Dow Jones Newswires July 21, 2000

IMF Official Outlines Pitfalls In East Timor Aid Effort

By DAMIAN MILVERTON

WASHINGTON -- The international effort to repair the devastation in East Timor is meeting with some success but at the same time is exposing many of the pitfalls in development economics.

For Luis Valdivieso, mission chief for the International Monetary Fund, the relief effort is helping, but he shares the frustration felt by many in former Portuguese and Indonesian colony.

Much of that frustration seems to stem from the fact that for more than six months, East Timor was administered from the U.N. headquarters in New York.

The U.N., the World Bank, the IMF and a host of humanitarian agencies sought to offer hope to a newly independent nation that was conceived amid bloody reprisals by Indonesia-backed militias.

"Everybody was trying to be helpful but, in the process, a number of things were omitted, a number of shortcuts were taken, and there weren't structures of government and social participation," Valdivieso said in an interview with Dow Jones Newswires.

"Everything was being done on an urgent basis, but there was no difference between important and urgent," he said. "So there was some over-reaction, but compared with other post-conflict cases...we are a step ahead."

UN Hands Fiscal Responsibility To East Timorese

Valdivieso and his IMF team have completed a report to be presented in coming weeks to the donor nations supporting the relief effort in East Timor that outlines how their money has been spent, and what impact this aid has had.

He estimated that around 80% of the $150 million in aid pledged to East Timor has been delivered, with the rest to be paid out before the end of the year.

This money has helped restore some basic services - electricity, water, sanitation and health care - and underwritten the formation of new fiscal and monetary policy agencies, the precursors to an East Timorese finance ministry and central bank respectively.

The new Central Fiscal Authority has assumed responsibility for directing the funds earmarked for East Timor, a development Valdivieso believes will be crucial to removing the delays in delivering more effectively the aid promised by donor nations.

But there is as yet no semblance of a functioning government in East Timor and the humanitarian phase of the U.N. mission will continue until the end of the year, six months longer than originally expected.

A key factor in the delays in rebuilding East Timor, Valdivieso's assessment will show, has been that around $30 million in reconstruction financing has flowed at a trickle, constricted by U.N. authorization procedures.

Spending decisions, he said, were until this month routed through U.N. headquarters, which managed a trust fund of donor's contributions.

Red Tape Choked Spending, Marred Dollar's Debut

The approval procedures were "typical of a U.N. mission, but not typical of a government of a country," Valdivieso said.

By slowing the flow of official spending in East Timor, the U.N. unwittingly hampered efforts to win support for East Timor's new official currency, the U.S. dollar.

Valdivieso and U.N. officials remain convinced the dollar will become more widely accepted in East Timor once the U.N. and the East Timorese administration pump more official funds into the economy.

Even so, a new problem is already apparent as the U.N. and transitional East Timorese administration finally begin the process of rebuilding public services on a permanent basis.

Oddly for a nation where unemployment is estimated at a staggering 80% of the working-age population, too many people have jobs.

The well-intentioned enthusiasm of humanitarian agencies - including the U.N. and the Red Cross - has seen some 5,000 teachers, for example, placed on stipends paid for by the aid agencies and nongovernmental organizations.

Under the budget put forward for the fiscal year that began July 1, it is simply impossible to employ all the teachers and health care workers receiving stipends from these agencies.

"So, it's not expected that they will be hiring all of the people who have been receiving stipends," Valdivieso said.

"The wage was also much higher than had envisaged," he added.

Too Many Paid Too Much While Revenue Falls Short

Valdivieso and the IMF have estimated that the stipends and early wage payments to teachers are up to 50% more than the average teacher in Indonesia receives on a monthly basis.

Additionally, East Timorese are yet to begin paying for public utilities or pay much in the way of taxes.

Accordingly, the IMF's early attempts at overseeing an orderly budget process have been thwarted.

"We were expecting $4 million-$5 million in revenues in the first half of the year. It is likely that only $2 million will materialize in the first six months," Valdivieso said.

"Why? Because not all the taxes that were recommended were adopted. Second, there was a delay in introducing user fees for public utilities. They're still not in place," he said.

"The service tax, which was supposed to produce quite a bit of money in the sense that it affects hotels, restaurants - mostly used by foreigners - was only approved June 30. So it will take a few weeks still to start collecting it," the IMF official explained.

Progress is being made, however, Valdivieso pointed to the outline of a cabinet with eight portfolios. Initially, four of these departments will be managed by the U.N., the other four by the East Timorese.

Additionally, Valdivieso and the IMF have drawn up comprehensive budgets for this fiscal year and the next two periods.

Accordingly, Valdivieso believes the international effort to aid East Timor should be viewed as a success.

"The first six months had all sorts of little problems here and there. We cannot say it was a complete disaster but it could have better," Valdivieso acknowledged.

-By Damian Milverton, Dow Jones Newswires; +202-862-9272; damian.milverton@dowjones.com

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