Report Committee C Budget 2009
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TEXT REALEASE TO COMMITTEE C ON THE 2009 BUDGET BILL By Apolinar Veloz ∗ V. ECONOMIC OUTLOOK International financial crisis will have a significant negative impact on developed and developing small open economies as well. According to the International Monetary Fund (IMF) 1 and the World Economic Outlook (WEO) projections, the advanced economies GDP growth rate will decrease around 1.0% in 2009; this is an important setback in global demand that would reduce economic activities in developing countries through noteworthy exports reductions. The WEO projections of GDP growth rate points out a slowdown from 8% in 2008 to 5% in 2009. On the other hand, international oil prices (West Texas Intermediate, WTI) would also slowdown insofar as advanced and developing economies GDP growth rate levels would not be as high as they were in past recent years, affecting the main production sector of Timor-Leste. Many countries have laid down countercyclical strategies seeking to stop economic crisis from spreading out. In this regard, many of them have submitted to consideration of their legislative bodies rescue fiscal packages to avoid GDP shrinking, unemployment, and higher inflation rates. Timor-Leste’s authorities would like to take similar steps as in major developed countries; however developing economies, especially small open ones, have not an articulated domestic production sector; instead supply is satisfied significantly from abroad (imports), impacting negatively on trade and current accounts, as well as on GDP growth rate, employment, income distribution, and poverty.
∗
The author is working for United Nations Development Program-Parliament Project as a Technical Specialist on Budget Oversight 1 International Monetary Fund: “Rapidly Weakening Call for a New Policy Stimulus”, World Economic Outlook Update of the key WEO Projections, November 2008, Washington DC, pp 1.
Figure 1. Timor-Leste: Oil Production 70.0
In Millions of Barrels
60.0 50.0 40.0 30.0 20.0 10.0 2008
2009
2010
2011
2012
2013
2014
Oil Production (in millions of barrels)
Source: Ministry of Finace: Proposta de Lei do Orcamento Geral do Estado 2009, Livru 1.
Therefore, it is difficult that GDP growth rate keep a similar trend (8%) in 2009 that TL experimented in recent years. According to the Ministry of Finance (MoF) Oil and Gas GDP would be smaller from in 2009, affecting petroleum income for TL, having a negative results in local economy, and reducing domestic tax collections.
VI. REVENUES A. Domestic Revenues The MoF is expecting that domestic taxes increase by 63.8% during 2009 compared to 2008; it is assumed that real GDP would grow by 8% and inflation rate would be around 9%. In other words nominal GDP would grow around 17% for the next year. In this scenario the MoF expects that tax collections would be around US$84 millions. The CG has collected on domestic taxes $42 millions up to September 2008. In previous years, the CG has collected less than US$50 millions, raging 17% of non-oil GDP. The GDP depends heavily on oil/gas exports, which would be lower in 2009, due to world recession of developed economies are facing since the financial meltdown during the second half of 2008. According to the World Economic Outlook Update of the IMF 2 , the world GDP growth rate will slow down 2
International Monetary Fund: World Economic Outlook: An Update of WEO projections, Washington DC, November 6, 2008, pp 1.
to 2.2% in 2009 coming from 3.7% of 2008 and 5% of 2007; meanwhile emerging economies would grow around 5% in 2009, 2.9% and 3% lower than previous growth rates exhibited in 2007 (7.9%) and 2008 (8%). Assuming that non-oil GDP grows in 2009 in 5% and considering an inflation rate of 9%, domestic collection should be around US$60 millions (assuming that domestic tax collections grows at the same rate as nominal GDP), in another words US$24 millions below MoF expectations. Up to September 2008 domestic tax collections was $42.6 millions, $4.7 millions per month, at this pace domestic tax collections 3 would end up around $57 millions in 2008. Expecting $84.2 millions in 2009 in domestic taxes means an increase of tax collections of $2.3 millions per month, in other words $7.0 millions per month, which is a significant higher target and during a period within which is expected a deceleration of GDP growth rates in Timor-Leste.
B. Petroleum Wealth The MoF is expecting that oil and gas production declines by 7 millions barrel in 2009 (Figure 1), from 64 millions barrels produced in 2008 to 57 millions barrel in 2009. On the other hand, West Texas Intermediate oil would reduce its prices to US$60 per barrel (p/b) during 2009 as is expecting the MoF. However, international oil prices have swung largely from US$103 p/b to around US$40 and US$47 p/b; consequently the international oil market is performing ⎯as of today ⎯ below the oil average price sets by the MoF in the 2009 Budget Bill. Bearing this in mind it has been built two additional scenarios for PW with US$45 p/b and US$50 p/b. A relevant issue for the sake of a long run sustainable fiscal policy is to observe the petroleum wealth (PW) and oil savings performances over the time span in simulated scenarios to see how evolve PW, allowing an evaluation of fiscal policy proposed. According to the Petroleum Fund Law (PFL) the government can withdraw 3% from the PW, and this amount is considered sustainable in the long run. Nonetheless, the 2009 Budget Bill proposes withdrawals from the PF of 4.33%, considering an additional from this fund of US$181.2 millions. Assuming the government would pursue a similar expansive fiscal policy, three basic scenarios were calculated considering different international oil prices, keeping interest rates on ten years US Treasury Bonds constant (3.7%), and using a similar discount rate as the MoF used to discount 2008 TL’s future petroleum income.
3
International Monetary Fund: Article IV Consultation, June 2008, ibdem, pp 26.
Figure 2. Timor-Leste Petroleum Wealth 25,000.00
In Millions of US$
20,000.00
15,000.00
10,000.00
5,000.00
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Scenario I- $45p/b
Scenario II-$50 p/b
Scenario III-$60 p/b
PW
Source: Ministry of Finance: Orcamento Geral do Estado, Livru 1. Author’s calculations
The Figure 2 shows that TL’s petroleum wealth would be higher considering an international oil price of US$45 p/b with a prudent fiscal policy which only withdraws 3% from petroleum wealth. The black line simulates the referred PW, meanwhile the lines green, red, and blue reflects a lower petroleum wealth with similar and higher than 3% consider in a conservative fiscal policy scenario. As can be seen in Table 1, in 2023 TL’s nominal petroleum wealth would end up in US$17.4 bn in Scenario III considering US$60 p/b, when in average the MoF between 2009 and 2023 estimates an average price of US$45 p/b. However, if the oil price is US$45 p/b, Scenario I, then PW would mount, for the same year, US$14.1 bn, in another words US$3.2 bn lower than the Scenario III. It is important to notice that the long run sustainability of fiscal policy can be seriously affected by swinging international oil prices, consequently affecting the sustainable savings path proposed by the Petroleum Fund Law (PFL). Therefore local authorities should be prudent setting public expenditures ceilings.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Table 1 Nominal Petroleum Wealth In Millions of US$ Scenario IScenario IIScenario III$45p/b $50 p/b $60 p/b 13,595.67 13,595.67 13,595.67 16,115.27 18,038.56 19,975.07 15,899.70 17,639.70 19,695.26 15,698.62 17,211.83 19,424.64 15,505.47 16,754.35 19,164.71 15,322.98 16,554.33 18,930.15 15,151.97 16,367.05 18,710.83 14,991.73 16,191.73 18,505.83 14,842.47 16,028.58 18,315.42 14,703.93 15,877.33 18,139.25 14,575.62 15,737.43 17,976.67 14,457.29 15,608.61 17,827.35 14,348.65 15,490.54 17,690.91 14,249.22 15,382.68 17,566.68 14,158.70 15,284.71 17,454.30
Source: Ministry of Finance. Author's calculations
If these three scenarios are recalculated using a more conservative fiscal policy (3% withdrawing from PF), the Timorese economy would have more resources to face increasingly financing annual budget accordingly to growing needs of one of the fastest growing population in the region (4%) 4 . Table 2 shows that in Scenario III the PW would be around US$21 bn in 2023 and in the Scenarios I and II, the PW is also higher than previously calculated by over US$4.0 bn, indicating that a conservative fiscal policy lays the country in a better position to face future challenges.
4
International Monetary Fund: Democratic Republic of Timor-Leste: Article IV Consultation, June 2008, Washington DC, pp 25.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Table 2 Nominal Petroleum Wealth In Millions of US$ Scenario IScenario IIScenario III$45p/b $50 p/b $60 p/b 13,595.67 13,595.67 13,595.67 13,913.08 14,040.37 14,239.82 18,270.78 12,207.96 12,604.27 17,845.62 12,570.21 13,209.79 17,780.32 13,264.55 14,134.50 17,750.39 13,830.93 14,898.76 17,595.16 14,508.79 15,750.05 17,638.27 15,127.00 16,536.76 17,694.11 15,757.28 17,320.96 17,762.51 16,435.12 18,133.16 17,843.04 17,073.22 18,890.92 17,935.52 17,717.67 19,640.61 18,039.74 18,427.96 20,436.78 18,155.25 19,068.50 21,148.59 18,281.81 19,739.67 21,871.88
Source: Ministry of Finance. Author's calculations
Figure 3. Timor-Leste Petroleum Wealth 25,000.00
In Millions of US$
20,000.00
15,000.00
10,000.00
5,000.00
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Scenario I- $45p/b
Scenario II-$50 p/b
Scenario III-$60 p/b
Source: Ministry of Finance: Orcamento Geral do Estado, Livru 1. Author’s calculations
The Figure 3 shows how the PW performs under the three scenarios described above. The Scenario III indicates that Timor-Leste would have higher resources at the end of this period and withdrawing each year more than US$400 millions, amount that the whole government has shown is incapable to spend efficiently.
VII. EXPENDITURES A. Budget Execution 2008 In General, the CG, according to MoF Execution Report 5 had spent –in cash– $198.7 millions and $14.7 millions spent from the Economic Stabilization Fund (ESF) and held outstanding commitments (or obligations) for $228.1 millions (114.5% of current cash outlays). The CG spent in total (cash plus obligations), during the first nine months, $441.5 millions, around 57.6% of total 2008 budget allocations. Only considering cash expenses, operational expenses 6 account for 36.1% and capital and development expenses share 8.6% of cash expenses of total budget, in other words operational expenses are four times bigger than capital and development. Setting aside outstanding CG obligations, the most important expense items are salaries and wages (57.9%), followed by goods and services (49.4%), and transfers (38.9%). Therefore, operational expenditures are far more important than capital and development outlays. Bear in mind that recurrent expenses have once and for all impact on domestic global demand, which contrasts with capital and development that has a long lasting effect on the economy due to the fact that enhances capacity production, creating new productive jobs, and increasing demand. Table 3 Timor-Leste: Budget Execution Report January-September, 2008 In Millions of US$ Current Appropriation Salaries and Wages Goods and Services Minor Capital Transfer Sub-Total Capital and Development Economic Stabil. Fund
57.3 194.4 40.8 132.0 424.5 101.5 240.0
Actual Payments 33.2 96.1 9.2 51.4 189.9 8.7 14.7
Obligations 50.5 29.0 62.8 142.3 85.8 -
Total 33.2 146.6 38.2 114.2 332.2 94.5 14.7
Actual as % of Appropriation 57.9 49.4 22.5 38.9 44.7 8.6 6.1
Source: Ministry of Finance: Budget Execution Report to Third Quarter, Jan-Sept, 2008, pp 6
The CG spent 6.1% (14.7 millions) of the ESF, between June and September, from the total appropriations approved for 2008. The current execution level confirms previous finding of low budget execution performance 5
Ministry of Finance: “Budget Execution Report Up to Third Quarter, January-September 2008”, Democratic Republic of Timor-Leste, Dili, Timor-Leste, pp 6. 6 Operational expenditures encompass, in the case of Timor-Leste and according to MoF classification, wages and salaries, goods and services, minor capital, and transfers.
highlighted by international institutions (IMF 2008, UE 2007). Although, if one considers government obligations, which are pending to be spent, then budget execution shows a better performance, reaching 78.3% of total appropriations. The National Elections Commission (93.9%), Ministry of Foreign Affairs (91.1%), and the Ministry of State Administration and Territorial Planning (85.3%) have an outstanding budget execution performance in 2008. In average, CG institutions spend around 56.6% of their approved budget, setting aside obligations. Table 4 Timor-Leste: Institutional Budget Execution January-September 2008 In Millions of US$ Budget President of the Republic National Parliament Prime Minister and C of M Ministry of Security and Defence Ministry of Foregin Affairs Ministry of Finance Ministry of Justice Ministry of Health Ministry of Education Ministry of State Adm and TP Ministry of Economy and Develop Ministry of Social Solidarity Ministry of Infrastructures Ministry of Turism, Trade and Ind Ministry of Agriculture and Fisheries Courts Office of the Prosecutor Ombudsman of Rights and Justice Public Broadcasting System of TL National Elections Commission Funds Administered by Ministry Total Average Standard Deviation from the Mean
Actual Obligations Expenditure
Total
4.98 8.73 70.90 53.85 9.42 11.29 9.79 30.80 51.37 13.74 7.32 27.24 67.69 18.53 30.68 2.13 2.25 0.55 2.08 1.61 101.03
2.30 3.90 34.57 19.55 6.47 4.91 2.26 13.15 23.05 9.47 3.93 15.00 10.84 5.73 9.45 0.46 0.67 0.30 1.40 1.33 29.94
1.33 2.29 15.78 21.57 0.63 4.23 5.28 9.17 14.34 1.63 1.80 9.01 49.37 11.84 18.12 0.75 1.30 0.12 0.36 0.09 59.07
3.63 6.18 50.35 41.12 7.10 9.14 7.54 22.31 37.39 11.10 5.73 24.01 60.21 17.57 27.57 1.21 1.97 0.41 1.75 1.41 89.01
525.96
198.65
228.07
426.72
% of Budget approved 63.38 63.03 68.67 47.54 91.08 53.68 29.95 58.92 61.65 85.29 68.62 62.46 18.00 32.59 34.27 37.93 34.06 71.43 79.75 93.91 33.64 46.55 56.66 21.62
Source: Ministry of Finance, Budget Execution Report, Jan-Sept, 2008, pp 43-48
Six of CG institutions out of twenty one (28.6%) had a budget execution (in cash) that exceed 60% of their approved budget in 2008. The 23% of CG institutions have an execution around 30% of their appropriations for the same year. The Ministry of Infrastructure has the lowest budget execution (18%), followed by the Ministry of Justice (29.9%). Only 35% of the institutional budget executions are nearby the execution average (56.7%), and 65% are under or over the average executed budget. For those institutions reporting budget execution over the average (56.6%), in general, have spent two thirds of the
approved budget at the time the MoF is reporting nine months of budget execution; considering proportional expenditure during the year these ministries should have spent around 75% of their budget by the time of this report from the MoF, however they are under this amount. For those that spent below the average (43%) their performance ranges 20% to 50% in 2008. The standard deviation from average budget execution is 21.62, which is high; pointing out that institutional budget execution shows a wide diversity (Figure 6), affecting government compliance with its annual institutional objectives and annual targets. Figure 4. Central Government Budget Execution, 2008
of Pr Na the i t m i in on Re e is try Mi al P pub li a of nis te rlia c M Secu r an me in is rity d C nt try a of of nd M Fo De f r M eg en c in i is n A e try ffa o M i in f F rs in is a t r nc y M o e i M M nis t f Ju M ini i r s s t nis y o tic in r t is try y of ry o f H e St f E ealt of h at d E M co n e A uca dm tio in o m is an n try y M of an d d T M in P in D S M is tr is tr oci eve al in y o y l o is try f T of In Sol p of uris fra idar str ity m A , gr ic Tra u ctu ul d tu e a r es re an n d I d n O Fi d m Of sh bu fic er Pu dsm e o ie ft bl s ic an h Br of e P Cou r R o r o N at adc igh s ec ts io na asti ts a u to n Fu r n l nd Ele g S d Ju s A cti ys t sti dm ons em ce o C in o f is ter mm TL ed is by sio M n in is try M
Pr e
sid en t
In Millions
100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 -
Source: Ministry of Finance. Budget Execution Report, September 2008.
The 47.5% of the CG institutions have a budget execution ranging between 36.7% and 86.7% of their appropriations for 2008 budget 7 . There are some institutions that perform far beyond of the average budget execution, such as Ministry of Foreign Affairs, Ministry of State Administration and Territorial Management, and the National Elections Commission, these institutions can be considered as outliers. Doing so and recalculating the sample mean as well as its standard deviation, budget execution overview changes as follow: 44.3% of the CG institutions should have a budget execution raging 30% and 70%. 7
⎛ ⎝
Calculating a z-score ⎜ z =
xi − x
⎞ for institutional budget execution, it is obtained that z = 1.38, in s ⎟⎠
another word the 47.49% of the budget execution range between 36.7% and 86.7% executed budget. See Anderson, Sweeny and Williams: “Statistics for Business and Economics”, Thompson, South-Western, Australia, 10th Edition, 2008, pp 96 and 97.
The ratio between obligations and actual expenditures (O/CE) gives an idea of the capacity of spending of central government institutions. According to our calculations, 38% of the institutions have a ratio bigger than one, so obligations were currently larger than expenditures in cash, 28% of CG has an O/CE ratio over 0.50, less than one, meaning that obligations represented at least 50% of their cash expenditures (Table 5). Table 5 Timor-Leste: Institutional Budget Execution January-September 2008 Actual Expentidure/Obligations
President of the Republic National Parliament Prime Minister and C of M Ministry of Security and Defence Ministry of Foregin Affairs Ministry of Finance Ministry of Justice Ministry of Health Ministry of Education Ministry of State Adm and TP Ministry of Economy and Develop Ministry of Social Solidarity Ministry of Infrastructures Ministry of Turism, Trade and Ind Ministry of Agriculture and Fisheries Courts Office of the Prosecutor Ombudsman of Rights and Justice Public Broadcasting System of TL National Elections Commission Funds Administered by Ministry
Obligations/ Actual Obligations Cash Expenditure (I) (II) Expenditures II/I 2.30 1.33 0.58 3.90 2.29 0.59 34.57 15.78 0.46 19.55 21.57 1.10 6.47 0.63 0.10 4.91 4.23 0.86 2.26 5.28 2.34 13.15 9.17 0.70 23.05 14.34 0.62 9.47 1.63 0.17 3.93 1.80 0.46 15.00 9.01 0.60 10.84 49.37 4.55 5.73 11.84 2.07 9.45 18.12 1.92 0.46 0.75 1.64 0.67 1.30 1.94 0.30 0.12 0.40 1.40 0.36 0.25 1.33 0.09 0.06 29.94 59.07 1.97
Source: Ministry of Finance, Budget Execution Report, Jan-Sept 2008. Author's Calculations
The 33% of CG institutions have an O/CE smaller than 50% and cash expenditures are bigger than obligations, which reflects a better budget execution performance, it is important to mention that obligations might or not be executed up to 31 of December 2008, according to the MoF’s Circular 8 . Most of funds not 8
Ministry of Finance: “2009 General Budget of the State”, MoF, Minister Cabinet, August 27, 2008, Dili, Timor-Leste.
spent by the December 31 of 2008 will not be carryover as it was the previous practice, except for some capital projects. Another way to look at the budget execution is through the relationship between initial appropriation and expenditure. It is expected that institution which has higher appropriation execute higher amount. In this regard, it was confirmed there is a positive and lineal relationship between budget appropriation and budget executed 9 ; consequently higher appropriations conducive to higher expenditures (Figure 9). However, this relationship seems to get relatively weaker as the size of budget allocation grows bigger. The Figure 9 that relates appropriations and budget execution shows a concentration of points at lower execution levels, suggesting that smaller institutions perform relatively better than those which have bigger budget allocations. One could say that institutions that having smaller budgets means having a better administrative management than bigger institutions. However, the lack of capability, identified by various international organizations, points out that not only small budgets appropriations but also larger ones have difficulties to spend in all public sector. Consequently, lower and higher budget appropriations are difficult to spend due to a lack of management and administrative support. Figure 5. Appropriation and Expenditure 40.00 35.00
Actual Expenditures In millions of US$
30.00 25.00 20.00 15.00 10.00 5.00 -
20.00
40.00
60.00
80.00
100.00
120.00
Appropriations
Source: Ministry of Finance, Budget Execution Report, September 2008
9
The correlation coefficient is 90.2% between budget allocations and budget execution, the institutions that gets more appropriation spends more resources. This indicator of a lineal relationship can be calculated using rxy =
s xy sx s y
.
In the Tables 8 and 9 show that smaller institutions (less than ten millions dollars appropriation) have stronger lineal and positive relationship (CC = 85%) between budget appropriation and expenditure for 2008; in turn larger institutions has a weaker positive and linear relationship between the two above mentioned variables (CC = 54.1%). It is important to determine if it is easier to spend smaller budget allocations than larger ones, if administrative procedures are the same, bidding process follows exactly the same steps, among others 10 . Table 6 Timor-Leste: Appropriation and Institutional Cash Expenditures For Small* Institutions, In Percentage 2008 % Cash Actual Expenditure/ Budget Expenditure Appropiation President of the Republic 4.98 2.30 46.24 National Parliament 8.73 3.90 44.64 Ministry of Foregin Affairs 9.42 6.47 68.64 Ministry of Justice 9.79 2.26 23.05 Ministry of Economy and Develop 7.32 3.93 53.71 Courts 2.13 0.46 21.54 Office of the Prosecutor 2.25 0.67 29.80 Ombudsman of Rights and Justice 0.55 0.30 53.83 Public Broadcasting System of TL 2.08 1.40 67.34 National Elections Commission 1.61 1.33 82.27 Average 4.88 2.30 49.11 Standard Deviation 3.61 1.95 20.27 Correlation Coefficient 73.89 84.99 41.27 (*) These institutions having less than $10.0 millions in appropiations are considered small institutions.
10
The discrepancy on how perform a small and large institution in their execution was also calculated considering cash expenditures over appropriation ratio, and conclusions on this matter do not change. See Tables 8 and 9, last columns.
Table 7 Timor-Leste: Appropriation and Institutional Cash Expenditures For Large** Institutions, In Percentage 2008 % Cash Actual Budget Expenditure/ Expenditure Appropiation Prime Minister and C of M 70.90 34.57 48.76 Ministry of Security and Defence 53.85 19.55 36.30 Ministry of Health 30.80 13.15 42.68 Ministry of Education 51.37 23.05 44.88 Ministry of Social Solidarity 27.24 15.00 55.04 Ministry of Infrastructures 67.69 10.84 16.01 Ministry of Turism, Trade and Ind 18.53 5.73 30.90 Ministry of Agriculture and Fisheries 30.68 9.45 30.80 Funds Administered by Ministry 101.03 29.94 29.64 Ministry of Finance 11.29 4.91 43.46 Ministry of State Adm and TP 13.74 9.47 68.89 Average 50.23 17.92 37.23 Standard Deviation 26.50 9.70 11.88 Correlation Coefficient 52.76 54.13 31.91 (**)These institutions have appropriations over 10.0 millions aere consider large.
On the other hand, in the Budget Execution Report, January-September, 2008, there is not indicators that can be used to determine if public investments are cost-effective and also if every institution is reaching out their annual targets. It is advisable, for 2009 budget that a set of performance indicators are properly forward to the MoF, to allow the NP members to exercise their oversight tasks.
B. 2009 Budget Bill The NSB mounts US$681.1 millions for 2009; financed by US$588.8 millions transfer from the PF; $407.8 according to ESI calculations done by MoF and an extraordinary transfer from of US$181.2 millions 11 . In addition, the MoF estimates domestic tax collection of US$84.2 millions plus US$6.9 millions stem from transfers of autonomous agencies. In another words the 86.5% of the resources that finances the 2009 NSB are coming from the PF and 12.5% from domestic taxes and transfers. The MoF reports that at the end of 2008 the Treasury shows a balance of US$212.9 millions, and the 2009 Budget would include US$178.2 millions. The government plans to spend 69% in current expenditures and 31% in capital and development. In another words, most of the PW would not be spent in expanding domestic production capability, instead the fiscal policy is devoted to stimulate consumption. Wages and salaries and goods and services as well represent 64.4% of the total current expenditures. 11
The PFL allows CG to withdraw over the ESI complying with various conditions, such as specifying the ESI for the fiscal year in which the transfer is made, specifying the ESI for the preceding year, and presenting a certification from an independent auditor of the previous ESI calculations. See PFL, Article 9.
On the other hand, capital and development expenditures are estimated in US$205 millions; US$85 millions would be spent on new schools (US$12 MM), roads (US$16.2 MM), local clinics (US$7.4 MM), as well as municipality buildings (US$1.5 MM). There is a project to support agriculture productivity (US$5.6 MM), improvement of sea ports (US$8.1 MM), food, water, and boats for the local marine, among others. The Ministry of Infrastructure would spend US$85 millions on the construction of a new electric power plant, transmission lines, transmission network and supervision.
VIII. RECOMMENDATIONS 1. Bearing in mind the 2008 institutional execution levels reveal a significant lack of an efficient capacity of spending of the Timorese public sector, the financing from the PF should be kept at the 3% level and non additional withdrawal is necessary to satisfy population needs. 2. It should also be considered the starting balance of US$178.2 millions to withdraw lesser amount from the PF. Therefore, for this year the PF withdrawal should be US$229.6 millions instead of US$407.8 millions. 3. It is highly recommended that the government should devote efforts in gathering international experts in development economics and poverty reduction to help local authorities to set up a national development plan (NDP) as the main guideline of future annual budgets. 4. Meanwhile the government needs to increase institutional capability to spend efficiently. In this respect it is crucial to train each financial department of each ministry to achieve properly an annual budget accordingly to NDP.
∗
The author is working for United Nations Development Program-Parliament Project as a Technical Specialist on Budget Oversight 1 International Monetary Fund: “Rapidly Weakening Call for a New Policy Stimulus”, World Economic Outlook Update of the key WEO Projections, November 2008, Washington DC, pp 1.
Figure 1. Timor-Leste: Oil Production 70.0
In Millions of Barrels
60.0 50.0 40.0 30.0 20.0 10.0 2008
2009
2010
2011
2012
2013
2014
Oil Production (in millions of barrels)
Source: Ministry of Finace: Proposta de Lei do Orcamento Geral do Estado 2009, Livru 1.
Therefore, it is difficult that GDP growth rate keep a similar trend (8%) in 2009 that TL experimented in recent years. According to the Ministry of Finance (MoF) Oil and Gas GDP would be smaller from in 2009, affecting petroleum income for TL, having a negative results in local economy, and reducing domestic tax collections.
VI. REVENUES A. Domestic Revenues The MoF is expecting that domestic taxes increase by 63.8% during 2009 compared to 2008; it is assumed that real GDP would grow by 8% and inflation rate would be around 9%. In other words nominal GDP would grow around 17% for the next year. In this scenario the MoF expects that tax collections would be around US$84 millions. The CG has collected on domestic taxes $42 millions up to September 2008. In previous years, the CG has collected less than US$50 millions, raging 17% of non-oil GDP. The GDP depends heavily on oil/gas exports, which would be lower in 2009, due to world recession of developed economies are facing since the financial meltdown during the second half of 2008. According to the World Economic Outlook Update of the IMF 2 , the world GDP growth rate will slow down 2
International Monetary Fund: World Economic Outlook: An Update of WEO projections, Washington DC, November 6, 2008, pp 1.
to 2.2% in 2009 coming from 3.7% of 2008 and 5% of 2007; meanwhile emerging economies would grow around 5% in 2009, 2.9% and 3% lower than previous growth rates exhibited in 2007 (7.9%) and 2008 (8%). Assuming that non-oil GDP grows in 2009 in 5% and considering an inflation rate of 9%, domestic collection should be around US$60 millions (assuming that domestic tax collections grows at the same rate as nominal GDP), in another words US$24 millions below MoF expectations. Up to September 2008 domestic tax collections was $42.6 millions, $4.7 millions per month, at this pace domestic tax collections 3 would end up around $57 millions in 2008. Expecting $84.2 millions in 2009 in domestic taxes means an increase of tax collections of $2.3 millions per month, in other words $7.0 millions per month, which is a significant higher target and during a period within which is expected a deceleration of GDP growth rates in Timor-Leste.
B. Petroleum Wealth The MoF is expecting that oil and gas production declines by 7 millions barrel in 2009 (Figure 1), from 64 millions barrels produced in 2008 to 57 millions barrel in 2009. On the other hand, West Texas Intermediate oil would reduce its prices to US$60 per barrel (p/b) during 2009 as is expecting the MoF. However, international oil prices have swung largely from US$103 p/b to around US$40 and US$47 p/b; consequently the international oil market is performing ⎯as of today ⎯ below the oil average price sets by the MoF in the 2009 Budget Bill. Bearing this in mind it has been built two additional scenarios for PW with US$45 p/b and US$50 p/b. A relevant issue for the sake of a long run sustainable fiscal policy is to observe the petroleum wealth (PW) and oil savings performances over the time span in simulated scenarios to see how evolve PW, allowing an evaluation of fiscal policy proposed. According to the Petroleum Fund Law (PFL) the government can withdraw 3% from the PW, and this amount is considered sustainable in the long run. Nonetheless, the 2009 Budget Bill proposes withdrawals from the PF of 4.33%, considering an additional from this fund of US$181.2 millions. Assuming the government would pursue a similar expansive fiscal policy, three basic scenarios were calculated considering different international oil prices, keeping interest rates on ten years US Treasury Bonds constant (3.7%), and using a similar discount rate as the MoF used to discount 2008 TL’s future petroleum income.
3
International Monetary Fund: Article IV Consultation, June 2008, ibdem, pp 26.
Figure 2. Timor-Leste Petroleum Wealth 25,000.00
In Millions of US$
20,000.00
15,000.00
10,000.00
5,000.00
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Scenario I- $45p/b
Scenario II-$50 p/b
Scenario III-$60 p/b
PW
Source: Ministry of Finance: Orcamento Geral do Estado, Livru 1. Author’s calculations
The Figure 2 shows that TL’s petroleum wealth would be higher considering an international oil price of US$45 p/b with a prudent fiscal policy which only withdraws 3% from petroleum wealth. The black line simulates the referred PW, meanwhile the lines green, red, and blue reflects a lower petroleum wealth with similar and higher than 3% consider in a conservative fiscal policy scenario. As can be seen in Table 1, in 2023 TL’s nominal petroleum wealth would end up in US$17.4 bn in Scenario III considering US$60 p/b, when in average the MoF between 2009 and 2023 estimates an average price of US$45 p/b. However, if the oil price is US$45 p/b, Scenario I, then PW would mount, for the same year, US$14.1 bn, in another words US$3.2 bn lower than the Scenario III. It is important to notice that the long run sustainability of fiscal policy can be seriously affected by swinging international oil prices, consequently affecting the sustainable savings path proposed by the Petroleum Fund Law (PFL). Therefore local authorities should be prudent setting public expenditures ceilings.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Table 1 Nominal Petroleum Wealth In Millions of US$ Scenario IScenario IIScenario III$45p/b $50 p/b $60 p/b 13,595.67 13,595.67 13,595.67 16,115.27 18,038.56 19,975.07 15,899.70 17,639.70 19,695.26 15,698.62 17,211.83 19,424.64 15,505.47 16,754.35 19,164.71 15,322.98 16,554.33 18,930.15 15,151.97 16,367.05 18,710.83 14,991.73 16,191.73 18,505.83 14,842.47 16,028.58 18,315.42 14,703.93 15,877.33 18,139.25 14,575.62 15,737.43 17,976.67 14,457.29 15,608.61 17,827.35 14,348.65 15,490.54 17,690.91 14,249.22 15,382.68 17,566.68 14,158.70 15,284.71 17,454.30
Source: Ministry of Finance. Author's calculations
If these three scenarios are recalculated using a more conservative fiscal policy (3% withdrawing from PF), the Timorese economy would have more resources to face increasingly financing annual budget accordingly to growing needs of one of the fastest growing population in the region (4%) 4 . Table 2 shows that in Scenario III the PW would be around US$21 bn in 2023 and in the Scenarios I and II, the PW is also higher than previously calculated by over US$4.0 bn, indicating that a conservative fiscal policy lays the country in a better position to face future challenges.
4
International Monetary Fund: Democratic Republic of Timor-Leste: Article IV Consultation, June 2008, Washington DC, pp 25.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Table 2 Nominal Petroleum Wealth In Millions of US$ Scenario IScenario IIScenario III$45p/b $50 p/b $60 p/b 13,595.67 13,595.67 13,595.67 13,913.08 14,040.37 14,239.82 18,270.78 12,207.96 12,604.27 17,845.62 12,570.21 13,209.79 17,780.32 13,264.55 14,134.50 17,750.39 13,830.93 14,898.76 17,595.16 14,508.79 15,750.05 17,638.27 15,127.00 16,536.76 17,694.11 15,757.28 17,320.96 17,762.51 16,435.12 18,133.16 17,843.04 17,073.22 18,890.92 17,935.52 17,717.67 19,640.61 18,039.74 18,427.96 20,436.78 18,155.25 19,068.50 21,148.59 18,281.81 19,739.67 21,871.88
Source: Ministry of Finance. Author's calculations
Figure 3. Timor-Leste Petroleum Wealth 25,000.00
In Millions of US$
20,000.00
15,000.00
10,000.00
5,000.00
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Scenario I- $45p/b
Scenario II-$50 p/b
Scenario III-$60 p/b
Source: Ministry of Finance: Orcamento Geral do Estado, Livru 1. Author’s calculations
The Figure 3 shows how the PW performs under the three scenarios described above. The Scenario III indicates that Timor-Leste would have higher resources at the end of this period and withdrawing each year more than US$400 millions, amount that the whole government has shown is incapable to spend efficiently.
VII. EXPENDITURES A. Budget Execution 2008 In General, the CG, according to MoF Execution Report 5 had spent –in cash– $198.7 millions and $14.7 millions spent from the Economic Stabilization Fund (ESF) and held outstanding commitments (or obligations) for $228.1 millions (114.5% of current cash outlays). The CG spent in total (cash plus obligations), during the first nine months, $441.5 millions, around 57.6% of total 2008 budget allocations. Only considering cash expenses, operational expenses 6 account for 36.1% and capital and development expenses share 8.6% of cash expenses of total budget, in other words operational expenses are four times bigger than capital and development. Setting aside outstanding CG obligations, the most important expense items are salaries and wages (57.9%), followed by goods and services (49.4%), and transfers (38.9%). Therefore, operational expenditures are far more important than capital and development outlays. Bear in mind that recurrent expenses have once and for all impact on domestic global demand, which contrasts with capital and development that has a long lasting effect on the economy due to the fact that enhances capacity production, creating new productive jobs, and increasing demand. Table 3 Timor-Leste: Budget Execution Report January-September, 2008 In Millions of US$ Current Appropriation Salaries and Wages Goods and Services Minor Capital Transfer Sub-Total Capital and Development Economic Stabil. Fund
57.3 194.4 40.8 132.0 424.5 101.5 240.0
Actual Payments 33.2 96.1 9.2 51.4 189.9 8.7 14.7
Obligations 50.5 29.0 62.8 142.3 85.8 -
Total 33.2 146.6 38.2 114.2 332.2 94.5 14.7
Actual as % of Appropriation 57.9 49.4 22.5 38.9 44.7 8.6 6.1
Source: Ministry of Finance: Budget Execution Report to Third Quarter, Jan-Sept, 2008, pp 6
The CG spent 6.1% (14.7 millions) of the ESF, between June and September, from the total appropriations approved for 2008. The current execution level confirms previous finding of low budget execution performance 5
Ministry of Finance: “Budget Execution Report Up to Third Quarter, January-September 2008”, Democratic Republic of Timor-Leste, Dili, Timor-Leste, pp 6. 6 Operational expenditures encompass, in the case of Timor-Leste and according to MoF classification, wages and salaries, goods and services, minor capital, and transfers.
highlighted by international institutions (IMF 2008, UE 2007). Although, if one considers government obligations, which are pending to be spent, then budget execution shows a better performance, reaching 78.3% of total appropriations. The National Elections Commission (93.9%), Ministry of Foreign Affairs (91.1%), and the Ministry of State Administration and Territorial Planning (85.3%) have an outstanding budget execution performance in 2008. In average, CG institutions spend around 56.6% of their approved budget, setting aside obligations. Table 4 Timor-Leste: Institutional Budget Execution January-September 2008 In Millions of US$ Budget President of the Republic National Parliament Prime Minister and C of M Ministry of Security and Defence Ministry of Foregin Affairs Ministry of Finance Ministry of Justice Ministry of Health Ministry of Education Ministry of State Adm and TP Ministry of Economy and Develop Ministry of Social Solidarity Ministry of Infrastructures Ministry of Turism, Trade and Ind Ministry of Agriculture and Fisheries Courts Office of the Prosecutor Ombudsman of Rights and Justice Public Broadcasting System of TL National Elections Commission Funds Administered by Ministry Total Average Standard Deviation from the Mean
Actual Obligations Expenditure
Total
4.98 8.73 70.90 53.85 9.42 11.29 9.79 30.80 51.37 13.74 7.32 27.24 67.69 18.53 30.68 2.13 2.25 0.55 2.08 1.61 101.03
2.30 3.90 34.57 19.55 6.47 4.91 2.26 13.15 23.05 9.47 3.93 15.00 10.84 5.73 9.45 0.46 0.67 0.30 1.40 1.33 29.94
1.33 2.29 15.78 21.57 0.63 4.23 5.28 9.17 14.34 1.63 1.80 9.01 49.37 11.84 18.12 0.75 1.30 0.12 0.36 0.09 59.07
3.63 6.18 50.35 41.12 7.10 9.14 7.54 22.31 37.39 11.10 5.73 24.01 60.21 17.57 27.57 1.21 1.97 0.41 1.75 1.41 89.01
525.96
198.65
228.07
426.72
% of Budget approved 63.38 63.03 68.67 47.54 91.08 53.68 29.95 58.92 61.65 85.29 68.62 62.46 18.00 32.59 34.27 37.93 34.06 71.43 79.75 93.91 33.64 46.55 56.66 21.62
Source: Ministry of Finance, Budget Execution Report, Jan-Sept, 2008, pp 43-48
Six of CG institutions out of twenty one (28.6%) had a budget execution (in cash) that exceed 60% of their approved budget in 2008. The 23% of CG institutions have an execution around 30% of their appropriations for the same year. The Ministry of Infrastructure has the lowest budget execution (18%), followed by the Ministry of Justice (29.9%). Only 35% of the institutional budget executions are nearby the execution average (56.7%), and 65% are under or over the average executed budget. For those institutions reporting budget execution over the average (56.6%), in general, have spent two thirds of the
approved budget at the time the MoF is reporting nine months of budget execution; considering proportional expenditure during the year these ministries should have spent around 75% of their budget by the time of this report from the MoF, however they are under this amount. For those that spent below the average (43%) their performance ranges 20% to 50% in 2008. The standard deviation from average budget execution is 21.62, which is high; pointing out that institutional budget execution shows a wide diversity (Figure 6), affecting government compliance with its annual institutional objectives and annual targets. Figure 4. Central Government Budget Execution, 2008
of Pr Na the i t m i in on Re e is try Mi al P pub li a of nis te rlia c M Secu r an me in is rity d C nt try a of of nd M Fo De f r M eg en c in i is n A e try ffa o M i in f F rs in is a t r nc y M o e i M M nis t f Ju M ini i r s s t nis y o tic in r t is try y of ry o f H e St f E ealt of h at d E M co n e A uca dm tio in o m is an n try y M of an d d T M in P in D S M is tr is tr oci eve al in y o y l o is try f T of In Sol p of uris fra idar str ity m A , gr ic Tra u ctu ul d tu e a r es re an n d I d n O Fi d m Of sh bu fic er Pu dsm e o ie ft bl s ic an h Br of e P Cou r R o r o N at adc igh s ec ts io na asti ts a u to n Fu r n l nd Ele g S d Ju s A cti ys t sti dm ons em ce o C in o f is ter mm TL ed is by sio M n in is try M
Pr e
sid en t
In Millions
100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 -
Source: Ministry of Finance. Budget Execution Report, September 2008.
The 47.5% of the CG institutions have a budget execution ranging between 36.7% and 86.7% of their appropriations for 2008 budget 7 . There are some institutions that perform far beyond of the average budget execution, such as Ministry of Foreign Affairs, Ministry of State Administration and Territorial Management, and the National Elections Commission, these institutions can be considered as outliers. Doing so and recalculating the sample mean as well as its standard deviation, budget execution overview changes as follow: 44.3% of the CG institutions should have a budget execution raging 30% and 70%. 7
⎛ ⎝
Calculating a z-score ⎜ z =
xi − x
⎞ for institutional budget execution, it is obtained that z = 1.38, in s ⎟⎠
another word the 47.49% of the budget execution range between 36.7% and 86.7% executed budget. See Anderson, Sweeny and Williams: “Statistics for Business and Economics”, Thompson, South-Western, Australia, 10th Edition, 2008, pp 96 and 97.
The ratio between obligations and actual expenditures (O/CE) gives an idea of the capacity of spending of central government institutions. According to our calculations, 38% of the institutions have a ratio bigger than one, so obligations were currently larger than expenditures in cash, 28% of CG has an O/CE ratio over 0.50, less than one, meaning that obligations represented at least 50% of their cash expenditures (Table 5). Table 5 Timor-Leste: Institutional Budget Execution January-September 2008 Actual Expentidure/Obligations
President of the Republic National Parliament Prime Minister and C of M Ministry of Security and Defence Ministry of Foregin Affairs Ministry of Finance Ministry of Justice Ministry of Health Ministry of Education Ministry of State Adm and TP Ministry of Economy and Develop Ministry of Social Solidarity Ministry of Infrastructures Ministry of Turism, Trade and Ind Ministry of Agriculture and Fisheries Courts Office of the Prosecutor Ombudsman of Rights and Justice Public Broadcasting System of TL National Elections Commission Funds Administered by Ministry
Obligations/ Actual Obligations Cash Expenditure (I) (II) Expenditures II/I 2.30 1.33 0.58 3.90 2.29 0.59 34.57 15.78 0.46 19.55 21.57 1.10 6.47 0.63 0.10 4.91 4.23 0.86 2.26 5.28 2.34 13.15 9.17 0.70 23.05 14.34 0.62 9.47 1.63 0.17 3.93 1.80 0.46 15.00 9.01 0.60 10.84 49.37 4.55 5.73 11.84 2.07 9.45 18.12 1.92 0.46 0.75 1.64 0.67 1.30 1.94 0.30 0.12 0.40 1.40 0.36 0.25 1.33 0.09 0.06 29.94 59.07 1.97
Source: Ministry of Finance, Budget Execution Report, Jan-Sept 2008. Author's Calculations
The 33% of CG institutions have an O/CE smaller than 50% and cash expenditures are bigger than obligations, which reflects a better budget execution performance, it is important to mention that obligations might or not be executed up to 31 of December 2008, according to the MoF’s Circular 8 . Most of funds not 8
Ministry of Finance: “2009 General Budget of the State”, MoF, Minister Cabinet, August 27, 2008, Dili, Timor-Leste.
spent by the December 31 of 2008 will not be carryover as it was the previous practice, except for some capital projects. Another way to look at the budget execution is through the relationship between initial appropriation and expenditure. It is expected that institution which has higher appropriation execute higher amount. In this regard, it was confirmed there is a positive and lineal relationship between budget appropriation and budget executed 9 ; consequently higher appropriations conducive to higher expenditures (Figure 9). However, this relationship seems to get relatively weaker as the size of budget allocation grows bigger. The Figure 9 that relates appropriations and budget execution shows a concentration of points at lower execution levels, suggesting that smaller institutions perform relatively better than those which have bigger budget allocations. One could say that institutions that having smaller budgets means having a better administrative management than bigger institutions. However, the lack of capability, identified by various international organizations, points out that not only small budgets appropriations but also larger ones have difficulties to spend in all public sector. Consequently, lower and higher budget appropriations are difficult to spend due to a lack of management and administrative support. Figure 5. Appropriation and Expenditure 40.00 35.00
Actual Expenditures In millions of US$
30.00 25.00 20.00 15.00 10.00 5.00 -
20.00
40.00
60.00
80.00
100.00
120.00
Appropriations
Source: Ministry of Finance, Budget Execution Report, September 2008
9
The correlation coefficient is 90.2% between budget allocations and budget execution, the institutions that gets more appropriation spends more resources. This indicator of a lineal relationship can be calculated using rxy =
s xy sx s y
.
In the Tables 8 and 9 show that smaller institutions (less than ten millions dollars appropriation) have stronger lineal and positive relationship (CC = 85%) between budget appropriation and expenditure for 2008; in turn larger institutions has a weaker positive and linear relationship between the two above mentioned variables (CC = 54.1%). It is important to determine if it is easier to spend smaller budget allocations than larger ones, if administrative procedures are the same, bidding process follows exactly the same steps, among others 10 . Table 6 Timor-Leste: Appropriation and Institutional Cash Expenditures For Small* Institutions, In Percentage 2008 % Cash Actual Expenditure/ Budget Expenditure Appropiation President of the Republic 4.98 2.30 46.24 National Parliament 8.73 3.90 44.64 Ministry of Foregin Affairs 9.42 6.47 68.64 Ministry of Justice 9.79 2.26 23.05 Ministry of Economy and Develop 7.32 3.93 53.71 Courts 2.13 0.46 21.54 Office of the Prosecutor 2.25 0.67 29.80 Ombudsman of Rights and Justice 0.55 0.30 53.83 Public Broadcasting System of TL 2.08 1.40 67.34 National Elections Commission 1.61 1.33 82.27 Average 4.88 2.30 49.11 Standard Deviation 3.61 1.95 20.27 Correlation Coefficient 73.89 84.99 41.27 (*) These institutions having less than $10.0 millions in appropiations are considered small institutions.
10
The discrepancy on how perform a small and large institution in their execution was also calculated considering cash expenditures over appropriation ratio, and conclusions on this matter do not change. See Tables 8 and 9, last columns.
Table 7 Timor-Leste: Appropriation and Institutional Cash Expenditures For Large** Institutions, In Percentage 2008 % Cash Actual Budget Expenditure/ Expenditure Appropiation Prime Minister and C of M 70.90 34.57 48.76 Ministry of Security and Defence 53.85 19.55 36.30 Ministry of Health 30.80 13.15 42.68 Ministry of Education 51.37 23.05 44.88 Ministry of Social Solidarity 27.24 15.00 55.04 Ministry of Infrastructures 67.69 10.84 16.01 Ministry of Turism, Trade and Ind 18.53 5.73 30.90 Ministry of Agriculture and Fisheries 30.68 9.45 30.80 Funds Administered by Ministry 101.03 29.94 29.64 Ministry of Finance 11.29 4.91 43.46 Ministry of State Adm and TP 13.74 9.47 68.89 Average 50.23 17.92 37.23 Standard Deviation 26.50 9.70 11.88 Correlation Coefficient 52.76 54.13 31.91 (**)These institutions have appropriations over 10.0 millions aere consider large.
On the other hand, in the Budget Execution Report, January-September, 2008, there is not indicators that can be used to determine if public investments are cost-effective and also if every institution is reaching out their annual targets. It is advisable, for 2009 budget that a set of performance indicators are properly forward to the MoF, to allow the NP members to exercise their oversight tasks.
B. 2009 Budget Bill The NSB mounts US$681.1 millions for 2009; financed by US$588.8 millions transfer from the PF; $407.8 according to ESI calculations done by MoF and an extraordinary transfer from of US$181.2 millions 11 . In addition, the MoF estimates domestic tax collection of US$84.2 millions plus US$6.9 millions stem from transfers of autonomous agencies. In another words the 86.5% of the resources that finances the 2009 NSB are coming from the PF and 12.5% from domestic taxes and transfers. The MoF reports that at the end of 2008 the Treasury shows a balance of US$212.9 millions, and the 2009 Budget would include US$178.2 millions. The government plans to spend 69% in current expenditures and 31% in capital and development. In another words, most of the PW would not be spent in expanding domestic production capability, instead the fiscal policy is devoted to stimulate consumption. Wages and salaries and goods and services as well represent 64.4% of the total current expenditures. 11
The PFL allows CG to withdraw over the ESI complying with various conditions, such as specifying the ESI for the fiscal year in which the transfer is made, specifying the ESI for the preceding year, and presenting a certification from an independent auditor of the previous ESI calculations. See PFL, Article 9.
On the other hand, capital and development expenditures are estimated in US$205 millions; US$85 millions would be spent on new schools (US$12 MM), roads (US$16.2 MM), local clinics (US$7.4 MM), as well as municipality buildings (US$1.5 MM). There is a project to support agriculture productivity (US$5.6 MM), improvement of sea ports (US$8.1 MM), food, water, and boats for the local marine, among others. The Ministry of Infrastructure would spend US$85 millions on the construction of a new electric power plant, transmission lines, transmission network and supervision.
VIII. RECOMMENDATIONS 1. Bearing in mind the 2008 institutional execution levels reveal a significant lack of an efficient capacity of spending of the Timorese public sector, the financing from the PF should be kept at the 3% level and non additional withdrawal is necessary to satisfy population needs. 2. It should also be considered the starting balance of US$178.2 millions to withdraw lesser amount from the PF. Therefore, for this year the PF withdrawal should be US$229.6 millions instead of US$407.8 millions. 3. It is highly recommended that the government should devote efforts in gathering international experts in development economics and poverty reduction to help local authorities to set up a national development plan (NDP) as the main guideline of future annual budgets. 4. Meanwhile the government needs to increase institutional capability to spend efficiently. In this respect it is crucial to train each financial department of each ministry to achieve properly an annual budget accordingly to NDP.
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