uncertainties in any forecast of petroleum revenues. The most sensitive assumption is oil price, meaning that the forecast of petroleum revenues changes substantially even given a relatively small change in assumed oil prices.

Other uncertainties include LNG contract volume and pricing terms, condensate and LPG spot sales prices relative to oil prices, operating costs and inflation. The Ministry of Finance has endeavoured to adopt prudent assumptions in all cases.

Table 3.6 shows the sensitivity of Petroleum Revenues, Petroleum Wealth and Estimated Sustainable Income to changes in production and prices.

Table 3.6
Sustainable Income Calculations – Sensitivity Analysis ($m)

The 2008 State Budget is based on the Ministry of Finance case (MoF Case).  The low price is based on oil
prices at $10 per barrel lower than that assumed by MoF officials; high price is based on oil prices $10 per
barrel higher than that assumed by MoF officials. Expected production is based on the
operators expected production rather than the low production estimate (P90).

Part 3 (sic) – Revenue

Total State revenue for 2008 has been revised as detailed in Table 3.1. This revenue is comprises of:

  • Petroleum revenues (including interest from the petroleum fund);
  • Domestic taxes;
  • User fees and charges;
  • Interest earned on cash balances of the State; and
  • Autonomous Agency fees.

Table 3.1
Total revenue 2007 – 201 ($m)

Table 3.2
Domestic Revenue 2007 – 2011 ($m)

Table 3.3
Domestic Taxes 2007 – 2011 ($m)

Discussion on petroleum revenues are discussed in Part 2 – Economic Overview.

Estimates of expected domestic tax have been revised to take into account the increase in domestic products and activities which have continued to grow since 2006. Increased Government spending and a significantly larger international presence both contributed to this increase. 

Revisions have also been made following the June 2008 reforms to the domestic tax system (Taxes and Duties Act, expected to be gazetted by July 2008). Revenue estimates in the 2008 Budget paper were prepared on the basis that the new tax law would operate from 1 January 2008. These estimates have now been updated to reflect the implementation date of 1 July 2008 as approved by National Parliament.

The new reforms aim to improve the competitiveness of Timor-Leste in the region and support the future expansion of the private sector. A brief summary of the key impacts on domestic revenue are set out below.

Wages Income Tax

For resident tax payers the first $500 of taxable monthly wages will not be subject to tax, with amounts in excess of $500 subject to tax of 10%. Non-residents will have to pay tax at 10% on all amounts of taxable wages received.

Withholding tax

Dividends and interest will no longer be subject to withholding tax, but interest must be included in gross income in calculating taxable income.

Recipients of certain service income currently subject to final withholding tax will be able to elect (irrevocably) that the withholding tax will not be a final liability. These taxpayers will lodge tax returns, be subject to normal income tax and receive credits for any tax withheld.

Service Tax

The rate of service tax will drop from 12% to 5%, and the provision of motor vehicles rental services will no longer be subject to service tax.

Income tax

Taxable income for resident natural persons in Timor-Leste (individuals) will be taxed at the rate of 10% on funds in excess of $6,000. The rate of income tax for non-resident natural persons will be 10% on taxable income. For all other taxpayers (non-individuals), the rate will be 10% on all taxable income. 1% minimum income tax will no longer be payable.


The depreciation rate for all depreciable assets and business buildings will be 100% in the year of acquisition from the 2008 tax year. As a transitional arrangement, tax payers will also be entitled to claim a depreciation deduction for the written down value of any depreciable assets and business buildings as at 31 December 2007. This is expected to provide a significant tax saving for many businesses in Timor-Leste.


The amortization rate for all intangibles will also be 100% from the 2008 tax year.  The same written down value applies to amortisation as is proposed for depreciation.


Deductions for interest expenses will only be allowable for financial institutions (e.g. – banks).

Table 3.4
User Charges and Other Revenue 2007 – 2011 ($m)

Table 3.5
Autonomous Agency Revenue 2007 – 2011 ($m)

Part 5 – Expenditure

Budget execution

The impact of the budget depends on how much of the funds appropriated are used to support the Government’s program. Budget execution occurs in four stages:

  • appropriation, which is the legal maximum amount the National Parliament has allowed the Government to spend under the budget appropriation;
  • commitment, which occurs when a Ministry raises a commitments and payments voucher;
  • obligation, which occurs when a Ministry is legally bound to make a payment at a later stage, through a signed contract with a supplier and upon delivery; and
  • cash payments

During the year, budget execution is estimated as the total of commitments net of obligations, obligations net of cash payments and cash payments as a percentage of the total appropriation

At the end of the budget year, appropriations lapse; no money can be spent against them after the budget year is over.  Similarly, commitments which have not been obligated or paid lapse. Budget execution is then obligations plus cash spending as a percentage of the total appropriation. Obligations, however, continue because the Government is legally bound to pay the money on delivery. Obligations are thus future payables and are classified as expenditure.

In the 2008 supplementation the Government is presenting a number of projects which are multi-year appropriations , that is with full costing of multi-year projects phased over the years in which they are expended. This will enable Government to estimate its expenditure more accurately, particularly as investment in basic infrastructure increases. It will also eliminate persistent large budget carryovers. To achieve this will require more careful project planning by the Government and a commitment by the National Parliament to agree to funding over more than one year. The Government recognizes that at this stage of budgetary reform it will take some time to implement both the required planning process and the multiyear budgeting.

This mid year budget update covers three stages of budget execution:

  • the transitional 2007 budget which covered the period 1 July 2007 to 31 December 2007;
  • execution for the first two quarters for the 2008 budget to 10 June 2008; and
  • carryover of unspent funds from previous years

Execution of the budget for the transitional period July – December 2007

Funds appropriated in the 2007 transitional budget had to be spent or obligated in just over two and a half months between approval on 10 October and the end of the transitional period on 31 December 2008.

To expedite execution of the transitional 2007 budget, a dedicated team was established for quicker specification, tendering and awarding of contracts, while ensuring probity, quality and value for money. As a result, despite the substantial amount of money appropriated in a very short time frame, execution for the transitional 2007 budget was 90.1%. This is very high compared with previous budgets.

Table 5.1
Transitional 2007 Budget execution, Whole of Government ($m)

Includes autonomous agencies Transitional 2007 appropriation (a) includes
virements since the budget was passed by National Parliament.

Budget execution was strong across all categories of expenditure, ranging from 89% for salaries and wages and goods and services to 94% for minor capital and 99% for capital and development. Much of the execution at the end of the year for the last two categories was in the form of obligations pending final delivery of the goods and completion of public works. Execution of salaries and wages is likely to have been reduced by lags in recruitment. Budget execution was improved across the Government, with more than half of all ministries and autonomous agencies executing 89% or more of their total budget.

Details of execution of the transitional budget for each Ministry by expenditure category are shown in the Ministry chapters. Full details are also included in the audited report on execution of the transitional budget, available on the Ministry of Finance website at

Execution of the 2008 budget

Execution for the 2008 budget has so far been progressed across all expenditure categories and for most ministries. Salaries and wages and goods and services are higher than in previous years and are broadly on target. Execution of minor capital, capital and development have a longer lead time and are expected to show more movement in the third and fourth quarters. Details of execution of the first quarter of the 2008 budget for all ministries and autonomous agencies are shown in the ministry chapters following.

Revision of the 2008 Budget - The Government’s Priorities

The Government presented its program to the National Parliament in 2007, based around re-establishing security and focusing on the central development tenets of:

  • economic growth;
  • increasing employment opportunities and income generation;
  • reforming the management of the State;
  • development of youth and national human resources;
  • provision of solidarity, health and social protection;
  • improving infrastructure and living conditions;
  • promoting equality and tolerance, internal security and strengthening democracy; and
  • national defence and foreign policy

These were addressed in Budget 2008. Significant advances have already been made on many critical matters, with progress often being faster than anticipated. Areas of notable achievement include:

Internally displaced persons are progressively returning to their homes, assisted by the Government. Large IDP camps, such as the camp at the National Hospital and Jardim Camp are now closed.

Security has been restored, community safety has been enhanced by the implementation of legal processes and the collection of illegal weapons.

Significant progress towards resolution of the concerns of the petitioners. This group have returned to Dili and are discussing options to either seek a civilian career with Government financial assistance or rejoin the F-FDTL.

Faced with difficulties in food supply and high food prices, the Government has mitigated the risks to the public by ensuring that rice is available at subsidised retail prices.

The Government will continue to put Timor-Leste on a sound foundation for a prolonged phase of economic growth and development through the rectification of the State Budget for 2008. This has been formulated by:

  • reviewing the Government’s programme for 2008;
  • assessing progress thus far;
  • responding to unforeseen internal events since January; and
  • moderating the impact of external economic shocks.

In light of the progress to date, the Government has identified additional priority work to commence in the second half of 2008. As a result of these emerging priorities the Government of Timor-Leste proposes a significant increase in public expenditure from $347.8 million to $773.3 million, which incorporates the $240 million for The Economic Stabilisation Fund and a further $185.6 million for various services, public investment and transfer payments such as pensions to the elderly and the veterans.

Overall actual and forecast expenditure is shown in Tables 5.1 to 5.5. All measures proposed for the second half of 2008 are shown in the measures, Table 5.6, and are described for each Ministry in detail in the following Ministry Chapters.

Table 5.2
Whole of State Budget Expenditure 2006-07 to 2011 ($m)

Table 5.3
Whole of State Budget Excluding Autonomous Agencies Expenditure 2006-07 to 2011 ($m)

Table 5.4
Autonomous Agencies Expenditure 2006-07 to 2011 ($m)

Table 5.5
Whole of State Budget Expenditure 2008 by Institution ($m)


Table 5.6
Summary of Measures Taken by Organs of State for 2008 ($m)
In a separate file. Click here to open it.

Economic Stabilisation Fund

This is the entire explanation given in the Budget Documents for this $240 million appropriation. -- La'o Hamutuk.

Table 5.74
Budget Appropriation 2008 - Ministry of Finance - Economic Stabilisation Fund ($’000)

New Measures

Global commodity price have increased dramatically during the past few months. At the recent international summit on the global food situation in Rome, over 180 nations agreed that food prices would remain around their current levels over the medium term. So far in 2008 higher prices have had a negative impact in many countries, producing social unrest and instability in some. As a developing economy that still has high levels of food insecurity, higher prices for essential food commodities could have a serious impact on lives and health of the people of Timor-Leste. Rising prices for construction material are also a cause for concern as this could delay or impede the development plans of the Government and deter the investment by the private sector. To reduce the potential impact of large price shocks for food and essential construction materials on the economy and people of Timor-Leste, the Government is requesting additional funds to establish the Economic Stabilisation Fund (ESF). The fund has three aims:

  • Ensure security of food supply;
  • Price stabilisation via market intervention; and
  • Ensure the supply of materials for construction

This will enable the supply of critical commodities at affordable prices and to ensure the continuing development process.

Annex IV to proposed 2008 Budget Rectification Act

Table 1 -  Multi-Year Direct Investment Projects








Ministry of Economy and Development

Construction of a Complex to collect and recycle used oil






Ministry of Infrastructure

Construction of infrastructure for electricity generation






Ministry of Infrastructure

Construction of infrastructure for electricity transmission






Ministry of Agriculture and Fisheries

Instlatation of an irrigation system in Uatalari







Construction of two patrol boats to prevent illegal fishing






Ministry of Tourism, Industry & Commerce

Construction of Silos for warehousing of Food






 Table 1 (sic) -  Multi-Year Indirect Investment Projects








Ministry of Agriculture and Fisheries

Purchase of Tractor and Equipment






Secretary of State for Energy Policy

Alternative Energy Study






Ministry of Infrastructure

Infrastructure Study






  The following table is not in the budget documents, but was compiled by La'o Hamutuk to show all multi-year projects

Total multi-year commitments






in Annex IV (above)






Only in Capital table






Total multi-year commitments












New multi-year commitments in mid-year update






Percent increase







The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua dos Martires da Patria, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
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