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Page last updated at 06:07 GMT, Thursday, 31 July 2008 07:07 UK

E Timor ignores economic warning

By Lucy Williamson
BBC News, Jakarta

File image of a woman washing clothes in a refugee camp in East Timor
Rising prices and the weak dollar are hitting East Timor's poor hard

East Timor's parliament has passed a controversial budget increase of more than 120%, despite calls for it to reconsider its economic policies.

The government plans to use much of the extra money to subsidise food and fuel prices and develop the economy.

East Timor relies on gas revenues for almost all its income, and is trying to create other industries.

However, this budget has caused a lot of noise both in East Timor's parliament and outside it.

It means the government now has more than $788m (400m) to spend this year - an increase of more than 120%.

The government says it needs the money, mainly to subsidise high food and fuel prices and to ward off instability.

Opponents say these subsidies risk dampening East Timor's nascent non-oil economy.

Pressure to spend

Building other industries is seen as essential if East Timor is to develop as a stable country once the oil and gas runs out.

But in the six years since independence, governments have struggled to spend much smaller budgets than this.

Map

New reforms intended to speed up financial decisions have recently been put in place.

But critics say the pressure to spend more quickly is leading to irregularities.

The new budget will allow the government to dip into its petroleum savings by around $300m more than is sustainable.

This is the first time the government has begun to spend its nest-egg in this way.

A leaked memo from the World Bank earlier this month said the Bank was concerned at the precedent this would set.

If repeated, it would signal that East Timor was following the detrimental path set by other resource-rich countries, it said.


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