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Democratic Republic of Timor-Leste and the IMF

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The Bank and the Fund's Perspective -- Some Lessons of the First Year of Official Multilateral Cooperation and Assistance to Help Rebuild East Timor

REMARKS BY LUIS M. VALDIVIESO

Asia and Pacific Department
International Monetary Fund
Prague, September 24, 2000

Ladies and Gentlemen: It is my pleasure to summarize for you on behalf of the Bank and the Fund some important lessons that we have learned during the first year of assistance to help rebuild East Timor.

1. Close coordination of external assistance efforts from the outset has proven to be very helpful. The relief assistance effort was orchestrated first by the UN Office for the Coordination for Humanitarian Assistance (OCHA) and permitted the preparation of a consolidated appeal for support. Subsequently the coordination of such activities was assumed by the humanitarian module of UNTAET. This coordination effort covered not only UN agencies but also NGOs who were funding their operations with bilateral assistance. The Bank took the lead in the coordination of reconstruction and development assistance. The Joint Assessment Mission (JAM) of October 1999 provided a first cut assessment of needs and proposed sectoral strategies. The JAM brought together the views of various groups representing the East Timorese civil society at large, multilateral official agencies, and representatives of bilateral donors and humanitarian assistance institutions. The IMF contributed to this effort by sending a concurrent mission which conducted a macroeconomic assessment and proposed a strategy for establishing the foundations of sound macroeconomic management. This multilateral coordination effort culminated in the Tokyo donors' meeting gin December 1999 and the establishment of two trust funds, an IDA-administered Trust Fund for East Timor amounting to US$170 million, more than half of the financial resources for reconstruction, and a smaller UNTAET Trust Fund to cover recurrent expenditures and capital expenditures of the civil administration and justice sectors. Coordination of bilateral assistance was facilitated by the Bank and a Donors Coordination Unit of UNTAET. On hindsight, the efforts to coordinate assistance have helped to (i) reduce the scope for duplicate requests for assistance to address particular needs; (ii) bring together the views of various participants about the size and prioritization of needs and the sequencing in which they should be addressed; (iii) lower the demands by foreign experts on the time of a limited number of East Timorese technical counterparts; and (iv) provide the transitional administration with a basic institutional structure and a simple macroeconomic framework to guide decision making, and ensure proper accountability and transparency in the management of financial resources made available to East Timor.

2. A simple and easily enforceable legal and regulatory framework must be developed rapidly as it reduces uncertainty. The UN Security Council resolution that created UNTAET contained provisions that allowed for the applicability of Indonesian law in East Timor unless otherwise modified by regulations to be issued by the Transitional Administrator. Since then several regulations affecting a number of key areas have been issued and the Bank and the Fund have contributed to their design and have helped UNTAET in forming consensus with the East Timorese leadership on the desirability of number of regulations, especially those in the economic sphere. UNTAET has pursued a very active information dissemination strategy and a gazette comprising all the new regulations is being published regularly. As East Timor moves towards independence it will be very important that the approach continues to be very pragmatic and that the design of the legal and regulatory framework be kept simple but sufficiently comprehensive to minimize the scope for discretion in their applicability.

3. A clear delineation of the lines of authority, responsibilities and obligations within and between decision-making and consultative bodies is a necessary precondition for an expedient implementation of policy. The initial experience gained from the interaction between UNTAET's Governance and Public Administration Department and the National Consultative Council confirms that a participatory and consensus-building approach to policy formulation has positive net benefits. Such benefits could have been greater, however, if there had been in place a structure akin to the Executive branch of any well established government. It is only recently that a Cabinet structure has been created with East Timorese representatives assuming leadership positions in half of the cabinet offices. While some cabinet offices have already well defined functions, rights and responsibilities, (e.g., finance) others must quickly move to develop such blueprints if they want to provide useful inputs in the process. The NCC is also in the process of being replaced by a National Council with a much broader representativeness of various non-political groups of society. The Bank and the Fund will continue to provide policy advice and technical assistance to these important bodies.

4. The establishment of key institutions must receive priority and allocated sufficient resources to be adequately staffed. The Bank and the Fund have focused their technical support in the development of the Central Fiscal Authority (CFA) and the Central Payments Office (CPO) and these two key institutions have become almost fully operational in a relatively short time. The process has not been easy, however, particularly because the UN budgetary allocation for key managerial positions has not been sufficient to attract the expertise required by these highly specialized positions. While the issue has been addressed thanks to additional generous assistance from donors, including some channeled through the Bank and the Fund, the risk of delaying the staffing for these institutions is that the experts will have less time between now and independence to help build up a virtually non-existent indigenous managerial capacity in these areas.

5. A basic macroeconomic framework does not need to be complex to facilitate sound decision making. The framework being implemented with the collaboration of the Bank and the Fund relies on market forces for the allocation of resources in the economy, while focusing on the building blocs for the establishment of sound banking and payments systems and a sustainable fiscal stance. The overall strategy is described in a paper that was circulated earlier today. I will focus here on some of the lessons learned in the process of implementing the strategy adopted.

    a. Payments and banking facilities must be restored quickly but with due regard for efficiency and competition. The first step in restoring the payments system in East Timor concerned the adoption of a legal tender. Under the circumstances and after considerable debate, the decision to adopt the US dollar was a step in the right direction. However, its use so far has been limited. Based on the experience from the first semester, it is clear that key to the dollarization of the economy will be a more timely and effective execution of the budget, additional efforts at educating the population in the use of the legal tender, and improved availability of low denomination U.S. notes and the introduction of coins. All these issues are being addressed and the use of the dollar is progressively increasing. Foreign exchange and banking activities are also emerging quickly. It has taken some time to make the Central Payments Office (East Timor's Payments and Banking Authority) operational, and to develop a simple regulatory framework. However, the delays in setting up a regulatory framework have not inhibited the development of some banking activities. In a few minutes we will have the opportunity to listen to the representative of the Banco Nacional Ultramarino that has been operating in Dili since December 1999. However, it remains true that the lack of a regulatory framework has discouraged other participants to enter the market and it has not been until recently that additional intermediaries have decided to apply for licenses.

    b. The adoption and enforcement of a basic but sustainable fiscal framework (including a simple to administer tax system, a consolidated budget, and appropriate fiscal management and oversight) is critical to ensure stability. The surrender of monetary independence resulting from the adoption of a foreign currency as a legal tender assigns to fiscal policy the responsibility for the management of aggregate demand and ultimately for economic stability. In this vein, the Bank and the Fund made special efforts to help UNTAET develop a preliminary budget, however rudimentary, from the outset, to guide expenditure decisions. Although the implementation of the preliminary budget for calendar year 2000 presented to donors in Tokyo in December 1999 was not without problems during the first 7 months of the year, the lessons learned were duly reflected in the preparation of the first consolidated budget for FY 2000/01 presented to donors in Lisbon in June 2000 and approved later in the same month. The adoption and enforcement of a budget provides a clear signal of the intention of UNTAET and the East Timorese leadership to adhere to a framework of transparency and accountability. As will be explained later by the UNTAET representatives there are already some pressures on the budget both from the revenue and expenditure side, but we remain persuaded that there is the will not to compromise fiscal sustainability.

    c. The timing of relief operations and the initial steps of reconstruction must be closely synchronized. There has been the perception that the implementation of the reconstruction process has taken longer than anticipated to take off. However, some delays should have been expected given the drawn out stages of investment projects. This perception could have been changed had there been a more closer synchronization between the execution of the relief programs and the initial reconstruction and rehabilitation projects. Such a task, however, was very difficult mainly because a significant portion of the relief effort was conducted by bilaterally-supported agencies which are outside the direct control of the transitional administration. The pace of reconstruction is now being accelerated as the planning cycle for investment projects is ending. The speed and quality of the reconstruction process should also be enhanced with the recent delegation of expenditure management to line departments, some of which are managed directly by East Timorese.

    d. The responsibility for the administrative and financial management of public resources must be assigned to the country's fiscal administration as early as feasible. The complex administrative procedures for the use of the UN Trust Fund resources encountered during the first 7 months of 2000 should be overcome with the enhanced financial management capacity which has been in place since early July and that will be guided by the provisions and procedures of the budget law approved in late June 2000. Following a long process of discussions within the UN, the East Timorese Treasury will momentarily assume full administrative responsibility over the UN Trust Fund. The transfer of responsibilities should help ensure a timely and effective budget execution.

6. Ownership and direct responsibility for the implementation of the reconstruction strategy by the East Timorese is essential for success. The success of the reconstruction effort, in general, and the strategy to establish the foundations of sound macroeconomic management in particular, depends most critically on the extent to which the East Timorese leadership and the civil society at large identify themselves with the objectives and associated strategy. It is clear that the East Timorese are becoming more actively involved in all stages of the process of rehabilitation and reconstruction, including the design and formulation of objectives and policy priorities, their implementation and monitoring. It is also noticeable that there is an increasing policy dialogue among the East Timorese, and between the East Timorese and the international community, as well as an intensive information campaign. Efforts at enhancing the participation of East Timorese is decision making and the policy dialogue should be intensified, especially as the date for the transfer to self rule becomes closer.


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