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Over-reliance on oil and gas threatens East Timor's economy

In the 12 years since independence, East Timor has experienced strong economic growth. But high inflation, unemployment and an over-reliance on gas reserves still plague the young nation, analyst Rajiv Biswas tells DW.

In May 2002, the Democratic Republic of Timor-Leste - better known as East Timor - became the youngest country in Asia to gain independence following a war with Indonesia. Violence had left the country and families torn apart, nearly 70 per cent of all buildings, homes and schools destroyed, and an estimated 75 per cent of the population was displaced, according to the World Bank.

The economy of the small independent Southeast Asian nation contracted in 2006 following a deterioration of security that led the government to request military assistance from neighboring countries and humanitarian and police assistance from the United Nations. But growth has picked up pace over the past six years thanks mostly to public expenditure, and revenue from a natural-gas reserves. However, East Timor continues to be one of the world's poorest countries.

Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, says in a DW interview that the government in Dili is facing an urgent challenge to try to diversify the economy to reduce vulnerability to oil revenues. Key strategic priorities will be to improve physical infrastructure, strengthen human capital, and develop new growth industries such as tourism, he adds.

DW: Has East Timor's economic growth over the past years fail to reach most of the population?

Rajiv Biswas: When East Timor gained independence from Indonesia, the nation had been embroiled in a protract civil war for many years that had left the population poor and devastated. After independence, economic growth was accelerated by the development of the Bayu Undan field, boosting the East Timor annual economic growth rate to double digit growth rates between 2007 and 2011.

Rajiv Biswas (Photo: IHS)

Biswas: 'Due to impact of protracted conflict, East Timor has faced difficulties in addressing high levels of poverty and malnutrition'

However, the transmission effects from the development of East Timor's oil and gas resources have not flowed through widely to the population, with much of it the population still living and working in rural areas, notably in subsistence farming.

East Timor sits at the bottom of the Global Hunger Index alongside Burundi, Comoros, Eritrea, and Sudan. Why have the economic measures taken by the government failed to tackle this problem so far?

Due to impact of protracted conflict, lack of civil administrative structures and shortages of skilled workers, East Timor has faced difficulties in addressing high levels of poverty and malnutrition. Moreover, there have been episodes of renewed civil unrest after independence which have also delayed economic development. However, efforts by the government together with multilateral institutions such as the World Bank and United Nations are gradually resulting in some progress.

What are the main political problems that are leading to such poor economic performance?

East Timor has had to rebuild its government institutions, overcome severe shortages of skilled workers as well as tackling issues such as corruption. The quality of physical infrastructure is also very weak although the government has ramped up efforts to accelerate infrastructure development. All this has resulted in slow progress in achieving economic development goals.

How long are the country's oil and gas reserves set to last and what should East Timor do to lessen its dependency on oil and gas and natural resource extraction?

East Timor remains heavily dependent on oil and gas, which currently funds around 90 percent of its annual government revenue. Oil and gas also account for around 80 percent of GDP and 93 percent of exports. However, the country is also facing depleting reserves from its major Bayu Undan oil and gas field, with reserves from this field projected to be exhausted by around 2024.

A major new field, Greater Sunrise, has still not commenced production. Therefore, East Timor is facing a difficult economic outlook as oil and gas revenues are eroded over the next decade while little progress has yet been made with economic diversification.

Why is East Timor not a member of ASEAN, and do you believe it may be accepted into the organization anytime soon?

East Timor has formally applied to become an ASEAN member in March 2011. While ASEAN member countries are supportive in principle of East Timor joining the ten-member association, there are concerns about whether East Timor would be able to meet the ASEAN Economic Community (AEC) roadmap for trade and investment liberalization by 2015, with AEC negotiations already very advanced. Therefore, there may be a significant transition timeframe before ASEAN members will agree to East Timor's ASEAN accession.

To which extent is East Timor of economic interest for regional powers such as China or Australia?

East Timor is of significant economic interest to Australia due to the oil and gas resources in the Timor Sea. Australia and East Timor negotiated the Timor Sea Treaty and set up a Joint Petroleum Development Area to allow the development of the Bayu Undan field, for which a gas pipeline has been built to bring the gas to Darwin in northern Australia. However, East Timor and Australia are currently involved in a dispute over the Greater Sunrise field, another major offshore field in the Timor Sea.

What should the government focus on in the short and mid-term to improve the living standards of its people?

Supporters of presidential candidate Francisco Guterres Lu-Olo of Fretilin Party shout slogans during campaign at Becora, East Timor, Thursday, April 12, 2012 (AP Photo/Kandhi Barnez)

East Timor has faced difficulties in addressing high levels of poverty and malnutrition, says Biswas

The East Timor government has taken the important step of creating a sovereign wealth fund to set aside some of their oil and gas revenues for the future when oil and gas resources are exhausted. However, this fund will rapidly be drawn down once oil and gas revenues stop flowing. In the meantime, an urgent challenge facing the government is to try to diversify the economy to reduce vulnerability to oil revenues. Key strategic priorities will be to improve physical infrastructure, strengthen human capital, and develop new growth industries such as tourism.

Unless the Greater Sunrise oil and gas project can get the green light soon, the East Timor economy could face a rapidly deteriorating fiscal position after 2024 and become highly dependent on donor aid as well as depleting the assets of its sovereign wealth fund, the Petroleum Fund.

Rajiv Biswas is Asia-Pacific Chief Economist at IHS, a global information and analytics firm. He is responsible for coordination of economic analyses and forecasts for the Asia-Pacific region.