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On the other hand, withdrawals from the PF both the Estimated Sustainable Income ESI and excess withdrawals and financing through loans will increase demand in
the year that such expenditure occurs, which will cause inflation. In the case of loans, this will be followed by a negative impact on overall demand in the future
when the Government begins to repay the loans.
2.7.2: ESI and Excess Withdrawals
The ESI can be thought of as the amount that can be withdrawn from the PF each year, forever, without the fund ever running out of money. The ESI is equal to 3 of
the net petroleum wealth and is 544.8 million in 2016. Further details on the ESI and petroleum wealth can be found in Section 2.6.3 of the Budget Book.
In addition, the Government plans to withdraw 739.0 million in excess of the ESI. This e ess ithd a al is i li e ith the Go e
e t’s poli on frontloading, and a detailed justification can be found in Annex 4.1. These excess withdrawals are being
used to finance core infrastructure, which is necessary for long-term growth.
2.7.3: Loans
In order to finance major infrastructure projects, the Government has a choice between taking loans and withdrawing excess amounts from the Petroleum Fund.
Withdrawing money from the Petroleum Fund, instead of taking loans, reduces the Fund balance, and potential interest earnings. Over the past few years, the
Government has adopted a prudent policy of using concessional loans with grace periods from development partners, because such loans have a number of
advantages for Timor-Leste. Loans allow greater budgetary flexibility, and in particular, reduce pressure
upo a o e ea ’s udget e elope. The Government will take loans to finance infrastructure projects when the financial
cost of borrowing is lower than the return on the Petroleum Fund. The Government is well aware of the potential disadvantages of excessive indebtedness, and has
ensured that all loans agreed to date have a cost of borrowing below the return on the Petroleum Fund as stated in the Public Debt Law, thus ensuring that the future
debt
epa e ts e ai ell ithi the ou t ’s apa it to pay. To date five there have been 5 Loan Agreements for financing road projects. They
are all for upgrading and strengthening arterial roads, these are:
x Road Network Upgrading Project RNUP of Dili-Liquica and Tibar-Gleno signed by GoTL and Asian Development Bank ADB in 2012
x Road Upgrading Project of Dili-Baucau signed by GOTL and JICA in 2012
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x Road Network Upgrading Project RNUSP of Manatuto-Natarbora signed by GOTL and ADB in 2013
x Road Climate Resilience Project of Dili-Ainaro signed by GoTL and World Bank in 2013
x Tasitolu-Tibar Dual Carriageway Road Project signed by GoTL and ADB in June 2015.
a. Road Network Upgrading Projects of Dili-Liquica and Tibar-Gleno
The focus of this loan project is for upgrading the Dili-Liquica and Tibar-Gleno roads. The Dili-Liquica road is the road in the inter-urban network with the highest level of
traffic. The Tibar-Gleno road is important in that it is a main coffee production route.
Two loans have been utilized from the ADB: the first from the Ordinary Capital Resources OCR of 30.9 million and the second from the Asian Development Fund
ADF of 9.2 million
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. OCR is a LIBOR-based lending instrument with respective maturity and grace period of 25 years and 5 years. The ADF loan has a grace period
of eight years and maturity of 32 years. The rate of interest for the OCR is equal to LIBOR rate plus 0.4 per annum and for ADF is fixed at 1 per annum during the
grace period and 1.5 thereafter. The agreements were signed on 2 May 2012 and became effective on 13 June 2012.
b. Road Upgrading Project of Dili-Manatuto-Baucau
This section is an important road connecting three main cities in the northeast of the country. The road works will upgrade a total of 116 Km. The Loan Agreement with
Japan International Cooperation Agency JICA was signed in March 2012 and is for JpY 5,278 million
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. The loan has a grace period of 10 years, maturity of 30 years and annual interest rate of 0.7 for construction works and 0.01 for other consultancy
services.
c. Road Climate Resilience Project of Solerema-Ainaro
This section is an important road connecting the main cities in the central region to the southern regions of Ainaro, Covalima and Manufahi. A sum of 40.0 million has
been borrowed from the World Bank for this project. The loan was signed in November 2013 and procurement has been completed.
15
As the loans are denominated in Special Drawing Rights SDR the dollar values are subject to small variation.
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USD 63.3 million, based on the exchange rate of 83.38 JpY per dollar as of the date of signing the loan.
