VZCZCXRO9771
PP RUEHPB
DE RUEHDT #0166/01 1171706
ZNR UUUUU ZZH
P 271706Z APR 07
FM AMEMBASSY DILI
TO RUEHC/SECSTATE WASHDC PRIORITY 3473
INFO RUEHDT/AMEMBASSY DILI 2836
RUCNDT/USMISSION USUN NEW YORK 0932
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHHMUNA/USPACOM HONOLULU HI
RUEHBY/AMEMBASSY CANBERRA PRIORITY 0991
RUEHLI/AMEMBASSY LISBON PRIORITY 0882
RUEHLO/AMEMBASSY LONDON PRIORITY 0679
RUEHKO/AMEMBASSY TOKYO PRIORITY 0733
RUEHWL/AMEMBASSY WELLINGTON PRIORITY 0817
RUEHBR/AMEMBASSY BRASILIA PRIORITY 0532
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC
RUEHROV/AMEMBASSY VATICAN 0127

UNCLAS SECTION 01 OF 03 DILI 000166 
 
SIPDIS 
 
DEPT FOR EAP/MTS 
TOKYO FOR HANS KLEMM 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EFIN TT
SUBJECT: NATIONAL BUDGET PLAGUED BY EXECUTION CHALLENGES AND 
POLITICAL UNCERTAINTY 
 
REF: A) 2005 DILI 406, B) 2006 DILI 474 
 
DILI 00000166  001.2 OF 003 
 
 
¶1. Summary: During an informal briefing for donors last week, 
the International Monetary Fund's Resident Representative in 
East Timor painted a bleak picture of budget execution to date 
for the fiscal year (FY) 2006-2007.  Of a $329 million budget, 
while $211 of it has been committed, only $84 million (about 25 
percent) has actually been spent.  The picture is worse 
regarding spending on capital development, the budget's single 
biggest category and a key component  of the government's 
anti-poverty priorities, where only $3 million of $120 million 
budgeted has been spent.  With large amounts of carryover from 
previous years still coming on line, the FY 06-07 numbers are 
not the whole picture, but nonetheless starkly demonstrate the 
barriers to progress on a development and anti-poverty agenda. 
Meanwhile, planning has begun for the FY 07-08 budget, but is 
overshadowed by preparation for elections and the uncertainty 
regarding the next government.  Plans for the new budget are 
similar to FY 06-07, but some new categories as well as 
innovations to improve execution are being discussed.  Available 
revenue from the Petroleum Fund to subsidize the next budget is 
expected to be around $330 million.  Post expects that even if 
planned budget proposal preparation proceeds on schedule, the 
current parliament is unlikely to pass a budget prior to the end 
of its mandate.  Operation on the resulting equivalent of a 
continuing resolution, however, would restrict the GOET's 
ability to begin new programs and commitments, delaying once 
again desperately needed progress on numerous issues.  End 
summary. 
 
Execution of 2006-2007 budget 
----------------------------- 
 
¶2. During an informal briefing for donors last week, the 
International Monetary Fund's Resident Representative in East 
Timor painted a bleak picture of budget execution to date for 
the fiscal year 2006-2007.  (The fiscal year ends on June 30.) 
While $211 million has been committed, and thus is counted as 
"executed" according to the government's accounting, actual cash 
expenditures stand at $84 million out of a $329 million budget. 
This is an improvement over this time last year when only $60 
million had been spent, but most of this reflects increases in 
recurrent costs, such as salaries, that are the easiest 
categories to spend.  The major focus of the 2006-2007 budget, a 
massive increase in capital development investment designed to 
address anti-poverty priorities, is where the inability to 
execute stands out.  Of $120 million allotted for the year, only 
$3 million has been spent to date. 
 
¶3. The gap between what the Timorese government defines as 
execution, i.e. the commitment of funds, versus the actual 
expenditure of those funds, has resulted in large amounts of 
each year's budget being carried over for spending in future 
fiscal years.  In fact, the government still has carryover 
commitments on the books as far back as the FY02-03 budget..  At 
present the IMF reports a total of at least $150 million in 
outstanding carryover commitments from previous years, 
encompassing some 600 items.  These carryovers are in many cases 
the source of larger spending currently taking place.  For 
example, in contrast to only $3 million spent out of the FY 
06-07 budget on capital development, carryover spending in this 
category is estimated to be around $12-15 million. 
 
Planning for new budget 
----------------------- 
 
¶4. Development of next year's budget, which according to East 
Timor's current fiscal year cycle is due to begin July 1, 
formally commenced this week and ministries are now working on 
their respective proposals.  These proposals are due to Ministry 
of Planning and Finance (MOPF) by May 7.  MOPF plans to forward 
the draft to the Council of Ministers in early June in order to 
reach Parliament by June 15 so that it can be voted on and 
approved before the end of this parliament and before the start 
of the new fiscal year (parliamentary elections will be on June 
30; the fiscal year runs from July 1 - June 30). 
 
¶5. Observers at the IMF and the World Bank note that this is an 
 
DILI 00000166  002.2 OF 003 
 
 
extremely tight timeframe.  The process is also overshadowed to 
a large extent by election-related activities-many ministers and 
ministry staff are taking regular leave to campaign-along with 
the uncertainty of the election outcome.  Moreover, there 
remains significant disagreement regarding whether the existing 
Parliament legally can or should pass a budget for a government 
not yet in power.  Separately, Post has also been informed that 
some political actors favor changing the fiscal year to align 
with the calendar year.  How and whether this will impact budget 
planning and the date at which a new budget comes on line is 
unclear at this point. 
 
¶6. Nonetheless, the process is moving forward and some aspects 
of what the new budget will likely include are emerging.  An 
advisor in the MOPF relayed to Emboff that the present 
expectation is for the new budget to reflect similar 
anti-poverty priorities as the current budget.  The advisor also 
noted that the current process is based on the expectation that 
recurrent funding (salaries, goods and services, minor capital, 
transfers) will remain at similar levels to FY 06-07, while 
capital development funding is to be reviewed to ensure its 
achievability and alignment with anti-poverty priorities. 
According to the IMF, this budget will incorporate some 
innovations particularly regarding the handling of carryovers 
from previous fiscal years.  Specifically, most items that are 
committed but not obligated by the end of June 2007 will lapse 
and have to be re-appropriated to remain active.  Obligated 
items will then be subject to deadlines for actual spending, by 
December 31, 2007 for most categories and by June 30, 2008 for 
capital development. 
 
¶7. New items that are reportedly being proposed for the FY 07-08 
budget include: 
-- $45 million to the Millennium Challenge Account Program for 
Accelerated National Development (PAND), mostly for a hydropower 
project; 
-- $28 million for new veterans' pensions; 
-- increased electricity costs; 
-- a ferry subsidy (for the ferry that provides the only public 
transportation between Dili and the Oecusse enclave as well as 
Atauro island); 
-- food security; 
-- and costs for a new career development and promotion 
regulation, the financial implications of which remain unclear. 
 
¶8. If Parliament and the President are unable to agree on a 
budget before the start of the fiscal year on June 1, then the 
government will follow the 1/12th rule, which in absence of an 
approved budget allows ministries to spend 1/12 of the previous 
year's budget per month on current expenditures and minor and 
major capital that has already been obligated.  The government 
cannot transfer monies from the Petroleum Fund without a budget, 
but this is unlikely to be a problem, as $200 million has just 
been transferred and another $60 million is expected to be 
transferred before the end of the fiscal year.  Given the low 
rate of current spending and available cash on hand, government 
will not be running into a liquidity problem for some time. 
 
Revenue status 
-------------- 
 
¶9. The Petroleum Fund, the single largest source of revenue for 
the GOET, is currently increasing at a rate of approximately 
$100 million per month, with a current balance of $1.2 billion. 
The fall in oil prices means that the ceiling for withdrawal 
from the Petroleum Fund is slightly lower than last year, but 
the limit for FY 07-08, at approximately $330 million, still 
stands at more than the FY 06-07 budget.  However, if a 
significant amount of unspent commitments need to be 
re-appropriated, and are thus incorporated in the FY 07-08 
budget, budget demand could then exceed the amount available to 
be withdrawn from the Petroleum Fund.  This could constrain the 
amount available for capital development, but should not be a 
major issue in light of the many projects in the pipeline.  The 
prospect of Millennium Challenge Corporation (MCC) funds coming 
on line does not at this time appear to be included in 
calculations for the new fiscal year, as government officials 
 
DILI 00000166  003.2 OF 003 
 
 
now appear to understand that MCC's due diligence requirements 
will take significantly more time and that continued eligibility 
is not a foregone conclusion. 
 
Comment 
------- 
 
¶10. The GOET's ongoing dismal budget execution demonstrates the 
fundamental difficulties Timor faces in translating its cash 
riches into national development and prosperity for the wider 
population.  Even with previous years' commitments coming 
on-line, the extreme shortfall on actual spending arguably 
represents East Timor's greatest barrier to effective 
development and poverty reduction.  Regarding the prospect for 
the new budget, Post assesses that Parliament is unlikely to 
pass a budget by June 30 despite the current efforts underway. 
The more likely scenario is that the MOPF will move forward with 
preparing a budget proposal for consideration by the new 
government, but differences over the start of the budget year, 
spending priorities, and the June 30 parliamentary elections 
will result in no budget being enacted.  After the end of the 
fiscal year June 30, the government would then operate under the 
rules that allow it to spend 1/12th of the previous year's 
budget on recurring expenses. The new government, once in place, 
would either accept the MOPF's proposal with limited changes or 
choose to operate for a sustained period without a new budget in 
order to develop a new proposal.  Operation on the resulting 
equivalent of a continuing resolution, however, would restrict 
the GOET's ability to begin new programs and commitments, 
delaying once again desperately needed progress on numerous 
issues.  One further dynamic to watch will be the role of the 
new parliament.  The current parliament, dominated by the ruling 
Fretilin party, has with few exceptions served as a rubber stamp 
on previous years' budget processes.  The new parliament is 
expected to be far less dominated by any single party and so may 
introduce a much more interesting -if less efficient-budget 
approval process. End comment. 
NAGY