During the last few years, Timor-Leste’s state expenditures have grown rapidly. Bayu-Undan oil production has passed its peak, Petroleum Fund investments are returning less than we would hope, our private-sector economy remains tiny, prices and population are rising, and we are taking out foreign loans. If we continue on this path, by 2022 our Petroleum Fund will be empty, our oil will be almost gone, we will be repaying the principal on infrastructure loans, and twice as many young people will be entering the work force as today. Our non-oil economy may be larger than it is now, but it will almost certainly not be able to provide revenues to cover our expenses.
Timor-Leste is heading toward financial disaster. With the conservative assumptions in the above graph, we will be spending more than we receive from petroleum and investment income in two years, and will have used up the entire Petroleum Fund in ten. How will we able to pay for public services like education, health care, local infrastructure, police, courts and public administration? How will old people and veterans live when there is no money for cash transfers?
As frightening as the above graph is, it is more optimistic than current reality:
- The state budget has actually gone up by more than 40% per year since 2010 (34% in 2012), but the graph assumes annual increases of only 14% after 2013, and 11% after 2025,
- Domestic revenues have increased 16% per year since 2010 (12% in 2011), but the graph expects them to go up by 25% per year after 2013, which will require both rapid economic growth and increased tax collection.
- Even though Timor-Leste and the oil companies have not yet agreed on how to develop the Greater Sunrise gas field, the graph assumes that Sunrise is developed soon with a pipeline to Timor-Leste and an LNG plant in Beaçu paid for by the companies.
- The graph assumes that investing the Petroleum Fund will earn 4.0% annual return, even though its best returns so far have been around 3.6%.
- The graph assumes only the loans discussed in the 2012 State Budget, none after 2016. The borrowed money is considered as part of State Revenues and expenditures (i.e., projected budgets aren’t enlarged by borrowed money), although loan repayments are added to state expenditures.
- After the Petroleum Fund is exhausted, the State will have an annual budget gap, as shown by the red line. The graph does not include repayments if this deficit is filled with borrowed money.
- The graph is in nominal dollars – that it, it does not consider inflation. If prices in Timor-Leste continue to rise at recent rates of more than 15%/year, the State Budget will probably go up even faster.
However, nobody will lend Timor-Leste that much money, especially since we will have shown that we are incapable of managing it. The more likely scenario is that in 2018 the state will be unable to cover its budget and pay back existing infrastructure loans, and we will be forced to drastically cut education, health care, public sector salaries, infrastructure maintenance, and all other services. Poverty will increase, we will not have money to import our everyday needs, and people will starve.
If we do not change our direction, and soon, we are likely to end up where we are headed.
La’o Hamutuk is sad that Timor-Leste is using up its oil and gas wealth so quickly, and does not want our country to rush over this cliff. We hope we have made a mistake in this analysis, and we encourage you to test this model with your own assumptions. Please download the spreadsheet that generated these graphs and tell us where we went wrong. Thank you.
Addendum, 24 March 2012: The spreadsheet model mentioned in the previous paragraph includes cells (B16 through B29 on the "DATA" worksheet) where you can change assumptions -- state expenditures growth rate, domestic revenues growth rate, return on Petroleum Fund investments, whether Greater Sunrise is developed, and borrowing to fill the budget gap -- to see how they affect the outcomes. As originally posted, the assumptions included were as mixture of those in the two graphs above, which confused at least one reader. We have reposted the Excel file with the assumptions as listed in the first graph above, which are more optimistic. If you want to make it closer to recent actual figures, you can replace the numbers in these cells with those described in the second graph, or with any others you want to explore.
Addendum, 30 May 2012: In response to comments that we were too pessimistic, we re-calculated this model using more optimistic assumptions of future oil selling prices. These imprudent projections, described in another blog posting, extend the Petroleum Fund's life for less than a decade.