Timor-Leste has made solid progress in nation-building, maintaining peace and unity, converting its petroleum wealth into a sustainable source of revenue for future generations, and restoring public services. The country now faces the challenges of building on this progress in the context of very limited human resources, embryonic institutions, slow growth of the non-petroleum economy, and high levels of poverty and unemployment. Subsequent to the ratification of the Timor Sea Treaty in March 2003, development of the Bayu-Undan oil and gas field has proceeded and liquids production began in April 2004. In January 2006, the Governments of Timor-Leste and Australia reached an agreement to evenly share revenues emanating from the Greater Sunrise oil and gas field for 50 years, thus postponing a decision on the delimitation of the maritime boundary between the two countries. A Petroleum Act, a Petroleum Taxation Law, and a Petroleum Fund Law were promulgated in early FY06. Separately, in February 2006, the Government of Timor-Leste launched bidding for the licensing of near-shore oil exploration. |
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Having embraced the principle of transparent management of petroleum revenues well before the launch of the Extractive Industries Transparency Initiative, Timor-Leste is a pilot country for EITI. The Petroleum Fund Law establishes a savings policy aimed at preserving the real value of petroleum wealth by spreading expenditures over an infinite horizon, safeguarding a sustainable budget in perpetuity. In September 2005, the Government established a Petroleum fund to collect all revenues from petroleum. Annual withdrawals of the sustainable income have to be approved by Parliament and are integrated into regular budget processes. An Investment Advisory Board was created in late 2005, and two quarterly reports have been released on time. In the context of historically high oil prices and the acceleration of offshore production, Timor-Leste’s petroleum revenues have risen from US$41 million in FY04 to about US$266 million in FY05, more than three times the US$74 million spent in the FY05 budget and more than twice the revised FY06 budget of US$130 million. Petroleum revenues are projected to jump sharply in the medium term. As a result, already large budget surpluses are projected to increase in parallel, reflecting not only the prudent savings policy but also constrained budget execution capacity. By end-December 2005, the Petroleum Fund had accumulated deposits amounting to US$370 million. While petroleum GDP is thus growing rapidly, developments in the non-petroleum sector have been much weaker. After declining by about 6 percent per year during 2002-03, non-petroleum GDP is estimated to have grown  modestly during 2004-05. But with population growing at around 3.9 percent, non-petroleum GDP per capita likely declined even in the recent period, and is estimated at US$366 in 2004. Non-petroleum exports, essentially consisting of coffee, are estimated at US$8 million in 2005. However, including revenue and royalties from oil and gas, as well as international aid, Timor-Leste’s current account surplus is estimated at about US$275 million in 2005 and is projected to rise sharply in the medium term in line with estimates of higher petroleum revenue. Inflation fell to about 1 percent in 2005, aided by the use of the U.S. dollar as the national currency. The overall wage level remains relatively high in comparison with neighboring countries, undermining competitiveness and limiting job creation for unskilled labor. Unemployment in the capital, Dili, where about a quarter of the formal labor force resides, is estimated at about 27 percent, and youth unemployment is a particular problem. Unemployment rates in the rest of the country are much lower, with the national rate estimated at 8.5 percent, reflecting the prevalence of self-employed and subsistence workers and a relatively small formal labor force. Promotion of trade and investment has begun with the establishment in July 2005 of the Instituto de Apoio do Desenvolvimento Empresarial, the domestic investment promotion agency, and TradeInvest Timor-Leste, the foreign investment and export promotion agency, which has received several proposals to date. Financial sector activity continues to expand, with bank deposits increasing to 28 percent of non-petroleum GDP at end-December 2005 and bank loans reaching 25 percent of non-oil GDP. Back to top
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