23 Nov 2015

Timor Leste's money drying up

6:32 am on 23 November 2015

Timor Leste is running out of money due to the decline of its oil industry and government overspending.

Timor-Leste President Taur Matan Ruak receives a ceremonial welcome during a visit to Australia

Timor-Leste President Taur Matan Ruak receives a ceremonial welcome during a visit to Australia Photo: AAP

The country, formerly known as East Timor, was brought into independence by a huge New Zealand and Australian effort, that cost five New Zealand lives and hundreds of millions of dollars.

But the country risks economic collapse, a generation after it was set up.

Timor was colonised by Portugal for centuries and occupied by Indonesia for 24 years.

It was delivered into independence by armed intervention led by New Zealand and Australia.

But Timor Leste never had a proper cash economy.

Apart from some coffee grown in the hills, its only real source of revenue comes from two offshore oil fields, Bayu-Undung and Kitan.

Oil companies drilling in these fields paid most of their royalties to the Timorese Government and the money went into a special petroleum fund.

But documents from the New Zealand Ministry of Foreign Affairs and Trade show this fund is extremely precarious.

The oil fields are being depleted and the low price of oil is reducing the level of royalty payments by energy companies.

A third problem is the Timorese Government's practise of spending more money than the fund is earning.

"More than 75 percent of the resource in the Bayu-Undung and Kitan fields has been exhausted," the ministry document said.

"Since 2012 (oil and gas revenues) have been in decline. In 2014, oil and gas revenues presented 40 percent less revenue to the government of Timor Leste than in 2013."

In 2014, the petroleum fund made up 93 percent of total state revenue, but the government had been spending twice the actual earnings of the fund every year since 2008.

Similar criticism comes from Timorese NGO La'o Hamutuk.

"Total oil and gas reserves are only enough to support half the current level of state spending," it said.

"This could empty the Petroleum Fund by early 2022."

Timor Leste's ambassador to New Zealand Cristiano da Costa agreed this was a serious problem.

Despite the troubles, the current state budget had just a small spending cut of 1.5 percent, and a bigger cut was on hold pending a vote by parliament, he said.

"This is a very challenging situation."

"It should encourage the Timorese ruling elite to start to think about how to manage this situation very quickly, because it is not sustainable.

"We need to speed up economic reforms and start to diversify our economy.

"We have to do it now otherwise we may run out of money in five to 10 years from now."

A complicating factor was a third oil field, Greater Sunrise, which could provide some relief to Timor Leste.

But this was lying idle, because of a commercial and jurisdictional dispute with Australia.

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