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East Timor: Advice, warnings greet newest IMF member
15 August 2002
Two very distinct welcomes have greeted the newest member of the International Monetary Fund (IMF): free-market advice from the Fund and World Bank and warnings from civil society groups about who controls its money.
The Democratic Republic of East Timor, the world's newest country, officially signed on with the two financial institutions this week, making it eligible for funds from the donor community and the Bank. The former Portuguese colony -- annexed by Indonesia in 1975 -- became independent May 20.
Even before the signing, a controversy had emerged over who should control the hundreds of millions of dollars that donors have pledged to the island nation of less than one million people.
The money went to the World Bank, which collects and disburses aid to members, but leaders in the capital Dili say they want the United Nations to keep the funds because they fear the IMF and World Bank would only make it available with strings attached.
The leaders and anti-debt activists believe the UN is more likely to allow East Timor to take the money in the form of unconditional grants rather than loans. The Bank and the Fund, they charge, would favour loans that would saddle the fledgling government with long-term debt.
"East Timor's sovereignty was hard fought for and we hate to see it diminished," said John Miller, media coordinator with the East Timor Action Network (ETAN), a US rights group. "A small country like that would have very little leverage against big institutions like the World Bank and the IMF," he added. "They really do not want to mortgage their future."
But IMF Managing Director Horst Koehler said the nascent South East Asian nation faces many economic difficulties and he saw only one path out of its hardship: working with the IMF.
"East Timor's transition to independence has been impressive, yet the future holds many challenges. East Timor begins its life as one of the world's poorest countries," he said.
To turn that around, the IMF chief said, the transitional government in Dili must follow "sound economic management, in order to establish the conditions for economic growth and stability, not least, by harnessing the benefits of future oil and gas revenues". Donors agree that East Timor will receive money in the form of grants for the first three years of the new country's life. After that, if the government requests money it will most likely be given as concessional or 'soft' loans.
By 2004 the country is expected to be generating about 70 million dollars a year in oil and gas revenues form sizeable offshore reserves.
Anti-debt activists, distrustful of the records of the IMF and World Bank in debt-ridden nations, immediately warned that giving them greater control could land the country in debt, the fate of other poor nations.
At least for the next few years, the economy will need to rely on technical and financial assistance from the international community, making the country vulnerable to conditions imposed from outside, says East Timor-based 'La'o Hamutuk'.
On its website, the group says it has investigated several World Bank projects and found their planning and execution wanting. The role that the Bank and IMF played in Indonesia also does not bode well for the new country, it adds.
Relations between the IMF and Indonesia broke down after the 1997 Asian economic crisis, when the Fund insisted that the state sell its assets to attract private investment.
But the IMF and the Bank say they are simply helping the country towards financial stability, "through an open and market-based economic system", and say that they have already helped shape the country's economy.
It was the IMF, for example, that led efforts to make the US dollar East Timor's official currency during the reconstruction period, perhaps its most controversial public role thus far in the territory.
The Fund was also behind the establishment of the Central Fiscal Authority (CFA), which is designing the new government's overall fiscal strategy.
In addition, the IMF urged Dili to levy taxes on revenues from coffee, hotels, and restaurants and to fix low wages for East Timorese civil servants in order to keep spending in line. After East Timor declared independence, donors met in Dili in May and pledged money to help meet a projected budget shortfall of around 90 million dollars for the next three years.
The Bank says it is best placed to manage the donor's money and set up safeguards to ensure that taxes are collected efficiently and the revenues and donations are used for their intended purposes.
But these are the very same conditions that civil society groups fear. "East Timor is too poor for the world community to impose any kind of conditions even within concessional loans," said Miller.
Half of the country's budget goes toward health and education, he said, adding he was concerned the IMF could later force cuts on that spending.
"If you look at most countries that have suffered under IMF conditions, those are the first areas [health and education] that the Fund urges be cut so that some money can be freed up to pay off foreign lenders," Miller said.
Earlier this month, the impoverished nation suggested to the United Nations that it be designated a "least developed country" (LDC), a status given to the poorest countries in the world that provides some preferential trade and aid treatment.
In a study released in June, the UN Development Programme (UNDP) said that East Timor would be among the world's poorest nations. Its human development index - based on life expectancy, education and income per person - is on par with three LDCs: Angola, Bangladesh, and Haiti.
Emad Mekay, Washington