Timor-Leste’s population bubble – will it lift or drag?

 

Charles Gent, Flinders University | 14 April 2015

Dr Saikia (far left) with a group of mothers and children in Timor-Leste

A Flinders demographer this week will tell the government of Timor-Leste that the population ‘bubble’ caused by soaring birth rates after independence in 2000 could potentially lead to an economic dividend for the young island nation.

However, Dr Udoy Saikia warned that if Timor-Leste does not respond to its current challenges through adequate investment in human capital in this early stage of demographic transition, then the country is likely to experience increased poverty, environmental degradation and risks of violent conflict.

Director of Applied Population Studies program in the School of the Environment, Dr Saikia said that from an already high base of 5.3 during its time as an Indonesian province, Timor-Leste’s fertility rate – the number of births per mother in the reproductive age group – grew after independence to reach an extraordinary average level of 7.8, one of the highest in the world, in 2003. It currently sits at 5.7.

Dr Saikia recently completed an updated projection (originally commissioned by Australia’s Defence Science and Technology Organisation) of population growth and its implications for the Timor-Leste that suggests that the current population of close to 1.2 million will reach 1.4 million by 2020, and that the increase could double to around ­1.82 million by 2030.

Analysis of rapid population growth points to serious issues for Timor-Leste, including social problems associated with potential mass unemployment among the nation’s youth.
“We are projecting that at the current rate of growth, 18,000 new jobs need to be created every year for the young population,” Dr Saikia said.

He said that given the number of formal jobs created in 2008 was around 400, there is “a big gap”.
But given the right government strategies, including disciplined use of its oil revenues to invest in education, Dr Saikia said that Timor-Leste could emulate the social and economic success of South Korea, which had treated its high birth rates as a “demographic dividend” by heavily investing in youth education and training.

The Flinders team, which comprises Dr Saikia, Associate Professor Gour Dasvarma, Dr Merve Hosgelen and Dr James Chalmers, was invited to present its findings to the Timor-Leste Government by the acting Prime Minister, Mr Agio Pereira. Mr Pereira was a keynote speaker at two conferences on transitional nations in the Asia Pacific organised by Flinders that were held in Adelaide in 2010 and 2011.

“What we are proposing to them is that we will organise a skills program to train local people in survey techniques, so that they can assist us in new research projects on the population, youth bulge and human well-being,” Dr Saikia said.

Timor-Leste has already demonstrated its ability to respond to social challenges: Dr Saikia said that faced with a total absence of doctors after independence, the Government negotiated a program with Cuba that has since trained hundreds of East Timorese as GPs.

Reducing fertility levels may take longer to address, Dr Saikia said. His field research and focus groups identified a strong cultural belief among East Timorese supporting bigger family size.
“If you ask East Timorese women, or their husbands, how many children they would like to have, the answer is almost always six or seven,” Dr Saikia said.

“There are, however, some encouraging signs of declining birth rate in recent years, and with the commitment from the Timor-Leste Government as stated in their strategic plan 2011-2030, there is every possibility that the country can transform the current demographic concerns to future demographic dividend.”

“It is highly important that we view the growing young Timorese as an opportunity rather than a burden, as otherwise their unmet aspirations can severely hamper the nation building process.”

Source: http://indaily.com.au/flinders-news/2015/04/14/timor-lestes-population-bubble-will-it-lift-or-drag/

Decentralisation and rural development in Timor-Leste

 

3 April 2015

Author: Terry Russell, Denpasar

Timor-Leste’s new Prime Minister, Rui Araujo, has inherited a policy of decentralising the nation’s governance. Given capacity issues, this process is unlikely to bring broader-based rural development to Timor-Leste in the short term. But, if managed effectively, greater decentralisation could have some positive impacts on village-level infrastructure and autonomy.


Administrative decentralisation isembedded in Timor-Leste’s Constitution. Recent laws, most notably Decree-Law no. 4/2014 on Administrative Pre-deconcentration, have now provided the legal framework for increased decentralisation to the districts. Under these laws, district managers continue to be appointed by the national-level government. Yet now these managers will have a bigger budget and direct authority over most of the offices operating at district level.

Considering the lack of institutional capacity even at national level, Timor-Leste is highly unlikely to find sufficient institutional capacity in its districts. The government needs to devolve budgetary power gradually so that the districts put the skills and systems in place before being given a large budget.

The main mechanism for devolving budgetary power to district governments has been through the government’s PDID program (Planeamento Desenvolvimento Integrado Distrital, Integrated District Development Planning). This program has also been the main mechanism for enabling district governments to gain experience in planning and procurement. Since 2012, PDID and its predecessor program PDD have been allocated a total US$193.7 million for small-scale infrastructure development in Timor-Leste’s 13 districts. That’s an average of only around US$5 million annually per district. Decentralisation is clearly moving slowly and so is the building of experience at the district level.

But slowing down devolution of budgetary power does not mean giving up on rural development in the short term. Timor-Leste’s government still has other tools for rural development. One less promising way is simply to continue directing its national budget through line ministries to develop agriculture, education, health and other services in the districts. Since 2002, this appears to have had no success inliftingTimor-Leste’s rural poor out of subsistence farming and has hadonly limited success in providing services to rural areas.

An alternative way ­ one that produces more bottom-up planning and lessbureaucratic red tape ­ is through the PNDS program (Programa Nasional Dezenvolvimentu Suku, National Program for Village Development). Here, money goes straight from the national to village level, with district-level government only playing a technical support role.

ThePNDS is modelled on Indonesia’s PNPM program, which gives grants directly to communities for high-priority, small-scale infrastructure projects. While it’s still early days, PNDS has so farbeen praised for its success in improving physical infrastructure and village-level planning.

The PNDS has limitations. It does not directly boost local production and it is not big enough to provide major infrastructure. It can refurbish schools and health posts but it cannot provide for ongoing costs. The government’s 2015 budget has allocated onlyUS$20 million for the PDID and PNDS programs combined. This represents only around 1.3 per cent of the national budget: the government is clearly not in a hurry to stake everything on the program. But while the budget may not be sufficient for each of Timor-Leste’s 442 villages to receive theinitially planned US$50,000 it will benefit many and will do so quickly.

Finally, the upcoming Suco Law formally recognises village councils as an arm of the government and provides a monthly allowance to each village chief and sub-village chief, as well as other members of the Suco Council. It will thus increase the accountability of village officials to the demands of the government.

The Suco Law and the PNDS and PDID programs will provide small-scale infrastructure, with some impacts on village-level and district-level governance. Decree-Law no. 4/2014 on Administrative Pre-deconcentration devolves decision-making to district level government structures, but in the short term these structures will lack skills and funding to have significant impacts.

Ultimately, none of the above elements of decentralisation provide confidence that government services and economic vibrancy will improve in rural Timor-Leste in the short term. Instead, the main hopes for improved government services come from national investment in large-scale road networks and telecommunications infrastructure. This will be of direct benefit to rural people, improving access to agriculture, health and education services in remote areas.

The main hope for economic growth comes from a large-scale source that has nothing to do with decentralisation: foreign investment. For example, Dutch-based brewery giant, Heineken, will beginconstruction of a brewery at Hera just east of Dili in 2015. Its total investment will range between US$30–45 million and is expected to provide 200 jobs directly and 800 indirectly. Also planned for construction in 2015 isa cement factory near Baucau, with investment from a Western Australian company. This investment has been projected to create thousands of jobs. Several large hotels will be constructed, including in Oecussi and just west of Dili, while hopes and planning continue for a gas processing plant at Beacu and a petrochemical refinery at Betano.

No one can safely say when district governments will have sufficient skills and systems to handle a larger portion of the national budget. The Special Social Market Economy Zone in Oecussi is already trying to handle a large budget ­ almost US$82 million in 2015. Hopefully it will provide important lessons before large budgets are devolved to other district governments. In the meantime, rural areas in the other 12 districts will remain largely reliant on the national government for any improvements in government services and economic vibrancy.

The relative impotence of decentralisation in the short term should not cause despair. Instead, it should be a spur to building skills and systems at district level in preparation for rising power. And it should also stimulate more innovative and efficientgovernance at the national level. Rural Timor-Leste has waited too long already.

Dr Terry Russell worked with the UNTAET mission in East Timor in 2001–2002 and has, as an NGO worker and consultant, made regular visits to Timor-Leste since its independence.

Source: http://www.eastasiaforum.org/2015/04/03/decentralisation-and-rural-development-in-timor-leste/

PNG to be a leading fast growing economy in Asia in 2015: ADB | Pacific Beat

PNG to be a leading fast growing economy in Asia in 2015: ADB | Pacific Beat

The Asian Development Outlook says PNG will see growth of 15 per cent, cementing its place as one of the fastest growing economies in Asia, while East Timor can expect growth of 6.2 per cent.

Both countries rely heavily on oil and gas.

Chris Edmonds says the strong growth in PNG is a spike brought about by the launch of liquid natural gas exports from the big ExxonMobil processing plant near Port Moresby.

He says growth will peak this year before falling to 5 per cent in 2016.

Asian Development Outlook 2015 on Timor-Leste Economic Performance

Asian Development Outlook 2015 pp.261-264

Timor-Leste
Large increases in public spending accelerated economic growth in 2014. Growth is expected to be slower in 2015 but recover in 2016 if major investment projects proceed as planned. Inflation eased under favorable external conditions but is projected to rise in 2015 and 2016. Declining petroleum production and low energy prices highlight the need to diversify the economy by encouraging private investment.

Economic performance

Economic growth accelerated in 2014, with GDP excluding the offshore petroleum sector (non-oil GDP) expanding by an estimated 7.1% (Figure 3.35.1). Improvements in budget execution saw own-funded government expenditures rise by 26.5% as the proportion of planned expenditures that were actually disbursed improved from 62% in 2013 to over 90% in 2014. Total public expenditures, including activities funded by development partners, were equivalent to 110% of non-oil GDP in 2014.

The private sector remains reliant on demand from government spending. This was highlighted by the recently published Business Activity Survey of Timor-Leste 2013, which provides the most recent comprehensive data on formally registered businesses. Public spending fell by 7.5% in 2013 and this contributed to an estimated 4.1% fall in formal employment in the private sector and a 3.5% drop in sector profits. The new data imply that non-oil GDP growth in 2013 was significantly lower than the most recent official estimate of 5.6%.

Fiscal stimulus in 2014 supported increased commercial activity and strong growth in private consumption. Electricity use by businesses rose by 10.9%. Motorcycle and passenger vehicle registration increased by 60.4%. The entry of a new airline restored competition on the Bali–Dili route. While total passenger numbers were flat, the number of Timorese passengers more than doubled.

Inflation continued its downward trend in 2014 as annual average inflation slowed to 0.7% despite higher demand from rising public spending (Figure 3.35.2). As the US dollar is the official currency of Timor-Leste, its continued strength against the currencies of trading partners such as Indonesia was a key factor. Lower oil prices reduced transport costs and lower international food prices kept local prices stable in the face of rising demand.

The 2014 budget introduced new regulations to improve the quality of public spending, including limits on single-source procurement, conditions linking withdrawals from the Petroleum Fund to timely budget execution, and controls on advance payments. Several of these regulations were subsequently relaxed as budget execution lagged. This helped push own-funded capital expenditures up by 27.8% to $448 million in the year, with more than half of this higher spending in November and December.

The government continued to invest in the national electricity network. Expenditures of $133 million in 2014 brought investment on the network since 2008 to $1 billion. Despite excess generation capacity, additional investment and reform are needed to reduce operating subsidies of $87 million in 2014­equal to 6% of non-oil GDP.

Government revenues totaled $3.0 billion in 2014 and yielded a fiscal surplus equivalent to 1.3 times non-oil GDP. This surplus was saved in the government’s Petroleum Fund, increasing the Fund’s balance to $16.5 billion or $13,700 per capita. Fund investments obtained a nominal return of 3.3% in 2014. This was consistent with the benchmark yields established by the fund’s investment mandate, but investment income nevertheless fell 35% short the 2014 budget forecast.

Real sector outcomes were mixed in 2014. Construction is estimated to have grown rapidly on the back of increased public capital investment and sustained demand from the private sector, though official trade statistics reported lower imports of such inputs as cement and steel. Heavy rains contributed to a 29% fall in coffee production, but coffee export revenues fell by only 12% thanks to higher international prices. The Food and Agriculture Organization estimated that rice and maize production increased by 18% with expanded planted area, the adoption of new technologies, and favorable growing conditions.

Lending to businesses and individuals was flat in 2014 but showed significant variation by sector. Lending for trade and finance accounted for 20% of all private sector credit in 2013 but fell by more than 64% in 2014, while lending for transport and communication fell by 18%. Lending to all other sectors grew. Credit to individuals rose by 11% and to construction firms by 15%. Lending for agriculture, manufacturing, and tourism accounted for 6% of all lending in 2013 but grew rapidly in 2014 to account for 13% of total private sector credit by the end of the year.

Businesses continued to accumulate bank deposits in 2014. Growth in business deposits averaged 46% year on year, such that the stock of deposits now exceeds total credit to the private sector. This growth, which started in 2013, suggests that more businesses can now use retained earnings to finance their operations.

Despite declining petroleum income, Timor-Leste once again posted a current account surplus, equal to 88% of non-oil GDP in 2014, as higher petroleum income offset a large deficit in goods and services trade (Figure 3.35.3).  

Economic prospects
Growth is expected to slow to 6.2% in 2015 as stimulus from rising public spending eases, then rise to 6.6% in 2016 as major public and private investment projects move forward. Inflation is forecast at 2.8% in 2015 and 4.0% in 2016 as the deflationary effects of the strong dollar and low international food prices dissipate and domestic demand builds.

While growth is forecast to be lower than in recent years, encouraging signs have emerged of a more active private sector. Work on a new $45 million brewery and bottling plant is set to begin in 2015, and domestic and foreign investors are considering several other major investment projects.

Budgeted spending for 2015 is 5% above the 2014 budget envelope and 21% above the government’s own target for long-term fiscal sustainability. The share of recurrent spending in the budget has continued to rise, with social transfers and grants accounting for more than a quarter of public spending. The government has also maintained plans for large public capital projects. The 2015 public investment program includes $66 million to upgrade national roads and bridges and an additional $57 million for the electricity system. Work to develop a new international port is expected to start, and the budget anticipates investments in other transport infrastructure to be greatly scaled up in 2016.

Taxes and royalties from petroleum production provided 57% of government revenues in 2014. Production from current fields peaked in 2012 and is forecast to end in 2020, while the prospects for new development remain uncertain. The 2015 budget cut the discounted forecast of future petroleum revenues by 16% to $4.7 billion in anticipation of production downgrades, rising costs, and lower prices (Figure 3.35.4). This forecast assumes an average oil price of $89 per barrel from 2015 to 2020. As it was prepared in May 2014, it did not factor in the sharp fall in oil prices in the second half of 2014. In January, the World Bank forecast the average price of crude at $63 per barrel during 2015–2020.

Lower oil prices will likely narrow the current account. Surpluses are expected to fall to 55% of non-oil GDP in 2015 and 51.6% in 2016. The fiscal surplus will fall to 36% of non-oil GDP in 2015 and 8% in 2016 if planned spending increases go ahead (Figure 3.35.5). The 2015 budget estimated that the Petroleum Fund could sustain annual withdrawals of $638.5 million without losing value in real terms. However, lower oil prices will likely cut the estimated sustainable income to less than $600 million­significantly below planned withdrawals of $1.3 billion in 2015 and $1.7 billion in 2016.

The government of Timor-Leste decided in October to establish a special commission to negotiate maritime boundaries with Australia. Progress in resolving territorial disputes could pave the way for developing the Greater Sunrise gas field, though prospects remain uncertain. As revenues from existing fields decline, prudent fiscal policy is needed avoid rapidly depleting savings in the Petroleum Fund. Fiscal consolidation is likely to mean a period of lower growth, but improving the quality of public spending can bring sustained improvement in living standards.

Policy challenge­ encouraging private investment
Growth and job creation increasingly depend on the private sector, which has expanded rapidly in recent years but remains at an early stage of development. Limited domestic capacity means that foreign investors can play important roles by providing access to capital, technology, and new markets.

Successive governments have implemented policies and laws to encourage foreign investment. The 2005 Foreign Investment Law established a framework for investment by foreign citizens and nonresident Timorese. The law guaranteed foreign investors equal treatment and established an investment certification process with modest tax incentives and few restrictions on the sectors open for investment. To encourage investment, tax reform in 2008 slashed corporate tax from 30% to 10%, which compares favorably with the average corporate tax rate of 23% among members of the Association of Southeast Asian Nations. Further incentives were provided in the 2011 Investment Law to encourage investment by foreign nationals and resident Timorese citizens. Investors who meet legal requirements can receive tax exemptions for up to 10 years.

Despite these incentives, private investment has increased only moderately. National accounts data show that private capital formation has grown modestly since 2007 when compared with the rapid increases in public investment (Figure 3.35.6). Growth in the number of registered foreign investments has also been slow. The government has registered an average of six foreign investments per year since 2006, with an average of $2.9 million per investment equal to 0.2% of non-oil GDP (Figure 3.35.7).

Investors from Australia, the People’s Republic of China, Indonesia, Portugal, and Viet Nam have been most active in the country since 2006, and there is clear potential to attract greater foreign investment. However, current low investment reflects the country’s challenging business environment and the failure of incentives to overcome these challenges.

To attract greater investment from overseas, the government has established a new agency to promote Timor-Leste as an investment destination and facilitate the entry of new investors. This could significantly improve investment flows if supported by a credible program to improve the business environment. Planned reviews of the investment law and tax code offer opportunities to ensure that tax incentives are clearly defined and well targeted. Legal reform to ensure clear and straightforward access to land is another priority and there is scope to streamline business licensing and improve access to foreign skilled labor where needed.

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Source: From http://www.adb.org/sites/default/files/publication/154508/ado-2015.pdf   (see also charts)

Newly sworn in PM of Timor Leste

Prime Minister Dr Ruia Maria de Araujo. Photo: Associated Press