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Spinning straw into gold
La'o Hamutuk - November 23, 2016
The article, which draws on government, World Bank and IMF sources, portrays a rosy outlook for the future of Timor-Leste's economy. Unfortunately, by quoting out of context and ignoring key underlying realities, they paint a surrealistic image very different from the reality facing Timor-Leste as our oil revenues end, investments produce limited income, and planned state spending threatens to exhaust our savings in 10-12 years.
Any government entering an election cycle will spin the facts to convince voters that they are doing a good job. In a parliamentary democracy, most politicians' planning horizon doesn't extend beyond the next election. However, we hope that Timor-Leste's decision-makers don't believe their own propaganda, which could lead them not to adopt policies which would advance urgently-needed, sustainable, equitable economic development. Our people – especially the half-million who still live in poverty – deserve better than that.
The government press release quotes the World Bank's October East Asia and Pacific Economic Update: "Timor-Leste is facing an outlook starkly different to its recent past. Previously one of the most oil-dependent countries in the world, it could become a post-oil country in as little as five years' time.... [The Government's] reform efforts are beginning to show results, with a pipeline of Foreign Direct Investment emerging... In 2016 and 2017, domestic growth is expected to continue in a similar range as the last two years, with growth forecast at 5.0 and 5.5 percent, respectively."
However, the same World Bank report also says "Development of the domestic economy will be essential. With no new oil fields under development and current wells depleting rapidly, Timor-Leste is expected to be a post-oil country in as little as five years' time. Oil production, exports and gross value added from the offshore oil sector will decline rapidly each year for the next few years.... Timor-Leste must employ its finite resource effectively and implement key reforms to support a more diversified economy.... A combination of marginal investments and high costs also raise important questions of the quality and prioritization of the [infrastructure] investment program.... Achieving the best results in terms of long-lasting economic and social impacts will require an effective management of the public investment program to ensure that projects are prioritized that have a high return and support steady and rapid progress along a viable path of economic development. This task requires careful planning, backed up by solid analysis."
The government also quoted a November press release from the IMF: IMF Concludes Staff Visit to Timor-Leste: "Economic activity in Timor-Leste is expanding at a satisfactory pace, and is likely to maintain the momentum into next year... the near-term outlook remains generally favorable with a continuing non-oil growth recovery accompanied by low inflation."
However, the IMF goes on to say "The medium-term outlook however depends critically on economic diversification as oil fields in operation are expected to be depleted by around 2020.... As projected withdrawals from the Petroleum Fund are above the estimated sustainable income levels, the PF balance is expected to decline over the medium-term.... Public investment should be better prioritized, focusing on projects with higher returns determined by rigorous investment appraisal."
The Government's press release cites its own Budget Overview that the "non-petroleum sector accounted for 39% of Timor-Leste's real Gross Domestic Product in 2014, and that real non-oil GDP grew by 5.9%." Although this is technically correct, it conceals two key points:
'Non-oil' GDP is an increasing portion of total GDP not because of improvements in non-petroleum sectors, but because oil GDP dropped by 40% in 2014. The petroleum sector is shrinking rapidly as oil and gas fields are used up. Total GDP dropped by 28% in 2014, so non-oil GDP is now a slightly bigger slice of a much smaller pie.
The largest parts of 'non-oil' GDP – and virtually all of its growth – are financed by government spending. Inflation-adjusted Government spending in 2014 was 23.2% higher than it had been in 2013, and more than 90% of it was financed from oil and gas income.
La'o Hamutuk has concerns about GDP as a measure of economic performance (it shows how people with money are doing, and leaves out those who have little). Nevertheless, we made a graph to illustrate the relative size of petroleum and non-petroleum GDP over the years. The figures for 2003-2014 come from the Government's latest National Accounts report, while 2015 is the preliminary estimate done by the IMF earlier this year. For 2016 through 2021, this graph shows projections by the IMF, which assume that inflation-corrected, 'non-oil' GDP will grow between 5.5% and 6.5% every year.
However, La'o Hamutuk believes that the IMF projections are overly optimistic for two reasons.
Their
oil sector GDP is based on outdated information. In the proposed 2017 budget,
the government reduced its projections for future oil revenues by half,
and this will cause the dwindling oil sector GDP to fall even faster.
Most
'non-oil' GDP growth is driven by government spending (90% of which comes
from oil money).
If you leave out construction and public administration, the growth in the non-oil GDP sectors which are not primarily reliant on government expenditures has barely kept up with inflation and population growth.
La'o Hamutuk used Government projections of oil revenues and state spending to make our own projections for oil and non-oil GDP. The contribution of the petroleum sector is already very small, and it becomes negligible after 2017. The Government projects that its spending, which grew an average of 18% per year from 2009 to 2014, will be the same in 2021 as in 2016, although it will be higher in intervening years. Although our analysis assumes a 5% annual real growth in the non-government part of 'non-oil' GDP, we conclude that total GDP per capita in 2021 will be $1,031 per person per year (in 2010 dollars), or $4.75 per person per day in 2021 dollars, about one-fourth of what it was from 2006 to 2013.
The IMF's more optimistic formula expects $6.46 per person per day in 2021 dollars, which, if shared equally, is enough to bring every Timorese person slightly above the poverty line, but still not enough to enjoy a comfortable life. However, if the current pattern continues – with most economic activity primarily benefiting a small fraction of our people – poverty could be even worse than it is today.
We agree with the statement in the Government's press release and Program which says that "it is urgent we diversify our economy [by focusing on] expanding and modernizing the agriculture sector, building a thriving tourism sector, encouraging much higher levels of private sector activity and activating industries, including the growth and expansion of small and micro businesses." Last month, the Ministry of Finance told Parliament that agriculture (hunger and malnutrition), health, education, water/sanitation, basic infrastructure and the election are the government's "national priorities" for 2017.
While La'o Hamutuk wishes that this was true, the proposed 2017 budget allocations tell a very different story. Education and agriculture spending in 2017 will be lower than any year since 2012, and health, water and rural infrastructure continue to be neglected. The big-ticket items, costing hundreds of millions of dollars, are Tasi Mane's highway, airport and supply base, ZEESM, Dili airport and Tibar port, none of which are likely to provide economic and social benefits for most of Timor-Leste's people.
Every country's government cherry-picks facts and spins stories to paint itself in a positive light. It is the role of civil society groups like La'o Hamutuk – as well as journalists, academics, development partners and ordinary citizens – to hold them accountable to the truth, as we have tried to do in this article and in our submission and presentation to Parliament.
More importantly, it is the responsibility of Parliamentarians, technical civil servants and conscientious political leaders to ensure that public relations claims intended to mislead do not get implemented as policy mistakes which damage the future of Timor-Leste's children. We hope that they are up to the task.
Source: http://laohamutuk.blogspot.com/2016/11/spinning-straw-into-gold.html.
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