2000 International Monetary Fund

Ordering Information

Donors' Meeting on East Timor

East Timor - Establishing the Foundations of Sound Macroeconomic Management   East Timor
Establishing the Foundations of Sound Macroeconomic Management

Luis M. Valdivieso, Toshihide Endo, Luis V. Mendonca, Shamsuddin Tareq, Alejandro López-Mejía

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Acronyms and Abbreviations
East Timor: Basic Social Indicators
I. Introduction and Background
II. Economic Developments and Institutional Set-up
Prior to the Referendum
  Output, Prices, Employment, and Wages
Financial Sector
Public Finance and Administration
External Sector
III. Immediate Impact of the Post-Referendum Violence
  Output, Prices, Employment, and Wages
Financial Sector
Public Finance and Administration
External Sector
IV. Strategy to Establish a Sound Macroeconomic Framework
  Monetary and Financial Aspects
Public Finance and Public Administration Aspects
Decision-Making Structure
Technical Assistance Program
V. Developments Since September 1999
  Output, Prices, Employment, and Wages
Banking and Payment Systems
Public Finance
External Sector
Economic Legislation and Institution Building:
    The Role of Technical Assistance
VI. Macroeconomic Outlook for the Near Term
  Output and Prices
Budgetary Outlook
External Financing Requirements
Scope for Deepening Dollarization and Developing the
    Banking and Payments System
Scope for Strengthening Fiscal Management
Scope for Improving the Decision-Making Structure
VII. Immediate Challenges and Concluding Remarks
Appendix: East Timor—The Role of the World Bank and the
    Asian Development Bank
  1. The Timor Gap Treaty
  2. Steps to Normalize Relations Between East Timor and Indonesia
  3. Preliminary Budget for the Year 2000
  4. Main Sources of External Financing
  1. Aggregate Supply and Demand Indicators
  2. Price, Monetary, and Banking Indicators
  3. Fiscal Indicators
  4. External Sector Indicators
  5. Indonesian Rupiah/U.S. Dollar Exchange Rate Developments in Dili
  6. Average Wages vs. GDP per Capita
Appendix Tables
  A1 East Timor: Key Economic Indicators
A2 East Timor: Real GDP by Sector
A3 East Timor: Monetary Survey
A4 East Timor: Distribution of Commercial Bank Credit
A5 East Timor: Consolidated Budgetary Operations
A6 East Timor: Consolidated Revenue
A7 East Timor: Balance of Payments
A8 East Timor: Balance of Trade
A9 Fiscal Accounts for the East Timorese Administration

I.  Introduction and Background
This report provides an overview of the economic and institutional developments in East Timor up to September 1999 and the immediate impact of the violent events that followed the August 30, 1999, referendum to decide the future status of East Timor. It then presents the key elements of the strategy recommended by IMF staff to the United Nations Transitional Administration in East Timor (UNTAET) to rebuild the institutions needed to support economic activity and public administration, including external financing requirements, technical assistance, and training needs in the area of macroeconomic management. Finally, the report assesses the status of implementation of the strategy, and discusses the steps that should be taken to ensure that the strategy will help East Timor to prepare to face future challenges.

East Timor was under Portuguese rule for more than four hundred years through 1975, when it was annexed by Indonesia. Following an agreement among the UN, Indonesia, and Portugal on May 5, 1999, a referendum was held on August 30, 1999, on the future status of East Timor. Four-fifths of the citizens of voting age voted in favor of independence. This outcome triggered widespread violence, which resulted in damage and destruction of property, the displacement of about two-thirds of the population, and the loss of many lives.

On September 21, 1999, a multinational peace-enforcement mission (INTERFET) arrived in East Timor to restore security and facilitate humanitarian relief efforts. The United Nations Mission to East Timor (UNAMET) was entrusted with the task of overseeing the humanitarian relief effort. On September 29, 1999, the World Bank coordinated a donors' conference in Washington, with the participation of the National Council of the Timorese Resistance (CNRT) and representatives of the Indonesian government. At that conference it was decided that there would be a joint mission of all multilateral and bilateral assistance agencies to be led by the World Bank that would assess the economic and social situation in East Timor and help to coordinate more effectively the international effort to assist East Timor. Subsequently, on October 20, 1999, the People's Consultative Assembly of Indonesia revoked the decree of annexation of East Timor, and five days later, the UN Security Council issued a resolution establishing the United Nations Transitional Administration in East Timor (UNTAET) with broad responsibility for the administration of the territory of East Timor during its transition to independence.

On October 22, 1999, in response to a request from the United Nations Secretary General, the Executive Board approved a proposal for IMF staff to field a mission to East Timor, and for the IMF to provide technical services in its areas of expertise. With this mandate, during the October 26­ November 21 period, an IMF mission visited Dili to prepare a macroeconomic assessment and provided advice on how to develop a macroeconomic framework for guiding key policy decisions. The mission coordinated its work closely with the World Bank-led Joint Assessment Mission (JAM). A summary of the IMF mission findings was presented to an informal IMF Executive Board meeting on November 22, 1999, and to a donors' meeting held in Tokyo on December 17, 1999. Since then, the IMF staff has had a permanent presence in Dili by means of sequential missions, and there have been four technical assistance missions on fiscal and monetary matters, involving the IMF's Fiscal Affairs Department (FAD) and Monetary and Exchange Affairs Department (MAE). In addition, the IMF has provided technical support and financial assistance (through an administered account) for recruiting qualified staff for top positions in the key economic institutions.1

Since mid-November 1999, UNTAET has been led by Mr. Sergio Vieira de Mello, the Special Rep-resentative of the Secretary General of the UN for East Timor (SRSG). UNTAET established the National Consultative Council (NCC) to be a forum for reaching consensus on all policy matters and it helped to address a serious power vacuum that had arisen from the destruction of the normal structures and systems of government. The NCC consists of 15 members: four from UNTAET, including the SRSG; and 11 East Timorese, comprised of seven from the pro-independence movement, one from the Catholic Church, and three from the pro-autonomy faction.2

1A summary of the role of the World Bank and the Asian Development Bank (AsDB) is presented in Appendix 1.
2One of the seats for the pro-autonomy faction is still vacant. In the remainder of this paper, the East Timorese members of the NCC together with other key figures of the CNRT and the church are referred to as the East Timorese leadership.