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PP RUEHCHI RUEHNH RUEHPB
DE RUEHDT #0474/01 2670424
ZNR UUUUU ZZH
P 240424Z SEP 06
FM AMEMBASSY DILI
TO RUEHC/SECSTATE WASHDC PRIORITY 2981
INFO RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEKJCS/SECDEF WASHDC
RUCNDT/USMISSION USUN NEW YORK PRIORITY 0687
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHXX/GENEVA IO MISSIONS COLLECTIVE
RUEHBY/AMEMBASSY CANBERRA PRIORITY 0760
RUEHLI/AMEMBASSY LISBON PRIORITY 0674
RUEHLO/AMEMBASSY LONDON PRIORITY 0512
RUEHKO/AMEMBASSY TOKYO PRIORITY 0538
RUEHWL/AMEMBASSY WELLINGTON PRIORITY 0612
RUEHBR/AMEMBASSY BRASILIA PRIORITY 0406
RHHMUNA/USPACOM HONOLULU HI
RUEKJCS/JOINT STAFF WASHDC
RHEFDIA/DIA WASHINGTON DC
RUEHDT/AMEMBASSY DILI 2312

UNCLAS SECTION 01 OF 03 DILI 000474 
 
SIPDIS 
 
DEPT FOR EAP/MTS 
PACOM FOR POLAD AND JOC 
NSC FOR HOLLY MORROW 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EFIN TT
SUBJECT: 06-07 BUDGET USES PETROLEUM FUND TO TARGET POVERTY 
 
REF: A) 2005 DILI 406, B) DILI 161 
 
DILI 00000474  001.2 OF 003 
 
 
¶1. Summary:  Following Parliamentary approval last month, the 
Government of East Timor (GOET) FY 2006-2007 budget went into 
effect in early September, two months after the beginning of the 
fiscal year on July 1.  At $315.9 million this budget reflects 
an increase of more than 100 percent over the previous year and 
is primarily funded by East Timor's Petroleum Fund, established 
in July 2005.  The budget's overarching theme is promoting 
economic growth as the key to fighting poverty, with significant 
infrastructure investment as the main mechanism to be employed. 
Submitted by the current government in August, it is nonetheless 
essentially the budget of former Prime Minister Mari Alkatiri 
and therefore reflects his priorities.  However, Prime Minister 
Jose Ramos-Horta has taken on the anti-poverty emphasis as his 
own and his government added several items reflecting his own 
priorities.  The key challenge for the budget will be the 
difficulties the GOET faces in executing its budgets.  Last 
year's budget, at less than half the size, was only 70 percent 
executed, and this year's budget must be implemented in much 
less time.  End summary. 
 
Despite spirited debate, Parliament passed budget with few 
changes 
--------------------------------------------- -------------- 
------- 
 
¶2. The National Parliament passed the budget for FY 2006-2007 on 
August 14.  Following final revisions, the President promulgated 
the budget in late August and it went into effect early this 
month.  There was spirited Parliamentary debate over the budget. 
 Members of Parliament complained that it devoted insufficient 
resources to the needs for rebuilding, justice, and 
reconciliation created by the recent political and security 
crisis.  However, they ultimately made only a few modest 
changes, all related to entitlements for Members of Parliament. 
Ramos-Horta required all ministers and vice ministers to be 
available for the duration of the Parliamentary debate, in sharp 
contrast to Alkatiri who was notoriously reluctant to make his 
ministers available to be called by Parliament.  All ministers 
will also be required this fiscal year to deliver monthly 
reports to Parliament on the work of their respective ministries. 
 
Huge increases in spending underwritten by Petroleum Fund 
--------------------------------------------- ------------ 
 
¶3. The $315.9 million budget for FY 2006-07 is more than double 
the size of last year's budget.  It is also significantly higher 
than the budget of $210 million budget that had been planned 
before the recent crisis.  This significant increase is made 
possible by a transfer of $260 million from the Petroleum Fund, 
the first use of the Fund to supplement the state budget since 
its establishment last year.  The $260 million Fund transfer is 
somewhat lower than the amount that could be withdrawn within 
GOET's previously announced guidelines for sustainable 
withdrawals from the Fund ($283 million).  Withdrawals on this 
scale have been made possible by the rapid growth of the Fund 
over the last year, which far outstripped early projections.  As 
of the most recent quarterly report, dated June 30, the Fund 
stood at $649.7 million, having grown from $507.9 million the 
previous quarter.  It is expected soon to exceed a billion 
dollars and will be the most significant source of budget growth 
for the foreseeable future. 
 
Budget planning focus on poverty reduction 
------------------------------------------ 
 
¶4. The Prime Minister and other GOET officials presented the 
budget's primary theme as poverty reduction, with increasing 
non-petroleum economic growth identified as the central strategy 
for addressing this.  The budget narrative states a goal of 
between 7 and 8 percent annual growth by 2010.  (Current 
non-petroleum growth is about 2 percent.)  The main mechanism 
identified for achieving this is a massive increase in 
infrastructure investment (capital development spending), which 
has been increased from $24 million in last year's budget to 
$120 million this year.  However, poverty reduction strategies 
 
DILI 00000474  002.2 OF 003 
 
 
have been integrated across the budget into all categories of 
spending, with particular emphasis on agriculture, health, 
education, and water and sanitation.  The Government also 
announced its intention to spend substantially more in "the 
districts" (that is, outside the capital city) in an effort to 
combat the Dili-centered development trends of recent years. 
 
Execution will be key challenge 
------------------------------- 
 
¶5. Attaining the budget's anti-poverty goals will depend, of 
course, on effective budget execution, and many observers are 
skeptical about the Government's ability to succeed in 
implanting much of the 2006-2007 budget.  A significant amount 
of each previous year's budget has been unexecuted.  Last year 
the official execution rate was approximately 70 percent. 
However, this figure is calculated on the basis of 
"commitments", which earmark the money so that it is not lost at 
the end of the fiscal year but do not actually spend the money 
or even legally commit it.  Thus the real execution rate last 
was far lower than the announced figure, and some money that was 
committed as long ago as FY 2003-2004 remains unspent. 
 
¶6. Execution of this year's budget will be made more difficult 
by the fact that the largest increase in the budget is in 
capital development, traditionally the most difficult to spend 
because of the scope and complexity of GOET procurement 
processes.  Also of concern is the short time during which the 
budget must be implemented.  In addition to being promulgated 
two months after the beginning of the fiscal year, the budget is 
tied to the Ramos-Horta government's mandate which runs out on 
May 20, 2007, leaving less than nine months for its 
implementation. 
 
¶7. The GOET has acknowledged the urgent need to improve budget 
execution.  There is thus an effort underway to address key 
structural issues underlying budget execution difficulties. 
These include an overly centralized decision-making structure 
and a procurement process that has previously required almost 
all spending to go through the underresourced and overburdened 
procurement office in the Ministry of Planning and Finance.  The 
procurement law has already been changed to allow individual 
ministries to approve expenditures up to $10,000 without going 
through the procurement office, but this change has not yet been 
fully implemented and will require extensive training on the new 
procedures before it can be. 
 
Mostly Alkatiri's budget 
------------------------ 
 
¶8. The budget as passed is essentially the same budget as that 
submitted by the former government prior to Alkatiri's 
resignation.  The overall budget strategy --- capital investment 
designed to create the infrastructure necessary for future 
growth --- was outlined in a major policy speech delivered by 
Alkatiri at the annual Timor-Leste Development Partners Meeting 
on April 4 (Ref B).  Although there were accusations at the time 
that Alkatiri's anti-poverty drive was a politically cynical 
move in preparation for the 2007 elections, most international 
observers have evaluated the strategy itself positively. 
 
¶9. There have, however, been substantive criticisms of some 
aspects of the budget.  Critics have pointed out that the armed 
forces (F-FDTL), whose conduct during late April and May is 
generally regarded as among the principal causes of the 
political and security crisis, are being funded at a level of 
about twice that dedicated to the national police service 
(PNTL), which is also troubled but most of whose members are 
generally regarded as having behaved honorably during the 
crisis.  Another focus of criticism is that the budget allocates 
the vast majority of funds for the 2007 elections to the 
Secretariat for Election Administration (STAE), which reports 
 
SIPDIS 
directly to the highly partisan Ministry for State 
Administration.  The National Elections Commission (CNE) 
mandated by the Constitution requires to supervise the election 
process is funded only at about one-tenth the level of STAE. 
 
DILI 00000474  003.2 OF 003 
 
 
 
Some changes reflect Ramos-Horta's priorities 
--------------------------------------------- 
 
¶11. While the budget submitted by Ramos-Horta retained all 
elements of the original Alkatiri budget, it did include some 
additional items.  The most significant single addition is a 
transfers and grants category, funded at $18.2 million.  This 
funding will be directly transferred to recipients, mostly in 
the districts, for projects related to education, agricultural 
development, health, crisis recovery, and civil society support. 
 Other additions in the Ramos-Horta budget include a 30 percent 
cost of living increase for civil servants, a $7 million fund 
for rebuilding of homes destroyed during the recent unrest, 
additional funds for food security, and funds for the 
replacement of government property lost or stolen in recent 
months. 
 
¶12. Comment:  It is important to note the significant role the 
Petroleum Fund is playing in the budget.  In Ref A, we expressed 
some concern that the Fund legislation left important loopholes 
that could allow GOET to draw down the Fund in excess of 
legislated limits.  In light of the rapid growth of the fund, 
that now seems an unlikely risk for the foreseeable future. 
Rather, the amounts that GOET can withdraw within the set limits 
are so large in relation to the economy that they could 
contribute to the "resource curse" of overreliance on petroleum 
revenue leading to weak development in other areas of the 
economy.  End comment. 
REES