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Excerpts from
World Bank Background Paper for the Timor-Leste and Development Partners Meeting

Dili, 3-4 April 2006

Full text of document (PDF) also in Tetum (PDF)

See also oil-related excerpts and complete Government Background Paper (PDF) and


Since the last Timor-Leste and Development Partners Meeting, the Government has continued to make substantial progress in implementing the NDP. In 2005, the Government adopted landmark legislation in the petroleum sector, including a Petroleum Fund Act, unanimously approved by Parliament, to preserve the country’s most precious resource for the benefit of current and future generations.

Macro-economic Developments and Outlook

In January 2006, the Governments of Timor-Leste and Australia reached an agreement to evenly share revenues emanating from the Greater Sunrise oil and gas field. Liquids production at the Bayu Undan oil and gas field is fully operational, and dry gas is being piped to Darwin, Australia, for recovery as liquefied natural gas. Following the promulgation of petroleum legislation, including a Petroleum Act, a Petroleum Taxation Act, and a Petroleum Fund Act, the Government launched bidding for the licensing of near-shore oil exploration in February 2006.

In a context of increasing petroleum production and high oil prices, GNI is rising fast, with an expected jump from USD 691 million in 2005 to around USD 1.5 billion in 2010. At the same time, non-petroleum GDP is growing only modestly.

 Following a decline of around 6 percent per year in 2002 and 2003, non-petroleum GDP recovered slightly to grow 0.4 percent in 2004 and an estimated 1.8 percent in 2005, reflecting a post-drought rebound in the agriculture sector and expansion in banking sector activity. Non-petroleum GDP is expected to grow at around 4.5 percent in the medium term, which is barely enough to keep up with a population growth rate of well over 3 percent – among the highest in the world. As a result, per capita non-petroleum GDP has steadily declined to USD 364 in 2005, and hence poverty is most likely increasing.

Strengthening Governance

In less than four years as an independent nation, Timor-Leste has made remarkable progress in building the State and laying the foundations for good governance. Peace and stability have been maintained and will continue to be a primary objective as national elections draw closer. Notable achievements this year include the formation of a Petroleum Fund to safeguard Timor-Leste’s significant natural resources for current and future generations, …

The Government has made excellent progress in establishing a legislative and institutional framework for the prudent management of oil and gas revenues. A Petroleum Act and Model Production Sharing Contract, a Petroleum Taxation Law, and a Petroleum Fund Law were promulgated in early FY06. In September 2005, the Petroleum Fund was established with an initial balance of nearly USD 250 million; at end- December 2005, the Petroleum Fund had accumulated deposits of about USD 370 million. Two quarterly reports have been published in a timely manner, and a website ( makes publicly available information on petroleum sector legislation, Petroleum Fund reports, overall revenue numbers, and Production Sharing Contracts. Members of the Investment Advisory Board have been appointed, and its first official meeting was held in January 2006. A number of appointments have been made to the Consultative Council, which is expected to be operational by June 2006. Having embraced the principle of transparent management of petroleum revenues well before the launch of the Extractive Industries Transparency Initiative, Timor-Leste is a pilot country for EITI and its petroleum legislation framework is consistent with EITI principles. The Petroleum Fund Law establishes a savings policy aimed at preserving the real value of petroleum wealth by spreading expenditures over an infinite horizon, safeguarding a sustainable budget in perpetuity (see box 2). Annual withdrawals of the sustainable income must be approved by Parliament and are integrated into regular budget processes.

Box 2: Ensuring Prudent Governance of Timor-Leste’s Petroleum Revenues

Building on the successful Norwegian model, the Government has adopted a Petroleum Fund Law and savings policy laying out a framework for accountable and transparent management of petroleum revenues on a long-term, sustainable basis. The Law became effective at the beginning of FY06. The arrangements are consistent with principles of international good practice:

A Petroleum Fund has been established to collect all revenues emanating directly or indirectly from petroleum resources. All revenues flow into an earmarked receipts account (including those revenues accumulated under the provisionary savings policy of the transition period).

A savings policy has been adopted to preserve the real value of petroleum wealth by spreading expenditures over an infinite time horizon, safeguarding a sustainable budget in perpetuity. Conditions under which the Government can withdraw funds from the Petroleum Fund above an estimated “sustainable income” are restricted and subject to Parliamentary approval.

Expenditures funded from petroleum revenues are integrated into the budget process. Transfers from the Petroleum Fund can only be made to a designated government account, and total transfers in a fiscal year cannot exceed a ceiling set by Parliament as part of the approval of the government budget. Expenditures are executed through the Treasury and recorded as part of the Government’s consolidated reporting. Revenue and expenditure figures are publicly available, and the Budget Law and regular external audits guard against misappropriation of funds.

Assets are managed prudently in safe, offshore investments that are sheltered from domestic economic risks. Overall Petroleum Fund management is the responsibility of the Minister of Planning and Finance, and operational management is the responsibility of the Banking and Payments Authority. Under the Law one or more professional investment managers will be appointed to oversee Petroleum Fund investments. An Investment Advisory Board has been established to advise the Government on Petroleum Fund investments.

Governance mechanisms have been put in place to ensure transparency and accountability in the use of funds. The Law requires the timely publication of quarterly reports and annual financial statements and the public release of non-confidential information. An independent Consultative Council is being established to advise Parliament on issues related to the Petroleum Fund. Independent external audits will be carried out by an internationally recognized accounting firm, and audit reports will be adapted into a format accessible to the public. The Government has established transparency as a fundamental principle in the Law, requiring the publication of aggregate information on company payments. The arrangements in the savings policy and Law are critical to safeguarding Timor-Leste’s petroleum wealth; however, their success will depend on the reinforcement of relevant institutions and the effective implementation of all the checks and balances in the Constitution. This includes Parliamentary oversight, the justice system, independent audit of Government accounts, the Provedor, and freedom of speech, all of which need strengthening. In addition, the independence of these functions and institutions from each other is important, but not yet firmly established.

CFTL Budget Execution in FY06

Execution of the FY06 budget has been characterized by significant revenue inflows and slower than projected expenditures. Total revenues are estimated at USD 395 million for FY06, of which about USD 350 million is expected to come from petroleum revenues. The remainder consists of domestic revenues, which have increased slightly to USD 34 million, and a USD 10 million grant for CSP I. In anticipation of these increased revenues, the Government elaborated a budget of USD 130 million in FY06, nearly twice previous year’s budget. While budget execution has improved in terms of actual dollars spent, spending remains below targets and the challenges will deepen with another expected jump in budgeted expenditures for FY07.

Petroleum revenues have continued to increase dramatically owing to historically high oil prices and increased production. Medium-term projections indicate that petroleum revenues will rise to over USD 1 billion by FY08, totaling over USD 2.9 billion over the next four years.

Domestic revenues are projected to grow to around USD 50 million by FY10, totaling around USD 129 million over the next four years. With the launch of ASYCUDA II scheduled for April 2006, it is expected that the efficiency of customs collections will begin to improve.

Table 3: CFTL Financing (following savings policy), USD millions5


FY05 Actual


FY07 Proposed





Domestic Revenues




Petroleum Revenues








CFTL Expenditures (incl. BPA capitalization, excl. autonomous agencies)




Overall Balance




Net Financing




Changes in cash balances (increase - )




Oil Gas/Revenue Savings (increase -)




Memorandum: Cumulative Oil/Gas Savings




Source: Expenditure data from Ministry of Planning and Finance; revenue data from IMF Staff Estimates.

The Medium-Term Combined Sources Budget and Financing Options

From FY02 to FY04, the Government faced a financing gap of approximately USD 30 million per year, which was filled by the Transition Support Program, a multi-donor program of grant-financed budget support to the implementation of the NDP. Now, with Bayu Undan in full production, revenue sharing arrangements in place for Greater Sunrise, and oil prices at historically high levels, the financing gap as previously defined no longer exists. Based on appropriately conservative projections, and taking into account the Government’s prudent savings policy for petroleum revenues as well as improvements in domestic revenue collection, the sustainable income is estimated at over USD 250 to 300 million per year, or roughly twice the FY06 budget. Approximately USD 30 to 40 million of the sustainable income is expected to come from non-petroleum revenues.

However, the currently sustainable budget will not suffice to implement the NDP or achieve the MDGs. As part of the SIP process, the Government has estimated that combined sources expenditures will need to grow to USD 400 million in FY15 to meet these goals. An expanded budget is justified by the country’s development needs, particularly in reducing poverty, rebuilding infrastructure and stimulating economic activity to create jobs and spur the development of a vibrant private sector. Without the ability to fuel demand through exchange rate or monetary policy, in the short term the main impulse for non-petroleum growth is likely to come from an appropriately expansionary fiscal policy. Finally, the volatility of oil production and especially prices argues for a conservative approach. 

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua D. Alberto Ricardo, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
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