Petroleum-related excerpts from
RDTL General State Budget 2008

Links

• Finance Ministry Budget Book 1 (from which this is excerpted) and Book 2 (tables for each directorate's expenditures). (PDF, each about 1.5 MB)
• Budget Book 1 in Portuguese
• Expenditures and Action Plan for State Secretariat for Natural Resources
• UNDP Budget 2008 Highlights pamphlet
• Proposal for domestic tax reform (many documents)
• Budget Execution Report for July-December 2007 Transitional Budget
• Information on balances, receipts and expenditures in Timor-Leste's Petroleum Fund
• Budget Execution Report for January-March 2008 (5 MB)

• Information on June 2008 mid-year budget update, which increases the budget by 122%

Contents

• Excerpt from Prime Minister's budget speech
• Executive Summary
• Excerpt of Revenue section
• Petroleum Fund

Part 1 - Budget Speech from Prime Minister (excerpt)

Revenues and Expenses

The estimated total revenues for 2008 are 1,385.6 million dollars. Out of this sum, 1,358.6 million come from oil revenues and 27 million from non-oil sources, including the autonomous agencies.

The sustainable income of the Petroleum Fund for 2008 is 294 million, i.e. 3% of the petroleum wealth estimated for next year.

The fiscal deficit, which is the difference between expenses and non-oil revenues, is estimated at 321.1 million. The Government will fund 294 million of this deficit through withdrawals from the Petroleum Fund, with the remaining 27.1 million coming from the State Treasury Account.

Regarding the use of the amount from the Petroleum Fund, which has caused so much controversy in the public opinion and especially among some Members of Parliament, I would like to clarify this: the Government will not be withdrawing from the Petroleum Fund any amount that exceeds the Estimated Sustainable Income for the next fiscal year.

The Law allows for the withdrawal of 294 million, to be used according to national interest. Considering that this amount will be used on infrastructures, health, education, training and rural development, areas without which it would be impossible to combat generalized poverty, we believe public interest to be evident!

This Government recognises that the Fund has been managed in a prudent, responsible and transparent manner, according to the Law, and is pleased to learn that it was ranked third best in the entire world. This Government is aware that the Petroleum Fund should contribute to a sensible management of oil resources, for the benefit of the current and future generations but believes we can manage it with greater efficiency still.

We have learned from the Norwegian experience, which was the basis for the Timorese model, that a prudent and responsible management may create an undisputable wealth that benefits future generations. The Norwegians, who presently have billions of krones in the bank, adopted the smallest possible risk, rather than seeking short-term gains.

Even so, the revenue from the Norwegian petroleum sector is currently invested in 42 different markets and in 31 different currencies.

Surely you will agree that it is not possible to compare the living situation of the Norwegian population with that of Timor-Leste! Poverty is still a reality in the Country, where approximately 41% of the population lives below the poverty threshold, on 0.55 dollars a day. This reality suggests that too much prudency would be a contradiction.

•  What will become of future generations if we do not invest in the present one?

•  What will become of future generations if most of their ancestors die in absolute poverty, the victims of starvation, disease and abandonment? And these are the same heroes who contributed for national independence.

•  What will become of future generations if we do not start now to create the conditions to develop the Country?

•  What will become of future generations if there are no qualified human resources?

We intend to keep the fund with a high quality standard, but we also want to improve the living situation of the people and make them enjoy the wealth that belongs to the Nation. Using the fund sustainably is using that money in order to create sustainable growth, and this implies investing in the current generation and improving the revenues from the petroleum sector even more.

Thus, the transfer from the Fund to the State Budget shall take place at the same time that mechanisms are created for a good budget execution; otherwise it would not be worth it. Just because the previous Governments were not able to execute their entire budget, this does not automatically mean that the current Government will also fail to do it. If we were not committed to reform and improve the system, the four parties that make up AMP would not have formed Government.

It has been important for Timor-Leste to steadily increase its internal capacity to be able to establish a sound and sustainable management for the Petroleum Fund. Up until now this strategy has been successful. However the Petroleum Fund is steadily increasing and there is potential to have a greater increase in the return of the investments. Therefore we are considering the current investment strategy and the management of the Fund, in order to make the maximum use of the possibilities under the Petroleum Fund Law, so as to maximize the total value of the revenue from the petroleum sector.

According to paragraph 3 of Article 14 of the Petroleum Fund Law, the investments considered as qualified instruments in the Law shall be revised by the Government and approved by the Parliament at the end of the first 5 years of existence of the Petroleum Fund, taking into consideration the size of the Petroleum Fund and the level of institutional capacity. The Government will start this revision process in 2008.

So, Members of Parliament, let us not turn the Petroleum Fund into a political banner. The natural resources belong to the People and must be used fairly and according to the good of the Nation. The changes we seek to implement will be consensual, as the Petroleum Fund can only be properly managed if there is a balance between the managing of the resources and the improvement of the living situation of the Timorese population.

Kay Rala Xanana Gusmão
18 December 2007

Part 2 - Executive Summary (entire)

The Combined Sources Budget for 2008 is estimated to be $502.5m, this is made up of $347.8m in State Budget expenditure, and an estimated $154.7m in spending by development partners. Funds from development partners excludes the cost of the security services provided by the International Stablisation Force (ISF) and the United Nations Police (UNPOL). Tables 2.1 and 2.2 provide a summary of the combined sources budget from 2006-07 to 2011.

Table 2.1
Combined Sources Budget 2006-07 to 2011 ($m)

Table 2.2
Financing of the Combined Sources Budget 2006-07 to 2011 ($m)

The Economy

The non-oil economy is projected to have rebounded in 2007, growing by around 8% (excluding UN activities). This reflects higher government spending and the increased international presence, which more than offset the negative impact on agriculture from drought and locust infestations.

The rebound of the economy is evidenced in a significant increase in trade. Total imports in the first seven months of 2007 amounted to $91 million, an increase of 80% from the monthly average in 2006. This increase stems from a large increase in purchases of capital goods, such as machinery and transport equipment and other equipments. Exports, which are mostly coffee, are of a much smaller magnitude and amounted to less than $1m during January to July 2007.

Annual inflation peaked at about 17% in February 2007, boosted by a regional rice shortage and local supply disruptions related to the unrest. Inflation subsequently retreated to 7.2% by September 2007, and is expected to moderate further as the impact of supply shocks subside.

The government budget for 2008 will provide additional stimulus to the economy and support long term development. At 347.8 million, total budget spending is only about 3% higher than the budget for fiscal year 2006/07 but steps to improve budget execution are expected to yield significant improvements in actual spending. If fully executed, overall cash outlays in 2008 would increase by some 80% compared to FY2006/07. Moreover, a series of large infrastructure projects, now in the planning phase, will provide essential support to the development of the country as they are realized over the next several years. To counteract inflationary pressure associated with the expansion of public sector activity, the government is determined to maintain tight expenditure controls and address emerging bottlenecks on the supply side of the economy as they appear. This will help ensure that higher spending is fully matched by quality outcomes.

Overall, the non-oil economy is projected to expand by 6.5% in 2008. This expansion is driven primarily by an increase in public spending, reflecting the larger government budget and improved implementation. The agricultural sector is expected to stay relatively subdued, in line with recent trends. The rest of the private sector is benefiting from fewer security related-disruptions and the indirect effects of a greater international presence. Nevertheless, despite pick-ups in construction and services, the private sector is relatively small and the government remains the engine of growth, with private investment representing just a small fraction of the total.

Revenue, Sustainable Income and the Petroleum Fund

The actual petroleum revenue, excluding the returns on petroleum fund investments for the fiscal year 2006/07 was $956.2m. Petroleum revenue excluding the returns on petroleum fund investments for 2008 is estimated to be $1,249.9m. The Estimated Sustainable Income for the Budget year 2008 is estimated at $294m. This is an increase of $23m compared to the calculation for the same period in the Transitional Budget 2007.

Table 2.3
Estimated Petroleum Revenue and Sustainable Income

Domestic revenue for the transition period from 1 July to 31 December 2007 is estimated to be $17.0 million. Domestic revenue for 2008 is forecast to be $27.0 million. This number incorporates the prescribed reforms to the domestic tax system of Timor-Leste which will reduce domestic tax revenue by approximately 50%. In 2008 the Government will introduce reforms to the taxation system of Timor-Leste which will lead to improving the competitiveness of Timor-Leste in the region. Some brief details on these reforms are provided below.

In regard to the Petroleum Fund the Government wants to outsource a substantial part of the portfolio to external managers and has authorized the BPA to initiate contract negotiations with the World Bank and the Bank for International Settlements, which are the two most relevant non commercial external investment managers.

The Government is considering increasing the investment universe and including other fixed income assets in the portfolio. There are other fixed income assets with higher expected return than US government fixed income assets.

The Petroleum Fund is estimated to reach $3.116m by December 2008 rising to $5,785.9m in December 2011.

Table 2.4
Estimated Balances of the Petroleum Fund 2006-07 to 2011 ($m)

General Budget of the State for Timor-Leste

The 2008 Budget is the first full year budget of the IVth Constitutional Government. The 2008 State Budget is designed to provide a more substantial contribution towards resolving the issues underlying national poverty whilst introducing a process of reforming the administration of the civil service and developing the new national plan . The Government will continue to focus on ensuring strong economic growth as one of the key policy drivers to reducing national poverty. The Government will maintain high levels of public spending and improve budget execution to create an environment that supports private sector growth and investment -- supporting employment and job creation. The 2008 State Budget will also focus on improvements to critical service provision and support for the veterans and vulnerable groups. It will support the re-establishment of security across the country and increase the provision of services to the community in the areas of:

• health;
• education;
• agricultural extension and support;
• social welfare; and
• human resources development.

The State Budget for 2008 is $347.8m, an increase of 8.1% on the annualised transition budget figure. Future spending in Table 2.5 shows a fall in expenditure, these estimates however show only the concrete activities the Government has planned and has not included amounts for predicted spending.

Table 2.5
Budget of the State Whole of State Aggregate Figures 2005-06 to 2011 ($m)

Salaries

Total salaries in 2008 are inclusive of the civil service subsidy which was introduced into the State Budget after the crisis of 2006 and maintained in the 2007 Transition Budget. Previously, the civil service subsidy was included in the Goods and Services category. The movement of the subsidy is responsible for the majority of changes. Staffing levels have experienced only minor increases.

As part of the process of administrative reform, the Government will develop a career regime for the civil service for implementation in 2008 that will promote efficiency and provide opportunities for career development and progression.

Goods and Services

As part of its commitment to transparent and accountable Government financing, all Organs of State are aiming to ensure that funds are spent strategically, transparently and represent good value for money. Organs of the State will be regularly audited and financial reports and information made more readily available.

In line with the approach first adopted in the Transition Budget, where there is an option to increase efficiency, administrative functions for activities such as payment of rent, utilities and travel costs have been centralised within each Ministry. Significant Whole of Government expenditure such as provision of fuel, international memberships and overseas travel remain centralised in the whole of Government funds managed by the Ministry of Finance. The civil service subsidy is no longer included in the Goods and Services category.

Public Transfers

Public Transfers are an excellent method to direct funding to areas of the population in greatest need of support. In 2008, the Government will administer transfer programs to the value of $63.9m to provide personal benefit payments to Veterans as well the frail elderly and disadvantaged in the community. The Government will also administer transfer programs that provide public grants to the Church, NGOs and civil society groups who will implement programs and deliver services to the population in areas such as education, sport, training and research. Some of the major activities include:

• Assistance to Religious and Civil Society Groups;
• Supporting Internally Displaced Persons (IDPs);
• Resolution of the Situation of the Petitioners;
• The Secretary of State for Youth and Sports;
• Youth Arts Development Fund;
• Youth Sports Development Fund;
• The Secretary of State for Energy Policy;
• Alternative Energy Fund;
• Support for other Professional Training;
• Pilot Project for Community Employment;
• Pensions for Veterans;
• Pensions for Former Office Holders;
• School Grants Programme;

Transfers for Territory Administration

• Funds to support Co-operatives
• Funds to support rural development
• Support for the Elderly
• Support for National Disasters
• Agricultural Community Development Fund
• Support for Political Parties

Capital Expenditure

The Government is conscious of the difficulties with spending in this category. As a result the Capital and Development programme for 2008 is a modest but realistic plan which will lead to improved infrastructure and more employment opportunities. Capital expenditure in 2006-07 was $11.6 million, the Government expects to execute the majority of the $68.0m which has been budgeted as well as execute the carryover from 2006-07 and previous years.

Table 2.6
General Budget of the State Timor-Leste 2006-7 to 2011 ($m)