East Timor - International University of Japan · Country Profile 2005 East Timor This Country Profile is a reference work, analysing the country™s history, politics, infrastructure

Country Profile 2005

East TimorThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

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East Timor 1

© The Economist Intelligence Unit Limited 2005 www.eiu.com Country Profile 2005

Contents

East Timor

3 Basic data

4 Politics4 Political background6 Recent political developments9 Constitution, institutions and administration11 Political forces13 International relations and defence

14 Resources and infrastructure14 Population15 Education16 Health16 Natural resources and the environment16 Transport, communications and the Internet17 Energy provision

18 The economy18 Economic structure18 Economic policy21 Economic performance22 Regional trends

23 Economic sectors23 Agriculture23 Mining and semi-processing24 Manufacturing24 Construction24 Financial services25 Other services

25 The external sector25 Trade in goods26 Invisibles and the current account26 Capital flows and foreign debt27 Foreign reserves and the exchange rate

28 Appendices28 Sources of information29 Reference tables29 Population29 Central government finances29 Gross domestic product30 Gross domestic product by sector at current prices

2 East Timor


30 Gross domestic product by sector at constant prices30 Consumer prices31 Balance of payments31 Net official development assistance31 Exchange rates

East Timor 3


East Timor

Basic data

14,609 sq km

924,642 (2004 census)

Tropical

Heavy monsoon rains, followed by a pronounced dry season. The north coasthas a brief rainy season from December to February; the south coast has adouble rainy season from December to June, with a break in March

Portuguese and Tetum (official languages); English and Bahasa Indonesian(working languages); numerous local languages are also in use

Metric system

Dollar (US$)=100 cents

8 hours ahead of GMT

2005: January 1st (New Year�s Day); March 25th (Good Friday); May 20th(Independence Day); August 15th (Assumption Day); August 30th (PopularConsultation Day); September 20th (Liberation Day); November 1st (All SaintsDay); November 12th (Santa Cruz Day); December 8th (Immaculate ConceptionDay); December 25th (Christmas Day)

Land area

Population

Climate

Weather

Languages

Measures

Currency

Time

Public holidays

4 East Timor


Politics

East Timor�s political system is similar to that of the Portuguese model of semi-presidentialism. The prime minister, Mari Alkatiri, is the leader of the FrenteRevolucionária do Timor-Leste Independente (Fretilin, The Revolutionary Frontfor an Independent East Timor), which has a parliamentary majority anddominates the Council of Ministers (the cabinet). Widely seen as a nationalhero is the president, José Alexandre �Xanana� Gusmão, who rebuilt theresistance to Indonesia during the 1980s as a broad-based movement ofnational unity. The political system gravitates around two poles: the Fretilin-controlled parliament and cabinet, and the non-Fretilin-controlled presidency.

Political background

The first Portuguese traders reached the island of Timor in the early 1500s.Before that little was known about the island, which was inhabited by ethnicgroups broadly classified along the lines of Polynesian, Melanesian andaborigine. Timor was divided along its present lines under agreements reachedbetween the Dutch and the Portuguese in 1859, with the Dutch controlling thewest of the island and the Portuguese keeping the east and the north-coastenclave of Oecussi. Until the mid-20th century East Timor remained astrategically important, but neglected, outpost of the Portuguese empire. Themilitary importance of the island was not lost on Australian or Japanese forcesduring the second world war. The Timorese sided with Australian forces in aneffort to resist the Japanese invasion in 1942. Around 50,000 Timorese lost theirlives during the battle and the ensuing three-year period of Japaneseoccupation. During the post-war period the Portuguese made efforts to promotethe recovery and development of East Timor. However, following theoverthrow of Portugal�s dictator, Marcello Caetano, in April 1974, Portugal beganto take steps towards casting off its burdensome colonies, including East Timor.

As expectations of independence reached a high level in East Timor in 1974, thedomestic political scene quickly developed. The most popular political partywas Fretilin, which was initially formed as the Timorese Social DemocraticAssociation in May 1974. Its main political rival was the União Democrática deTimorense (Timorese Democratic Union, UDT), which was formed at the sametime by businessmen and landowners. The two parties were united in theirprincipal objective of securing independence, and so formed an alliance inearly 1975 ahead of an election planned for 1976. However, the union wasfragile, and was eventually undone in August 1975 when UDT members,believing that Fretilin was planning a coup to secure power for itself, launchedtheir own coup supported by police units. Faced with fierce resistance fromFretilin groups, which were supported by Timorese soldiers, the UDT and othersmall political groups fled to the neighbouring Indonesian province of WestTimor, from which they launched crossborder raids supported by Indonesiantroops. After calling for the UN to force Indonesia to withdraw its troops,Fretilin declared East Timor an independent republic on November 28th 1975.This period of independence was short-lived. On December 7th 1975 Indonesia

East Timor suffers underPortuguese neglect

An initial period ofindependence was short-lived

East Timor 5


invaded East Timor, and in May 1976 ministers of the so-called ProvisionalGovernment!a group of East Timorese delegates chosen by the Indonesianmilitary!voted for East Timor�s integration into Indonesia. On July 17th 1976Indonesia�s parliament passed the integration bill and East Timor becameIndonesia�s 27th province. The UN Security Council never recognisedIndonesia�s sovereignty over East Timor.

In the immediate aftermath of Indonesia�s invasion, around 60,000 EastTimorese were killed. Such violence was to be a defining characteristic of the24-year Indonesian occupation, during which perhaps as many as one-third ofthe pre-invasion population died. Although the Indonesian authorities investedheavily in the development of East Timor in terms of building healthcareclinics, schools and transport infrastructure, much of this served the needs ofthe increasing number of immigrants from Indonesian provinces. The majorityof East Timorese refused to accept the rule of the occupying forces. Althoughthe resistance movement, Falintil!originally the military wing of Fretilin!suffered massive losses in the late 1970s, the movement regrouped in the early1980s under Mr Gusmão�s leadership. Mr Gusmão left the party in 1988 andcreated a broad resistance coalition!Conselho Nacional da ResistênciaTimorense (CNRT, the Timorese Council of National Resistance)!thatemphasised a strategy of civil disobedience rather than armed conflict, in aneffort to attract international attention and sympathy. The cost of runningmilitary operations and maintaining an administrative presence in East Timorproved to be a heavy burden for the Indonesian government in the aftermathof its own 1997 economic crisis. Owing partly to this, and partly to intensifyinginternational concern, the Indonesian government finally decided in January1999 to offer the people of East Timor the chance to vote on whether or not toaccept wide-ranging autonomy or independence.

The UN Assistance Mission for East Timor (UNAMET) was set up in June 1999to prepare for the independence referendum, or �popular consultation�, whichwas set for August 30th 1999. The UN and local political groups pressed theIndonesian government to delay the referendum in order to give them moretime to prepare. However, the government remained defiant, partly in responseto the demands of the military, which appeared intent on embarking on a shortcampaign of destabilisation and intimidation. Despite the best efforts of themilitary and pro-independence militia groups to deter voters, 98.6% ofregistered voters took part in the referendum and 78.5% voted for independence.The military and the pro-independence militia groups sought brutal and violentretribution immediately after the referendum. At least 1,000 people were killed,more than 250,000 East Timorese were forced into Indonesian West Timor, andanother 500,000 fled to the hills. International outrage at these developmentsled to the intervention of an Australian-led, UN-sponsored force, known asInterfet (International Force East Timor), to restore peace and order. Indonesiantroops withdrew soon after.

In October 1999 the UN Security Council passed a resolution establishing a UNTransitional Administration in East Timor (UNTAET), which was led by thespecial representative of the UN secretary-general, Sergio Vieira de Mello

Indonesia�s brutal occupationlasts 24 years

The East Timorese chooseindependence, but at a cost

The UN oversees the transitionto independence

6 East Timor


UNTAET�s mandate was the broadest ever for a UN mission, and gave it fulland exclusive governmental powers over East Timor. Among the main tasksfacing UNTAET were those of providing security and maintaining law andorder; establishing an effective administration; supporting capacity-buildingfor self-government; and assisting in the establishment of conditions forsustainable development. In moves towards self-government, a 15-memberlegislature, the National Consultative Council, was established in 1999 andincorporated CNRT members and UNTAET officials. This was later replaced bythe 36-member East Timor National Council, a precursor to a nationalparliament, in late 2000. Mr Gusmão was elected as the council�s speaker.

Recent political developments

An election to an 88-member Constituent Assembly was held on August 30th2001. Belying fears generated by the violence that had marked East Timor�sprevious experience of elections, the poll was peaceful. Despite predictions thatthe East Timorese would be baffled by the complexity of the issues and theelectoral system and would not vote, 91% of registered voters turned out.Fretilin emerged as the largest party, winning 57% of the national vote and 62%of the vote for district seats, giving it a total of 55 seats, just short of the two-thirds �supermajority� required to give it absolute control of the new assembly.On September 15th 2001 the assembly was sworn in and an all-East TimoreseSecond Transitional Government was appointed by Mr Vieira de Mello.

Although Mr Gusmão initially refused to run for the presidency, on April 14th2002 he won the presidential election by a landslide. Gaining 82.7% of the vote,he easily defeated his token opponent, the deputy assembly speaker,Francisco Xavier do Amaral. This was the final stage in East Timor�s transitionto independence, which was officially granted on May 20th 2002 whenUNTAET transferred authority to Mr Gusmão, although the UN maintained apresence in East Timor under the UN Mission of Support in East Timor(UNMISET). However, the euphoria associated with the independencecelebrations was short-lived, and the harsh realities facing the country duringthe early stages of independence soon became apparent.

The fledgling East Timor government has struggled to live up to theexpectations of the populace. Following the euphoria surrounding the grantingof independence, people have become increasingly despondent and critical ofthe government�s failure to tackle rising unemployment and crack down onalleged incidences of corruption, collusion and nepotism. The lowest point wasreached in December 2002, when the capital, Dili, was placed under a state ofalert after a student-led protest turned violent. In the ensuing clashes with thepolice, two students were shot dead and more than 25 were injured. Therewere also public disturbances in July 2004, when more than 100 peopleprotested outside a government building in Dili, calling for reforms to the policeforce and also for fresh elections. Most of the protesters were reportedly formermembers of the resistance movement, Falintil, originally the military wing ofthe current ruling political party, Fretilin. The police eventually fired tear gas toevict protestors from the government building. There were a number of

A Constituent Assembly isestablished

East Timor becomes anindependent nation

The government struggles tomaintain public confidence

East Timor 7


injuries, and around 30 people were arrested. Mr Gusmão has been particularlycritical of the government�s failure to create a credible justice system, which hascontributed to the public�s growing concerns over the potential for corruptionand abuse of power within the governing elite.

From late 2004 to mid-2005 East Timor held its first ever local elections, fundedby the UN Development Programme and donor nations. Elections were heldfor village heads, village councils and sub-village heads. In total there are 442villages (known as sukus) and 2,228 sub-villages (known as aldeias). Althoughopposition parties claimed that the process had been characterised by terrorand manipulation, according to the UN the elections proceeded fairly smoothly.The first round of elections was held in late 2004 in the districts of Oecussi andBobonaro, comprising a combined 68 sukus and 255 aldeias. Voter turnout washigh!for example, it reached 92% in both Oecussi�s suku elections andBobonaro�s aldeia elections. The National Election Commission noted someproblems, such as voters� names not appearing on voter lists, but the processwas peaceful. Elections were held in March in the districts of Baucau, Lautemand Manatuto, with the remaining eight districts holding their elections in thefollowing few months. Initial results generally indicated that Fretilin had lostsome of its popularity at local level, with independent candidates, relying onstrong local backing rather than party affiliation, performing well in a numberof districts.

Important recent events

January 1999

Indonesia�s president, B J Habibie, announces that East Timor will be given theopportunity to vote on whether to accept wide-ranging autonomy or independence.

August 1999

A total of 98.6% of registered voters take part in the popular consultation, despiteintimidation tactics of pro-integration militia groups and the Indonesian military.

September 1999

The results of the popular consultation are announced, with 78.5% voting forindependence. At least 1,000 people are killed as pro-integration militia groups andthe Indonesian military go on the rampage, destroying buildings and infrastructure.Almost the whole of the population is displaced. The UN Security Councilauthorises a multinational force, known as the International Force East Timor(Interfet), headed by Australia, to enter East Timor.

October 1999

Indonesia�s parliament formally accepts the results of the independence referendum.The UN Transitional Administration in East Timor (UNTAET) is established tooversee the transition to independence.

August-September 2001

Voting for the 88-member Constituent Assembly takes place. Frente Revolucionáriado Timor-Leste Independente (Fretilin, the Revolutionary Front for an IndependentEast Timor) wins 57.3% of the vote.

Local elections show Fretilin�sweakening support

8 East Timor


January 2002

Indonesia sets up a human rights court to try those believed to be responsible for theatrocities committed in the aftermath of the independence vote.

March 2002

The Constituent Assembly agrees on the country�s first constitution.

April 2002

The resistance hero, José Alexandre �Xanana� Gusmão, becomes president aftercapturing 82.7% of the votes in the presidential election.

May 2002

East Timor officially becomes an independent nation. UNTAET is replaced by the UNMission of Support in East Timor (UNMISET).

March 2003

The UN secretary-general, Kofi Annan, calls for the planned scaling down of UNsecurity forces in East Timor to be delayed, amid widespread concerns of a growingsecurity risk. The UN Security Council later agrees to extend UNMISET�s mandateuntil May 2004.

August 2003

The Indonesian government�s ad hoc human rights tribunal of 18 officials iscompleted, with only two officials found guilty. Both are civilians of East Timoreseorigin.

May 2004

The UN Security Council agrees to extend UNMISET�s mandate for another sixmonths, with a possible further extension of six months to May 2005 (an option thatis later taken up). However, East Timor assumes greater responsibility for its ownsecurity arrangements, taking over full control of defence and internal policing.

July 2004

More than 100 people, mostly members of Falintil (originally the military wing ofFretilin), protest outside a government building in the capital, Dili, calling for reformsto the police force and also for fresh elections.

December 2004

Parliament passes the Law on Freedom, Assembly and Demonstration, whichregulates political gatherings. The law includes provisions that prohibit demon-strations that are intent on �questioning constitutional order�, and those that aim todisparage the reputation of the head of state and other state officials.

March 2005

The governments of East Timor and Indonesia formally establish a jointCommission of Truth and Friendship with the aim of resolving outstanding issues inthe two countries� past relationship in a peaceful and objective manner.

April 2005

Susilo Bambang Yudhoyono makes his first official visit to East Timor sincebecoming Indonesia�s president. The two sides sign a provisional land borderagreement.

East Timor 9


May 2005

UNMISET�s mandate expires, but the UN maintains a presence in East Timor in theform of the UN Office in Timor Leste (UNOTIL), which has a one-year mandate. Anagreement is reached to settle a dispute between the government and the powerfuland popular Catholic church over the proposal to make religion optional rather thancompulsory as a subject in government schools. This brings to an end threeweeks of peaceful demonstrations, with protestors at times reportedly numberingaround 5,000.

Constitution, institutions and administration

On March 22nd 2002 the Constituent Assembly promulgated the constitution,which was drafted with the direct input of the East Timorese, although theoutcome of the Constituent Assembly election gave Fretilin de facto commandover the drafting of the constitution. The constitution defines the powers ofthe president quite narrowly, following the Portuguese rather than the Frenchmodel of semi-presidentialism. In a statement issued at the start of thepresidential campaign, Mr Gusmão indicated several times that he would notbe content to operate strictly within the limits set on the presidency in thenew constitution.

In late 2001 the Constituent Assembly decided to adopt Portuguese and Tetum,a local language, as official languages. By choosing both languages theauthorities aimed to avoid alienating the majority of the population, which arenot Portuguese speakers; Portuguese is spoken mainly by the older generation,who were educated under Portuguese rule, whereas Tetum and BahasaIndonesia are now more widely spoken. According to an official householdsurvey conducted in 2001 by the Planning Commission (which was given thetask of producing a national development plan prior to independence),Portuguese is spoken by only around 5% of the population, whereas Tetum isspoken by around 82% and Bahasa Indonesia by around 43%. The decision toadopt Portuguese as the main official language of government remainscontroversial, as a shortage of translators in parliament has at times preventeddebate and the progress of legislation.

East Timor�s legal system is inadequate, and its legal institutions are fragile.Dr José Ramos Horta, the Minister for Foreign Affairs and Co-operation, hascomplained publicly that the judicial and prison systems were establishedhastily, with an inadequate number of qualified judges. During the Indonesianoccupation the East Timorese did not hold positions of responsibility in thejustice administration. The departure of judges, prosecutors and court clerks in1999 therefore left a dearth of legal capabilities in East Timor. The judicialinfrastructure, including court-houses and detention centres, also sufferedextensive damage in the immediate aftermath of the 1999 �popularconsultation�. One of the most worrying ongoing problems is the failure toestablish a strong judiciary comprising national judges. In January 2005 it wasreported that all 22 national judges had failed an evaluation test and weretherefore not eligible for conversion from probationary to career judges; 20were to continue with advanced training.

The powers of the presidentare defined narrowly

Portuguese and Tetum are theofficial languages

The judiciary is weak

10 East Timor


East Timor�s need to come to terms with past atrocities has been recognised inthe creation of a Commission for Truth, Reception and Reconciliation. How thisnon-prosecutory body will dovetail with the justice system is clear enough intheory. In practice, however, there are differences of view among politiciansand the general public over the scope for amnesties and the question of whichcrimes are to be treated as too serious to be forgivable. Mr Gusmão�s moreinclusive stance emphasises reconciliation. The apparent smoothness withwhich returning East Timorese have been reintegrated into the communitiesfrom which they fled in September 1999 suggests that the general public is notthirsty for revenge.

In March 2005 East Timor and Indonesia formally established a jointCommission of Truth and Friendship (CTF) with the aim of resolvingoutstanding issues in the countries� troubled past relationship in a peaceful andobjective manner. The commission, which is set to commence its two-yearmission in August 2005, will seek to reveal the �truth� rather than seek topunish those guilty of serious crimes committed in 1999 in the wake of theindependence referendum. The UN has not given the commission its fullbacking. The UN secretary-general, Kofi Annan, has set up an independentcommission of experts, a move that has been rejected by the Indonesiangovernment. The UN commission conducted an assessment of the progressmade by the UN Special Crimes Unit (SCU) and the Indonesian ad hoc humanrights tribunal, and in June 2005 stated that those with the heaviestresponsibility for serious human rights violations in East Timor had still notbeen brought to justice. International human rights groups, such as the US-based Human Rights Watch, have continued to call for an internationaltribunal.

The search for justice

There have been two formal efforts, one sponsored by the UN and one by theIndonesian government, to bring to justice those guilty of serious crimes in theaftermath of the 1999 independence referendum. However, neither process hascompletely satisfied widespread calls for justice to be served.The UN-sponsored Special Crimes Unit (SCU) in East Timor completed itsinvestigations in November 2004 and had to complete its trials by May 20th 2005.The SCU filed charges against around 400 people, many of whom wereIndonesians. The SCU�s operations, however, were generally hampered by theIndonesian government�s refusal to recognise the unit�s authority, which meant thatmany accused officials were not extradited for prosecution in East Timor. Amongthose charged, the most senior official was General Wiranto, who was the head ofIndonesia�s military during the violence in 1999. By late 2004 a total of only 74defendants had been convicted, and two defendants had been acquitted.The Indonesian government established an ad hoc human rights tribunal inMarch 2002 under intense international pressure. The court was set up to try 18Indonesian officials suspected of human rights violations in East Timor. The tribunalwas widely dismissed by human rights organisations, as Wiranto had not beenindicted. Furthermore, a number of key witnesses ignored summons to appear incourt owing to fears for their own safety. Of the 18 suspects, 16 were found not guilty.One of the two defendants who were found guilty, East Timor�s former governor,

The Commission for Truth,Reception and Reconciliation

Indonesia and East Timor forma joint commission

East Timor 11


Albilio Soares, has since had his conviction overturned on appeal, and the other, amilitia leader, Eurico Guterres, remains free pending an appeal.

Owing to security concerns and the apparent weaknesses of the localinstitutions, particularly the defence and police forces, UNMISET�s mandatewas extended (while the number of its personnel was reduced) on twooccasions, in May 2003 and 2004, but the unit was finally dissolved in May2005. However, reflecting the UN�s ongoing concerns over the weaknesses ofkey emerging institutions and the failure to develop fully the rule of law in EastTimor, a new UN office, the UN Office in Timor-Leste (UNOTIL), has been setup. UNOTIL, which was formally established on May 20th 2005 with a one-year mandate, comprises 45 civilian advisers to support the development ofvital institutions; 40 police advisers, with an additional 35 supporting theBorder Patrol Unit; and ten officers to provide training in democraticgovernance and human rights. The UN Security Council has requested thatUNOTIL transfer skills and knowledge to build up sufficiently the capacity oflocal institutions.

Political forces

Fretilin dominates the parliament, controlling 55 out of a total of 88 seats.East Timor�s 13 districts are represented by one seat each; the remaining 75 seatsare allocated to political parties based on a nationwide proportionalrepresentation system. Fretilin�s claim to power derives from its status as theparty of the resistance. Founded in 1974, Fretilin spearheaded the drive forindependence and, with its armed wing, Falintil, organised resistance in theaftermath of the Indonesian invasion, declaring East Timor independent onNovember 28th 1975. Fretilin successfully ran its campaign for the ConstituentAssembly election almost entirely on the basis of these historical achievements.Some see disturbing authoritarian tendencies in Fretilin. During the ConstituentAssembly election campaign there were signs of this unattractive streak, onlypartly tempered by the UNTAET electoral and law-enforcement machinery.Fretilin inserted a clause in the constitution to make the assembly EastTimor�s first post-independence parliament. Critics of this decision includedMr Gusmão, the Nobel Peace Prize-winner, Bishop Carlos Ximenes Belo, mostof the non-Fretilin political parties and many civil society groups.

Mr Gusmão was the chairman of Fretilin until 1988, when he left the partywith a stinging condemnation of its dogmatism. He created a broad resistancecoalition that embraced not only the guerrilla movement but also suchimportant forces as the Roman Catholic Church and the growing body ofdisillusioned collaborators, urban youth and Indonesian-educated students.This alliance was formalised in 1998 in the Conselho Nacional da ResistênciaTimorense (CNRT, Timorese Council of National Resistance). Fretilin was afounding member of the CNRT, but withdrew from it in August 2000. Shortlybefore the August 2001 Constituent Assembly election, the CNRT dissolveditself. During the election, Mr Gusmão�s estrangement from Fretilin was evident,as was his sympathy for two new CNRT-based parties, the Partido Democrático(PD) and the Partido Socialista Democrático (PSD). He agreed to a truce with

Fretilin dominates parliament

Relations between Fretilin andthe president are strained

UNMISET�s mandate expires;UNOTIL takes over

12 East Timor


Mari Alkatiri, the leader of Fretilin and the current prime minister, beforeindependence was granted, but Mr Gusmão�s public shows of discontent withthe government�s performance since independence have been a constant thornin the prime minister�s side. The parliamentary opposition is made up of acoalition of eight parties, which espouse a diverse range of political ideologies.Fernando de Araujo, the leader of the PD, the second-largest party inparliament, leads the opposition.

Constituent Assembly election results, 2002No. of

national seatsNo. of

district seats% ofvote

Fretilin 43 12 57.4Democratic Party (PD) 7 � 8.7

Social Democratic Party (PSD) 6 � 8.2Social-Democratic Association of Timor (ASDT) 6 � 7.8

Timor Democratic Union (UDT) 2 � 2.4Others 11 � 11.9Independent (Oecusi) � 1 �

Total 75 13 100.0

Source: International Foundation for Election Systems.

Leading political figures

José Alexandre �Xanana� Gusmão

The president, Xanana Gusmão is widely regarded as East Timor�s independencehero. Although initially reluctant to take on the presidency, Mr Gusmão�s universalappeal was reflected in his landslide victory in the presidential election. Mr Gusmãoled the resistance movement in East Timor for two decades. He was arrested by theIndonesian authorities in November 1992 and, after spending more than six years inprison and under house-arrest, was released soon after the announcement of theindependence referendum result. Although his presidential powers are limited,Mr Gusmão has wasted no time in acting in his self-defined role as governmentwatchdog. In 2004 Mr Gusmão announced that he would not run for re-electionin 2007.

Mari Alkatiri

The prime minister and Fretilin�s secretary-general, Mr Alkatiri was a foundingmember of Fretilin. He left East Timor on the eve of the Indonesian invasion in 1975as part of an international mission to drum up support for the newly proclaimedDemocratic Republic of East Timor. He spent the following 24 years in exile, mainlyin Mozambique. As government leader he has struggled to live up to theexpectations of the electorate.

José Ramos Horta

The foreign minister, Dr Horta was awarded the Nobel Peace Prize in 1996 (togetherwith Bishop Carlos Ximenes Belo) for working towards a just and peaceful solutionto the conflict in East Timor. He had fled East Timor three days before Indonesiantroops invaded in 1975, and spent the following two decades in exile, lobbyingforeign governments and the UN.

East Timor 13


International relations and defence

East Timor�s government has adopted a conciliatory stance towards Indonesia.Despite overseas pressure for an international tribunal to try Indonesianofficials accused of human rights abuses, East Timor�s government has notsupported such moves, expressing a determination not to provoke a disputewith Indonesia over the issue. Since East Timor became an independent nationin May 2002, there have been a number of high-profile state visits by leaders ofboth countries. In April 2005 Indonesia�s president, Susilo BambangYudhoyono, made his first official visit to East Timor. Mr Yudhoyono�s visit wasaimed at promoting co-operation and reconciliation; during the trip he visitedthe Santa Cruz cemetery, where more than 200 people were killed byIndonesia troops during a demonstration in November 1991. Although therewere fears that local people would demonstrate against Mr Yudhoyono�s visit,the trip passed peacefully, with Mr Gusmão urging the East Timorese to embarkon a new relationship with its former occupier. There were also more tangiblesigns of improving ties during Mr Yudhoyono�s visit, with both sides signing aprovisional land border agreement on April 8th. There are, however, still someland border issues that remain unresolved, with disagreements continuing overparts of the border (4% of the total) that are delineated by a river.

In June 2003, during his first official visit to Indonesia, Mr Alkatari met the thenIndonesian president, Megawati Soekarnoputri, to discuss pressing bilateralissues, such as border tensions and refugees. Before this, Mr Gusmão hadvisited Indonesia in July 2002, and had been treated to an official stateceremony. He had also met General Wiranto, indicted by the UN SpecialCrimes Unit in East Timor in May 2004. Mr Gusmão has expresseddisappointment over the indictments, and has said that it is not in the nationalinterest to pursue such matters at the risk of damaging relations with Indonesia.

Although Australia�s overall support for East Timor�s economic and securitydevelopment has been welcomed, there are concerns that the lack ofco-operation in other areas, particularly in resolving the disputed maritimeborder, threatens to damage bilateral ties. The Australian government has beencriticised for its apparent unwillingness to renegotiate the joint maritimeboundary. The current definition of the boundary, which was agreed betweenIndonesia and Australia, relates to the deepest point in the seabed between thetwo countries. Under this definition, Australia is entitled to claim ownership oflarge oil and gas reserves in the Timor Sea. The East Timor government,however, is calling for the boundary to be set at the mid-point between the twocountries, according to the modern Law of the Sea convention. Under such adefinition, East Timor would be entitled to claim ownership of all the large oiland gas developments in the Timor Sea. Owing to the fact that Australiawithdrew from the International Court of Justice and International Treaty ofthe Law of the Sea prior to East Timor�s independence in 2002, there is nopossibility of recourse to a third-party arbitrator. According to East Timor, byredrawing the boundary the country could earn US$12bn in royalties fromfuture oil and gas developments, compared with its current estimate under theexisting boundary of US$4.4bn. By mid-2005 the dispute had resulted in a

East Timor has been keen toimprove ties with Indonesia

A maritime border disputestrains relations with Australia

14 East Timor


number of heated exchanges between the leaders of the two countries, and noclear resolution had been reached.

The Australian government�s initial attempt in early 2003 to force 1,600 EastTimorese asylum seekers to return home after residing in Australia for morethan a decade also threatened to damage relations. Mr Gusmão called on theAustralian government to allow the refugees to remain in Australia, arguingthat East Timor was already poverty-stricken and that the returnees wouldplace a huge burden on the economy. In June 2003 the Australian governmentannounced that it would grant permanent residency to about 400 EastTimorese asylum seekers, and that the cases of 200 others would beconsidered. Many of the refugees have integrated into local communities inAustralia since fleeing East Timor in the early 1990s.

East Timor became the 191st member of the UN in September 2002, and itsleaders have worked on building the nation�s standing by strengtheninginternational relations, particularly with its neighbours in Asia and Australasia.East Timor, which once considered itself part of the South Pacific and still hasstrong emotional links with Portugal, has grasped that its interests lie incultivating a close relationship with the members of the Association of South-East Asian Nations (ASEAN). Although membership of ASEAN may still lie along way off, the government has been invited to attend ASEAN meetings inrecent years and has received some support for its efforts to gain observerstatus, which would give it access to leadership networks within ASEAN. EastTimor is expected to participate in the ASEAN Regional Forum (ARF) for thefirst time in July 2005. The ARF is the region�s largest international securityforum, comprising ASEAN and a number of other countries, includingAustralia, Canada, China, the EU, India, Japan, South Korea, New Zealand,Russia and the US.

The fledgling East Timor Defence Force (ETDF) has been partially recruited andtrained. It will eventually consist of 1,500 regular light infantry and 1,500reservists. However, the founding of the ETDF and the disbanding of theguerrilla force, Falintil, in early 2000 created resentments. Demobilised formermembers of Falintil complained that the selection process was biased, bothgeographically and in the favour of Mr Gusmão�s former Falintil protégés.Fretilin is committed to recruiting a wider range of former members of Falintil,some of whom may well not be acceptable to the present high command.

Resources and infrastructure

Population

Attempts to gather accurate population data in recent years have beencomplicated by the flow of refugees. According to the 1990 census, thepopulation stood at around 748,000. In mid-2001 the UN attempted to recordthe population through a registration process; the results indicated that thepopulation had dropped slightly, to around 738,000. However, results from East

Ties are formed with ASEANand the wider region

A fledgling defence force iscreated

The 2004 census indicatesrapid population growth

East Timor 15


Timor�s first post-independence national census, which was carried out in July2004, indicate that the population has grown rapidly over the past few years,rising to nearly 925,000. According to the results of the census, the gender ratiohas remained fairly stable; in 2004 around 49.4% of the population was female.Dili, Baucau, Ermera and Bobonaro remain the four largest districts in terms ofpopulation (out of the total of 13), together accounting for around 50% of thecountry�s population. There has been particularly rapid growth in thepopulation of Dili, which is now home to nearly 168,000 people, up from anestimated 120,000 in 2001.

Population by district and gender: 2004 census(m unless otherwise indicated; preliminary data)

District Total Male FemaleAileu 36,889 19,049 17,840Ainaro 53,629 26,964 26,665Baucau 104,571 52,483 52,088

Bobonaro 82,385 40,955 41,430Covalima 55,941 28,018 27,923

Dili 167,777 88,373 79,404Ermera 103,169 51,960 51,209

Lautem 57,453 28,174 29,279Liquica 55,058 27,786 27,272Manufahi 44,235 22,564 21,671

Manatuto 38,580 19,363 19,217Oecussi 58,521 29,119 29,402

Viqueque 66,434 32,949 33,485Total 924,642 467,757 456,885

Source: National Directorate of Statistics.

Education

The educational infrastructure was seriously damaged during the post-referendum violence, and around 95% of schools and other educationalinstitutions were destroyed. During the years of Indonesian rule, teachers weredrafted in from other provinces in an attempt to use education to�Indonesianise� students. In late 1999 around 80% of secondary school teachersand administrative staff returned to Indonesia. The standard of education waslow during Indonesia�s rule and has not improved in the post-independenceperiod, owing to the lack of highly skilled and experienced teachers; thestudent to teacher ratio stands at around 60:1 in primary schools. In 2001 thenet primary enrolment rate was 75% for those aged between seven and 12.However, at secondary level the rate was only 30%. The poor standard ofeducation in East Timor is reflected in the literacy rates of its population: only48% of the adult population (15 years and older) are literate. By comparison, theliteracy rate in Papua New Guinea (PNG) is 65%, and in Indonesia it is 87%.

Literacy rates are low

16 East Timor


Health

Standards of health in East Timor were below the average for Indonesia duringthe Indonesian occupation. In the aftermath of the popular consultation thesituation worsened dramatically, owing to the total breakdown of the healthsystem through the destruction of buildings, the loss of equipment and drugsand the departure of senior medical staff. The health infrastructure has sincebeen rebuilt steadily, but the overall situation remains poor, and many die frompreventable diseases. Life expectancy at birth was around 62 years in 2003,compared with nearly 67 years in Indonesia and around 57 years in PNG,according to World Bank data. In terms of other health indicators, such as infantmortality, East Timor fares poorly compared with both Indonesia and PNG.

Health statistics, 2003Life expectancy at

birth (years)Infant mortality

(per 1,000 births) Fertility ratea Immunisation rateb

East Timor 62.2 87 7.6 60

Papua New Guinea 57.2 69 4.3 49Indonesia 66.9 31 2.4 72

a Births per woman. b Percentage of children under 12 months receiving measles vaccination.

Source: World Bank, World Development Indicators.

Natural resources and the environment

East Timor�s total land area is 14,609 sq km, which includes the small enclaveof Oecussi in West Timor (78 sq km), Atauro Island (141 sq km) and Jaco Island(11 sq km). Located near the equator, East Timor has a hot and humid climatewith only slight seasonal temperature variations. The north coast has a briefrainy season from December to February; the south coast has a double rainyseason from December to June, with a break in March. The terrain is ruggedand mountainous, making transport difficult. The land is made up of limestone,coral, thick clayey soil, sand and a small amount of volcanic material. Onlyaround 7% of the land area is irrigated. Widespread use of slash-and-burnagricultural techniques has contributed to deforestation and soil erosion, so thatlandslides and floods are common. As well as vast reserves of natural gas andoil in the Timor Sea, East Timor�s natural resources include reserves of gold,manganese and marble. However, only the reserves of marble are thought tobe sufficient for commercial exploitation.

Transport, communications and the Internet

East Timor�s transport infrastructure is poorly developed and has been badlymaintained. The results of a survey detailed in a report by a World Bank-ledJoint Assessment Mission in 1999 show that East Timor had 1,414 km of pavedroads but that 57% of the network was in poor or damaged condition. Inaddition, less than 50% of villages had access to paved roads. Owing to theprevalence of potholes and gravel roads, four-wheel drive vehicles are essentialfor land travel in most areas. There are eight airports in total, but only threehave paved runways. There are limited international air services into Dili�s

Health standards are poor

Rugged terrain makestransport difficult

Roads and airports are poorlydeveloped

East Timor 17


airport, Komoro, from Darwin, Australia and Denpasar, Indonesia. The portinfrastructure has remained fairly undamaged, and includes services at thecapital, Dili, and Laleia (Carabela Port).

Much of the telecommunications infrastructure was severely damaged in 1999.Before the popular consultation there were 12,000 fixed lines in operation, butthis had dropped to around 2,000 in 2000 (according to the most recentavailable data). An Australian telecoms company, Telstra, began rebuilding thetelecoms infrastructure in 1999 under a UN contract. Telstra managed toresurrect the fixed-line network, in addition to creating a Global Systems forMobile Communications (GSM)-based mobile phone network. There werearound 12,000 mobile subscribers in 2000, but most were UN personnel. InJuly 2002 a consortium led by Portugal Telecom was selected to run thenation�s telecoms services as Timor Telecom. Internet usage is very limited.

Energy provision

The electricity supply is uneven and unreliable. Prior to the 1999 popularconsultation and the ensuing destruction of infrastructure, total powergenerating capacity was around 40 mw, with 20 mw coming from two powerstations in Dili, according to the Joint Assessment Mission. (The JointAssessment Mission included local technical specialists in addition to officialsfrom the IMF, the Asian Development Bank, UN agencies, Australia, Portugal,Japan, the US and the UK; it was established to gauge reconstruction andexternal financing needs.) The low-voltage distribution systems had sufferedowing to the burning of buildings following the popular consultation, and anumber of power stations were damaged. However, the physical damage togeneration and distribution plant in Dili and the larger district centres was fairlylight, making possible the rapid restoration of the facilities with internationalassistance. A total of 21 of the 57 power stations had been returned to anoperational condition by early 2000. Fossil fuels provide the source for allelectricity production, but there may be potential for hydro-power.

In late 2002 the government decided to implement a programme of reforms inthe power sector. In addition to an agreement to install prepaid meters, thestate power authority, Electricidade de Timor-Leste (EDTL), was to be placedunder a three-year external management contract, and agreement was reachedwith the Macau Electricity Corporation (MEC) in mid-2003. Under theconditions of the contract, MEC has taken over the management of assets andstaff at EDTL, but the government will continue to be responsible for policy,regulations and the tariff structure.

Telecoms services are rebuilt

The electricity supply isunreliable

18 East Timor


The economy

Economic structureMain economic indicators, 2003Real GDP growth (%) -2.7Consumer price inflation (av; %) 7.2Current-account balance (US$ m) 43.0a

a Includes official transfers.

Source: IMF, Democratic Republic of Timor Leste: Statistical Appendix, October 2004.

East Timor is primarily a low-productivity agricultural economy. No officialnational accounts have been compiled since 1999, but according to estimatesfrom the World Bank and the IMF, agriculture accounts for 25-30% of non-oilGDP. However, more than 90% of the population rely on agriculture and thesubsistence economy for their livelihoods. In 2000-01 the services sectoraccounted for over 55% of GDP, but this data is skewed by the presence of UNpersonnel during these years. There are huge reserves of oil and natural gasriches in the Timor Sea, but they will have little impact on the economy untilfiscal year 2005/06 (July-June). The non-oil export sector is small: exportrevenue reached only around US$6m a year in 2000-03, and coffee is the onlysignificant export earner.

Comparative economic indicators, 2003

East Timor Australia Indonesia New ZealandPapua

New Guinea FijiGDP (US$ bn) 0.3 508.9 238.5 78.3 3.8 2.3GDP per head (US$) 444 25,570 1,082 19,525 670 2,793

Consumer price inflation (%;av) 7.2 2.8 6.8 1.8 14.7 4.2Current-account balance (US$ bn) 0.04 -30.4 7.3 -3.4 0.1 -0.3

Exports of goods (US$ bn) 0.01 70.5 63.3 16.8 2.2 0.7Imports of goods (US$ bn) 0.27 85.9 39.5 17.3 1.2 1.2Foreign trade (% of GDP) 61.5 30.7 43.1 43.6 89.5 82.6

Sources: Economist Intelligence Unit; Asian Development Bank; IMF.

Economic policy

The government has made substantial progress in implementing its NationalDevelopment Plan (NDP), according to East Timor�s development partners,which include the World Bank and the IMF. The NDP, which is entitled �OurNation, Our Future�, focuses on economic growth and poverty reduction, andwas endorsed at a meeting of development partners in May 2002, shortlybefore independence. (In May 2002 the development partners pledged a totalof US$360m in aid, to be disbursed over the following three years, in additionto US$80m in previously pledged funds.) The government�s performance hasbeen evaluated at regular meetings with its development partners. The latest ofthese was in April 2005, and at the meeting East Timor�s donors pledged theircontinuing commitment to supporting the country.

Low-productivity agriculturedominates the economy

The government�s policyperformance is praised

East Timor 19


In order to make greater progress in meeting its objectives under the NDP, thegovernment is shifting from a �road map� comprising action plans forministries and departments!a process that began in 2003!to Sector InvestmentProgrammes (SIPs). SIPs cover 14 sectors, including primary sectors and thoserelating to infrastructure (such as power and communications) and socialservices (such as education and health). The government has aimed toimplement this development strategy in 2005/06. The SIPs are aimed atclarifying sectoral goals, establishing comprehensive strategies and enabling theplanning of essential investment programmes.

The government has placed a high priority on education and health in itsannual budgets. Around 21% of total expenditure was allocated to education inthe 2004/05 budget, with around 12% going to health; similar levels of spendinghad been planned for 2003/04. Recurrent expenditure accounted for around86% of total expenditure in 2003/04, with major capital and developmentworks accounting for the remainder. In 2004/05 the split was 89% for recurrentexpenditure and only 11% for capital and development works. By end-February2005 the government had spent only 57% of its full-year budget.

The government is estimated to have recorded an overall budget deficit ofUS$14.8m in 2003/04, compared with US$22m in 2002/03. The governmentreceived estimated revenue of US$59.3m in 2003/04, up from US$48.8m in2002/03 and US$31.3m in 2001/02. Domestic revenue recorded steady growth in2003/04, rising to an estimated US$27.5m, as did revenue from oil and gasprojects in the Timor Sea, which reached an estimated US$31.8m in 2003/04. In2004/05 the government has estimated that its revenue will rise sharply,surpassing the initial expectations that were incorporated into the 2004/05budget, to reaching US$306.5m. According to the government�s estimates,US$33.2m of the total will come from domestic tax revenue, US$30.7m will bein the form of grants, and US$242.6m will come from Timor Sea hydrocarbonsrevenue. The impressive performance of Timor Sea revenue reflects the fact thatoil prices have been at historical highs and that the Bayu Undan field has beenin full production.

The government has made good progress in its efforts to establish a permanentPetroleum Fund by July 1st 2005 (the start of fiscal year 2005/06) to manage thecountry�s revenue from its oil and gas resources, with parliamentary approvalhaving been given in mid-June. The fund will be used to save first tranchepetroleum (FTP) revenue, comprising royalties and interest, for futuregenerations, to smooth government expenditure and to insulate the non-oileconomy from oil and gas windfalls. (The government has estimated thatcumulative savings from FTP revenue reached US$63m in 2004/05, and thatsavings will reach US$467m by 2008/09.) The fund will be integrated into thebudget, with inflows and outflows subject to parliamentary approval. In orderto balance the demands of current and future generations, the government hasseparately adopted a savings and expenditure policy that aims to determine asustainable outflow from the fund. However, there are specific reportingrequirements imposed on the government if it proposes to withdraw from thefund more than the �estimated sustainable income from petroleum�. The

The budget prioritiseseducation and health

A petroleum fund isestablished

Oil and gas projects boostgovernment revenue

20 East Timor


government has responsibility for the overall management of the fund, withthe minister of planning and finance exercising key functions. However, therewill be regular independent, external audits carried out by internationallyrecognised accounting firms.

As the new constitution does not explicitly define East Timor�s currency, theauthorities decided to adopt the US dollar, rather than the Indonesian rupiah orthe Portuguese escudo, as its official monetary unit of exchange. A newnational currency is unlikely to be introduced until East Timor has a fullyoperational central bank and monetary system. The adoption of the US dollarhas helped East Timor to avoid currency convertibility and supply issues duringthe early stages of development. Furthermore, it will enable East Timor to avoidthe symptoms of the so-called �Dutch Disease�!the economic distortions,particularly an overvalued exchange rate, produced by windfalls of foreignexchange from sudden increases in oil and gas revenue. However, aconsequence of adopting the US dollar is that the government has minimalcontrol over domestic monetary policy, thus limiting its ability to manage theeconomy. (The Banking and Payments Authority, formerly the Central PaymentsOffice, plays a limited central banking role, overseeing a small financial sector.)Use of the US dollar is also proving problematic in agricultural communities,particularly in terms of the differentiation of coins, owing to the long-standingfamiliarity with the former currency, the Indonesian rupiah. Heavy fines havebeen imposed to deter the activities of unlicensed money-changers and theunlicensed import of all other currencies, including the Australian dollar.

Recent economic policy changes and initiatives

December 1999

The multi-donor Trust Fund for East Timor (TFET) is established during a meeting inDecember 1999 in Tokyo. TFET-financed projects started in the first half of 2000.

January 2000

The US dollar is adopted as the legal currency.

November 2001

The Central Payments Office of East Timor is transformed into a Banking andPayments Authority of East Timor. The aim is to strengthen the economy byproviding for efficient payments and sound banking systems.

May 2002

The National Development Plan is presented with the country�s fiscal strategy forfiscal year 2002/03 (July-June) at the May 2002 Donors� Meeting in the capital, Dili.

July 2002

The Transition Support Programme (TSP) begins. The TSP, which consolidates donorcontributions with the government budget, is used to finance part of the budget untiloil and gas revenue is sufficient to meet the government�s financing requirements.

The US dollar is adopted as theofficial unit of exchange

East Timor 21


April 2003

During the IMF�s Article IV consultation, the IMF and the East Timorese authoritiesagree that the US dollar will remain the official monetary unit for the foreseeablefuture, and that it will form the cornerstone of macroeconomic management.

October 2004

In its Article IV consultation report, the IMF praises the government�s efforts tomaintain a prudent fiscal policy and tackle the country�s deep-rooted structuralproblems.

December 2004

The cabinet approves a petroleum law that will permit international energycompanies to obtain licences to commence oil and gas exploration, both onshoreand offshore.

April 2005

During a Timor-Leste and Development Partners meeting, the government receivespraise for its policy performance, and particularly for its efforts to establish aPetroleum Fund to manage future revenue from oil and gas development projects.

June 2005

Parliament approves the government"s plan to establish the Petroleum Fund, whichwill be in place for 2005/06.

Economic performance

East Timor is one of the region�s poorest countries. According to IMF estimates,nominal GDP in 2003 was only US$341m, and annual income per head was lessthan US$445. More than 40% of the population live below a poverty line set atan income of 55 US cents per day. Real GDP contracted by 35.5% in 1999 in thewake of the destruction following the independence referendum. Inter-nationally funded rebuilding operations and spending by UN personnelcontributed to a booming economy in 2000-01, with real GDP expanding by15.5% in 2000 and 14.6% in 2001. This expansion, however, has not lasted beyondindependence. The economy is estimated to have grown by only 3% in 2002,owing to the withdrawal of the international presence following independencein May 2002 and the subsequent impact of this on the services and con-struction sectors. The economy is estimated to have contracted by 2.7% in 2003.

Real gross domestic product by sector, 2003(% change, year on year)

Agriculture, forestry & fisheries -4.3

Industry -4.5Services -1.3

GDP -2.7


Although a household survey in 2001 found that two-thirds of Timoreserespondents regarded their lives as being the same as, or better than, before the1999 ballot, the scale of the 1999 devastation and the attendant disruptioncaused to the economy were massive, creating huge unemployment. In early

A pre-independence boom isshort-lived

Unemployment is high

22 East Timor


2000 the unemployment rate was estimated to be 80%. There have beenimprovements in the economy since then. However, some of these areunsustainable!most obviously the service economy built up around the UNTransitional Administration in East Timor (UNTAET). Unemployment wasestimated to have been at least 20% in urban areas in 2002, and the situation isunlikely to have improved since then.

Consumer price inflation based on Indonesian rupiah prices in the capital, Dili,reached 140% year on year in 1999, reflecting the shortages of vital goods andservices. Inflation (in US-dollar prices) has since fallen sharply. In 2001 theaverage annual rate of inflation (in Dili) was only 3.6%, but it picked up in2002 and 2003, reaching 4.7% and 7.2% in the two years respectively.

The National Directorate of Statistics produced the first issue of its nationalconsumer price index (CPI) report in October 2004. According to the report,consumer prices rose by an average of 2.5% year on year in the fourth quarterof 2004, up slightly from 2.1% in the third quarter. The CPI basket compriseseight categories of goods and services. In the fourth quarter, prices for transportand communications rose fastest, increasing by 9.5% year on year, followed byfood (up by 4.3%) and housing (up 2.7%). Prices in the alcohol and tobaccocategory dropped by nearly 15% year on year.

Regional trends

According to data calculated from the 2001 Timorese Living StandardMeasurement Survey, the urban-rural divide in East Timor is wide. Urban areas,mainly Dili and the city of Baucau, contain around 24% of the population,although the recent rural exodus, in which many people have moved towardsthe cities in search of economic opportunities, suggests that this percentage hasprobably increased, with rising urban unemployment a notable outcome.According to the survey, poverty is concentrated in rural areas, with around 44%of the rural population living below the national poverty line, and 25% ofurban dwellers falling into this category. In terms of available infrastructure,there are also marked differences. For example, 70% of the urban populationhas access to sanitation, compared with only 33% of the rural population, and72% of urban households have access to electricity, whereas only 11% of ruralhouseholds have an electricity supply.

In addition to the urban-rural divide, there is also an imbalance between thewestern and eastern districts. According to the World Bank, the three westerndistricts of Oecussi, Bobonaro and Covalima account for around 20% of thepopulation but 25% of the poor, whereas the three eastern districts of Baucau,Lautem and Viquque account for 25% of the population but less than 20% ofthe poor. Part of the explanation for this may be that the western districtssuffered more severely from the disruption to agricultural capacity thatfollowed the 1999 referendum. Baucau and Lautem were among the leastdisrupted areas.

Inflation decelerates post-1999

Urban-rural disparitiesare large

East Timor 23


Economic sectors

Agriculture

Agriculture is the main source of income, but only a small proportion of outputis sold. The agricultural sector is in dire need of substantial new investment,particularly in the coffee industry, which is likely to be the country�s leadingnon-oil and gas export earner for some time. Although the most important cashcrop is coffee, there is potential for other crops, such as cocoa, cashew nuts andvanilla, to be developed. Over the past few years the agriculture sector(including forestry and fisheries) has accounted for a growing share of GDP (atcurrent market prices), rising from 25.9% in 2000 to 30.5% in 2003.

Coffee productivity is low. The World Bank believes that there is scope todouble current yields of 150-200 kg/ha, and costs are high. Investment inreplanting, infrastructure, transport and marketing is needed to increase yieldsand reduce costs. At present only about one-third of the 10,000 tonnes of coffeethat the country produces annually is suitably processed for sale in the nichemarket for high-quality organic coffee. Only about one-third again of thatfraction is actually sold, owing to a paucity of buyers.

Mining and semi-processing

The profitable development of oil and gas reserves in the Timor Sea is crucial toEast Timor�s future economic prosperity, but the determination of ownershiprights and maritime boundaries with Australia has been problematic. Underthe Timor Sea Treaty, which came into force in March 2003, East Timor isentitled to 90% of revenue from the oil and gas projects in the 6,200-sq-km JointPetroleum Development Area (JPDA) in the Timor Sea. Australia will receive theremaining 10%. The JPDA covers the whole of the Bayu Udan development,which has reserves of around 400m barrels of condensate and 3.4trn cu ft ofnatural gas. (Production at the Bayu Undan gasfield commenced in February2004.) However, only 20.1% of the largest oil and gas development project inthe Timor Sea!the Greater Sunrise project!is located within the JPDA. TheGreater Sunrise field is estimated to have reserves of 9.5trn cu ft of gas and300m barrels of condensate. East Timor has proposed that a maritimeboundary should be set mid-way between the two countries, which wouldentitle it to full ownership of the Greater Sunrise project. However, theAustralian government has refused to revise its definition of the boundary asthe deepest point between the two countries, and as a result negotiationsbetween the two sides have been protracted and often aggressive.

Tough negotiating tactics are adopted in the Timor Sea dispute

The Timor Sea Treaty was signed by both sides in May 2002 and ratified byEast Timor�s parliament in December 2002. The Australian government, however,refused to push the treaty through its parliament until East Timor had formallyaccepted a so-called unitisation agreement for the Greater Sunrise project, which setsout the sharing of future royalties from this project. This stance threatened the

Coffee is the primaryagricultural commodity

Valuable oil and gas reserveslie under the Timor Sea

24 East Timor


development of the other major project in the Joint Petroleum Development Area(JPDA), the Bayu Undan field. Faced with the prospect of a delay to the receipt ofmore than US$3bn in much-needed revenue over the 17-year lifetime of the BayuUndan project, the East Timor government had little choice but to sign theunitisation agreement in early March 2003. Under the agreement East Timor isentitled to only 18.1% of future royalties from the Greater Sunrise project. (Thisrepresents East Timor�s 90% share of the 20.1% of the Greater Sunrise field that lieswithin the JPDA.) The Australian parliament ratified the treaty in March 2003.The East Timor government has subsequently adopted a much tougher approach toits negotiations. Although in March 2004 Australia�s parliament passed legislationto implement the unitisation agreement, East Timor�s parliament has yet to dothe same, with East Timor�s government expressing its strong disapproval ofAustralia�s apparent unwillingness to negotiate a permanent agreement on a seabedboundary.By mid-2005 progress towards a solution appeared to have been made, but nodetails had been officially announced. The solution may take the form of com-pensation provided by Australia to East Timor (possibly through a payment ofUS$5bn over 30 years) for agreeing to maintain the maritime boundary as it standsand ending its efforts to draw the boundary mid-way between the two countries. Along-term solution to the sovereignty issue remains vital if projects in the disputedregion are to be developed.

Manufacturing

Manufacturing accounts for only around 3% of GDP at current market prices,and the potential for development in the near future is limited, owing to lowskills and poor transport links. Most manufacturing is small-scale. The mostactive area of manufacturing is cloth-weaving and furniture-making.

Construction

Activity in the construction sector has slowed after an initial two-year period ofexpansion in the aftermath of the 1999 post-referendum violence anddestruction. The reconstruction of physical infrastructure, such as buildings,roads and bridges, financed by international aid, contributed to high rates ofGDP growth in 2000-01. At current market prices, the construction sectoraccounted for around 16.5% of GDP in 2003, up slightly from 15% in 2001-02.

Financial services

Although available financial services are limited, there has been marked growthin banking sector deposits and loans. According to the Banking and PaymentsAuthority, banking sector deposits reached US$84m in 2004, up from US$72min 2003. Bank lending has also been rising rapidly, increasing sevenfoldbetween January 2003 and March 2004. There are now three commercial banksoperating in Dili. In August 2003 Indonesia�s Bank Mandiri commencedoperations, joining the ANZ Banking Group of Australia and the BancoNacional Ultramarino, a subsidiary of the state-owned Caixa Geral de

Manufacturing is mainlysmall-scale

Construction activity expandsafter the destruction of 1999

Financial services are limited,but demand is growing

East Timor 25


Depósitos of Portugal. The banks offer telegraphic transfer facilities, and theWestern Union bank recently established a money transfer service. The TrustFund for East Timor (TFET) has established a Microfinance DevelopmentProject, which provides credit and savings services on a small scale. A total ofUS$4m was given to the project, of which US$2m (the minimum required toregister a bank) went to the Microfinance Institute of East Timor. The projectalso aims to rehabilitate East Timor�s credit unions, which enable people to pooltheir savings and offer loans.

Other services

There is some potential for developing East Timor as a tourist destination,particularly in terms of the niche market of ecotourism. The landscape retains aclean natural beauty, and there are pristine beaches and marine life. There areonly a few hotels and resorts, but interest in developing tourism facilities isevident. In an effort to promote the tourism industry, the president,José Alexandre �Xanana� Gusmão, attended the annual Pacific Asia TravelAssociation (PATA) travel mart in Singapore in October 2003 and became thefirst head of state to address the event. (East Timor became a governmentmember of PATA in April 2003.) Mr Gusmão used the opportunity to speak totourism industry representatives about attracting tourists and investors to EastTimor, in the hope of boosting the local tourism industry, providing jobs anddeveloping the country�s tourism infrastructure. However, prices in the tourismsector are relatively high, and the security risk remains a concern. In mid-2004the Australian government was continuing to issue travel warnings, urgingAustralians in East Timor to exercise �extreme caution� owing to the threatof terrorist attacks and the general need for vigilance in areas near theIndonesian border.

The external sector

Trade in goods

East Timor�s trade in goods since 2000 has been dominated by foreign aid-related imports. Merchandise imports contracted in 1999 to US$119m, beforerising sharply in the following two years. However, imports have since fallensteadily, dropping to US$195m in 2003 from a high of US$264m in 2001. Thedisruption of production and transportation following the 1999 politicalupheaval hit the export sector hard. Although stocks of the main exportcommodity, coffee, remained fairly well preserved, logistical problems meant thatshipments could not be made. Export revenue remained weak in 2001-03,averaging only around US$6m a year. As a result, the trade account has recordedlarge deficits in recent years.

There is potential for tourismdevelopment

Foreign aid-related importsdominate trade

26 East Timor


Foreign trade, 2003(US$ m)

Merchandise exports 7Merchandise imports -203

Trade balance -195


Invisibles and the current account

As with merchandise trade, imports of services picked up owing to expandingforeign aid-related services. However, the current account recorded a surplus ofUS$48m in 2000 as net transfers of US$327m offset the trade and servicesdeficits. Net transfers rose further in 2001, reaching US$363m, before decliningin 2002 and 2003, resulting in a fall in the current-account surplus fromUS$54m in 2001 to US$43m in 2003.

Current account, 2003(US$ m)

Trade balance -195Services balance -40

Income balance 6Net transfers 273

Current-account balance 43


Capital flows and foreign debt

In the absence of foreign investment, East Timor remains heavily dependent onaid. In May 2002 East Timor�s development partners pledged a total ofUS$360m in aid, to be disbursed during the following three years in budgetaryand balance-of-payments support. By March 2005 the multi-donor Trust Fundfor East Timor (TFET) had disbursed around US$148m (out of totalcommitments of US$177m) to a number of projects in major development areasincluding agriculture, education, health and infrastructure.

East Timor officially affiliated itself with the international financial communityby joining the World Bank, the IMF and the Asian Development Bank (ADB) in2002. The move has enabled the fledgling nation to tap foreign lenders formuch-needed funds to help to build its economy. The prime minister, MariAlkatari, signed the Articles of Agreement of the International Bank forReconstruction and Development (IBRD) in July 2002 as East Timor became the184th member of the IMF and the World Bank. East Timor�s initial quota, whichdetermines its capital subscription, voting weight and access to IMF financing,is SDR8.2m (US$11m).

Net transfers offset the tradedeficit

Foreign aid flows are vital

East Timor joins the globalfinancial community

East Timor 27


Foreign reserves and the exchange rate

East Timor adopted the US dollar as its unit of monetary exchange in 2000 (seeThe economy: Economic policy). This move initially created problems forEast Timor citizens who held assets and cash denominated in Indonesia rupiahor Australian dollars, owing to the depreciation of these currencies against theUS dollar in 2000-01. The rupiah depreciated against the US dollar by 6.7% in2000 and by 18% in 2001, and the Australian dollar fell in value against the UScurrency by around 10% a year in 2000-01. However, both the rupiah and theAustralian dollar have since rebounded. The Australian currency has appre-ciated strongly, reaching an average of A$1.36:US$1 in 2004, compared withA$1.93:US$1 in 2001, and the rupiah appreciated by 10% in 2002 and 8.6% in2003, before falling back in 2004, when it depreciated by 4%.

Exchange rates, 2004(foreign currency unit per US$; annual av)

Rp 8,939

A$ 1.36¥ 115.9

Source: IMF, International Financial Statistics.

Regional currencies gainground against the US dollar

28 East Timor


Appendices

Sources of information

Ministry of Planning and Finance, Democratic Republic of Timor Leste CombinedSources Budget 2004-05, May 2004

Asian Development Bank, Key Indicators of Asian and Pacific Countries, 2004

IMF, Democratic Republic of Timor Leste: Statistical Appendix, October 2004

World Bank, Background Paper for the Timor Leste and Development PartnersMeeting, December 2003

World Bank, Background Paper for the Timor Leste and Development PartnersMeeting, May 2004

World Bank, Background Paper for the Timor Leste and Development PartnersMeeting, April 2005

World Bank, Report of the Joint Assessment Mission, 1999

World Bank, World Development Indicators database, April 2005

Irena Cristalis, Bitter Dawn: East Timor, A People�s Story, Zed Books, London, 2002

Sonny Inbaraj, East Timor: Blood and Tears in ASEAN, Silkworm Books,Thailand, 1995

Damien Kingsbury, �East Timor�, in The Southeast Asian Handbook, FitzroyDearbon, London, 2001

Bill Nicol, Timor, A Nation Reborn, Equinox, Jakarta, 2002

Anthony L Smith, �Timor Leste, Timor Timur, East Timor, Timor Lorosa�e:What�s in a Name?�, in Southeast Asian Affairs 2002, Institute of SoutheastAsian Studies, Singapore, 2002

John G Taylor, East Timor: The Price of Freedom, Zed Books, London, 1999

Asian Development Bank: adb.org

East Timor Action Network: www.etan.org

East Timor Government: www.gov.east-timor.org

IMF: www.imf.org

UN Development Programme Timor Leste: www.undp.east-timor.org

UN Timor Leste: www.unagencies.east-timor.org

UN Transitional Administration in East Timor (UNTAET): www.un.org/peace/etimor/etimor.htm

World Bank: www.worldbank.org

National statistical sources

International statistical sources

Select bibliography andwebsites

East Timor 29


Reference tables

These reference tables provide the most up-to-date statistics available at the time ofpublication.

Populationa

(�000)

1999 2000 2001 2002 2003Total 715 702 711 739 768

a As of July 1st.

Sources: Asian Development Bank, Key Indicators of Asian and Pacific Countries, 2004.

Central government finances(US$ m; fiscal year)

2000/01 2001/02 2002/03 2003/04a 2004/05b

RevenueDomestic revenue 14.1 20.5 19.3 27.5 23.0 Direct taxes 0.6 5.4 5.3 6.1 5.4 Indirect taxes 11.6 12.7 11.7 16.9 13.6 Non-tax revenue & other 1.9 2.4 2.3 4.5 4.0Oil & gas revenue 13.1 10.8 29.5 31.8 44.2 Tax revenue 9.9 6.5 26.4 27.2 18.3 Royalties & interest 3.1 4.3 3.1 4.6 25.8Total 27.1 31.3 48.8 59.3 67.2ExpenditureRecurrent expenditure 29.6 41.1 56.2 63.7 64.9 Wages & salaries 13.9 18.8 21.9 25.6 28.2 Goods & services 15.7 22.2 34.3 38.1 36.7Capital expenditure 21.7 11.5 14.5 10.4 10.2Total 51.3 52.6 70.8 74.1 75.1Overall balance -24.2 -21.3 -22.0 -14.8 -7.9

a Estimate. b Budget.


Gross domestic product(market prices)

1999 2000 2001 2002 2003Total (US$ m)At current prices (US$ m) 270.1 321.2 387.4 380.7 341.2At constant prices

(% change, year on year) -35.5 15.5 14.6 3.0 -2.7Per headAt current prices (US$)a 377.8 457.5 544.9 515.2 444.3

a Estimates based on population data from the Asian Development Bank.


30 East Timor


Gross domestic product by sector at current prices(US$ m; current market prices)

1999 2000 2001 2002 2003Agriculture, forestry & fisheries 116.6 83.3 99.9 104.6 104.0Mining & quarrying 2.7 3.1 3.4 3.6 3.8

Manufacturing 7.5 8.7 9.8 10.5 11.0Electricity, gas & water 2.1 2.6 3.1 3.2 3.2

Construction 33.0 45.9 55.1 57.5 55.9Trade, hotels & restaurants 15.1 25.1 32.7 33.4 29.9

Transport & communications 14.6 23.2 29.2 30.1 27.5Finance, rents & business services 10.8 21.1 26.7 26.5 23.8Public administration & defence 66.2 106.3 125.0 108.7 79.9

Private services 1.6 1.9 2.4 2.5 2.3GDP 270.1 321.2 387.4 380.7 341.2

Note. 1999 GDP based on data provided by Indonesian authorities; 2000 GDP data based on estimates made under World Bank-supportedtechnical assistance project.


Gross domestic product by sector at constant prices(US$ m; constant 2000 market prices)

1999 2000 2001 2002 2003Agriculture, forestry & fisheries 95.1 83.3 96.0 96.7 92.5

Mining & quarrying 3.1 3.1 3.2 3.3 3.4Manufacturing 7.9 8.7 9.4 9.7 9.8Electricity, gas & water 2.3 2.3 3.0 3.0 2.9

Construction 34.4 45.9 52.8 53.0 49.8Trade, hotels & restaurants 17.4 25.1 31.2 30.7 26.7

Transport & communications 15.9 23.2 27.9 27.7 24.6Finance, rents & business services 16.9 21.1 25.4 24.4 21.2

Public administration & defence 83.5 106.3 116.9 128.2 135.9Private services 1.7 1.9 2.3 2.3 2.1GDP 278.2 321.2 368.2 379.1 368.7

Note. 1999 GDP based on data provided by Indonesian authorities; 2000 GDP data based on estimates made under World Bank-supportedtechnical assistance project.


Consumer prices1999 2000 2001 2002 2003

% change, year on year n/a n/a 3.6 4.7 7.2


East Timor 31


Balance of payments(US$ m)

1999 2000 2001 2002 2003Merchandise exports 52 5 4 6 7Merchandise imports -119 -240 -268 -251 -203

Merchandise trade balance -67 -235 -264 -245 -195Services balance -25 -48 -49 -48 -40

Income balance 0 3 5 1 6Current transfers balance 98 327 363 336 273

Current-account balance (incl official transfers) 6 48 54 44 43Current-account balance (excl official transfers) -92 -279 -309 -292 -230Capital & financial account balance -3 -54 -61 -36 -16Errors & omissions -3 23 14 12 -10Overall balance 0 16 8 20 18


Net official development assistance(US$ m)

1999 2000 2001 2002 2003Bilateral 147.2 212.3 154.3 188.4 127.7 Portugal 66.1 52.6 58.0 75.9 42.7 Australia 71.7 82.4 37.3 37.5 28.9 US 0.0 1.4 4.3 27.5 22.7 UK 3.1 16.4 8.7 10.6 -12.7

Multilateral 5.6 20.6 40.7 31.4 23.1 EU 2.5 17.5 27.5 21.2 15.3 UN Development Programme 0.0 0.3 1.5 2.2 2.2 UN Children�s Fund (UNICEF) 1.3 0.7 1.6 0.9 2.0Total 152.8 232.9 195.0 219.8 150.8

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients.

Exchange rates(foreign currency unit per US$; period averages)

2000 2001 2002 2003 2004Rp 8,422 10,261 9,311 8,577 8,939A$ 1.72 1.93 1.84 1.54 1.36

¥ 107.8 122.0 125.4 115.9 108.2

Source: IMF, International Financial Statistics.

Editors: Danny Richards (editor); Caroline Bain (consulting editor)Editorial closing date: June 24th 2005

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

Documents

East Timor - International University of Japan · Country Profile 2005 East Timor This Country Profile is a reference work, analysing the country™s history, politics, infrastructure