IMPACT OF RISING FOOD/COMMODITY PRICES ON TIMOR-LESTE

UNCLAS SECTION 01 OF 03 DILI 000128

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON TT
SUBJECT: IMPACT OF RISING FOOD/COMMODITY PRICES ON TIMOR-LESTE

REF: STATE 39410

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1. Summary. While an estimated two-thirds of Timor-Leste's
population is food insecure or vulnerable to food insecurity,
the worldwide increase in food and commodity prices has not yet
led to social or political unrest in Timor-Leste. The increase
in the price of food in the first quarter of 2008 was 3.2
percent, higher than the overall inflation rate of 2.6 percent.
Timor-Leste's rural population relies on domestically-grown
staples of maize and tubers. However, the price of rice - an
important urban staple - is 40 percent higher than the historic
norm, due to increased reliance on imported rice. While rice is
grown in Timor-Leste, recent poor growing conditions and
inefficient agricultural practices mean that the country is now
dependent on imports for over half its rice supply. The GOTL's
current official policy is to stabilize the rice market by
providing 20 percent of the supply, but its uncoordinated,
erratic, and opaque approach to the problem appear to deter
private suppliers from responding to demand. Post believes that
a more rational approach on the part of the GOTL, together with
promotion of better agricultural techniques, would significantly
alleviate these conditions. End summary.

DEMAND


2. Eighty-five percent of Timor-Leste's labor force makes its
living from agriculture, and maize is the most important food
crop for 83 percent of these. However, while rice is the most
important food crop for just 13 percent of the farming
population, it is the commodity most affected by the worldwide
increase in food prices. The reason is that, to date,
Timor-Leste has maintained a practice of not importing maize -
it only imports rice. Normally, Timor-Leste produces somewhat
more than half of the approximately 100 thousand metric tons of
rice it consumes annually. However, production has been lower
the last two years owing to a combination of drought and
flooding, high winds, and locust outbreaks in the western part
of the country. As a result, imports now account for a majority
of Timor-Leste's rice consumption, and the retail price of
imported rice in Dili has risen by more than 40 percent over the
historical level of about $0.35 per kilogram. Cassava and other
tubers are also important staples and are typically substituted
for maize and rice when stocks are depleted.

SUPPLY


3. Agricultural productivity in Timor-Leste is extremely low.
While 85 percent of the labor force makes its living from
agriculture, the sector only accounts for about 30 percent of
non-oil GDP. Basic agricultural techniques, such as the use of
compost, are not widely applied, irrigation systems are poorly
maintained where they exist, the lack of threshing and drying
facilities results in a high proportion of broken rice, and
adequate storage facilities are generally lacking. In addition,
road networks are in grave disrepair, making it difficult for
farmers to get products to markets. As a result of such
structural problems, domestic agricultural production is not
expected to respond to the worldwide increase in food prices.
Rising food prices have, however, affected the availability of
food assistance, most of which is provided by the World Food
Program (WFP). As of April 2008, WFP stopped providing blanket
food assistance to 70 thousand internally displaced persons
(IDPs) - a welcome development - but is still contemplating the
closure of its office in the enclave of Oecusse due to a
resource shortage.


4. Other factors affecting supply include the above-mentioned
weather and locust outbreaks in recent years. In addition, some
humanitarian assistance provided to persons displaced by the
2006 crisis no doubt leaked on to the market at below-market
prices once the situation became more stable, as has a civil
servant rice subsidy that came into effect in mid-2007 and is
expected to last until a civil service reform program is
enacted, perhaps in mid-2008. These programs no doubt hurt the
profitability of private traders. More importantly, however,
following a shortage in February/March 2007, the Government
became extremely sensitive to rice price increases and
periodically leaked rice onto the market in an effort to
maintain price stability. As a result, private traders stopped
placing international orders and began acting only as
distributors of Government-procured rice, most of which is
sourced from Vietnam. Official Government policy has since
changed, but the general inconsistency and opacity of Government
rice policy has dampened the private traders' interest in
reengaging in the market. Finally, any sign of instability - as

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occurred with the recent assassination attempts on the President
and Prime Minister - discourages shipping companies from
traveling to Timor-Leste and results in higher shipping
insurance premiums.

POLITICAL IMPACT


5. To date, there have been no protests or instances of
violence directly related to the most recent rise in the price
of imported rice, which began in early 2008. However, the
February/March 2007 shortage was believed to have exacerbated
tensions lingering from Timor-Leste's 2006 political and
security crisis. As a result, the Government became extremely
sensitive to rice price increases and, as mentioned above, took
measures to maintain price stability. In addition, the
Government repeatedly postponed deadlines for the
discontinuation of blanket food assistance to IDPs, even in the
face of a September 2007 WFP assessment which found that IDPs
were no more food insecure than the general population of Dili.
In February 2008, the Government and WFP cut IDP food rations in
half as an interim measure before complete discontinuation,
which resulted in a very small number of peaceful protests in
selected IDP camps but no outbreaks of violence. While WFP no
longer provides food to IDPs (except as part of IDP return
packages),the Government has chosen to extend the distribution
of half rations through June 2008 using its own resources, an
indication that there may still be some concern about potential
violence. It should also be noted that since the attacks on the
President and Prime Minister, the country has been under a state
of emergency that includes a curfew.

ECONOMIC IMPACT


6. Overall, food prices in Timor-Leste have risen by 3.2
percent in the three months to March 2008, higher than the
average inflation rate of 2.6 percent for the same period. In
the year to March 2008, food prices also rose 3.2 percent,
though this was lower than the average inflation rate of 3.7
percent, driven largely by the housing sector. Within the
general category of food, prices for cereals, roots, and their
products (including rice) have risen 14.1 percent in the 3
months to March 2008. The price of imported rice in Dili is now
estimated to be 40 percent higher than the historical price of
about $0.35 per kilogram, though it is still less than the price
during the February/March 2007 rice shortage. According to WFP,
nearly two-thirds of Timor-Leste's population is food insecure
or vulnerable to food insecurity: 20 percent of the population
is chronically food insecure, another 23 percent is highly
vulnerable to food insecurity, and a further 21 percent is
moderately vulnerable. Even though rice is principally an urban
staple, and food insecurity tends to be more acute in rural
areas, the rise in prices has likely resulted in increased food
insecurity, particularly among the vulnerable.

ENVIRONMENTAL IMPACT


7. Shifting cultivation, often utilizing slash-and-burn
methods, is widely practiced in Timor-Leste. As a result, the
country is suffering from numerous environmental problems.
However, these are structural in nature and cannot be attributed
to the recent rise in prices for agricultural commodities.

GOVERNMENT POLICY RESPONSE


8. In the face of rising world prices, the Government
officially abandoned its policy of maintaining rice price
stability, as it would have cost substantially more than the $5
million for "food security" included in the 2008 state budget.
The Government is now seeking to cover only 20 percent of the
country's import requirement, leaving the remaining 80 percent
to the private sector. However, since the private sector has
not responded to this official change in policy, the Government
continues to be the principal source of imports, and many
suspect it still leaks imported rice onto the market at
subsidized prices.


9. As of mid-April, the Government had approximately 7,200
metric tons of rice in its stocks, amounting to about 6-7 weeks
of the country's import requirement. There is an outstanding
Government order for 16,000 MT of rice from Vietnam to be
delivered in April, May, and June. However, given the
turbulence of world markets and the policy responses of various
rice exporters, this is order may not be secure - i.e., it may
not come to Timor-Leste. It was reported that the Minister of

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Commerce, Industry, and Trade recently traveled to Thailand to
try to secure additional orders. International advisors have
encouraged Government policy-makers to consider placing
international orders for maize as a substitute for rice.


10. Since his return to Timor-Leste on April 17, President Josi
Ramos-Horta has publicly advocated withdrawing more resources
from the Petroleum Fund to finance additional rice imports
through the state budget. However, the size of the Government
budget has not proven to be a binding constraint to public
investment to date. The formula that sets withdrawal limits
from the Petroleum Fund provides ample room for the Government
to meet such a need, which can be incorporated into the mid-year
budget revision currently being prepared.

IMPACT ON POST PROGRAMS


12. USAID supports WFP's operation in Timor-Leste, which is
being squeezed as a result of rising food prices and the
increased demands elsewhere.

POLICY PROPOSALS


13. First, intra-governmental coordination on food security
policy in Timor-Leste, including coordination of rice imports,
needs to improve dramatically, and policy itself needs to be
more transparent and consistent. The national food security
committee is the appropriate body to lead such efforts and would
benefit from stronger Ministerial engagement. Second, the
Government should end the provision of blanket food assistance
to IDPs and target all future food assistance according to clear
and objective vulnerability criteria. This would imply an
immediate end to the civil service rice subsidy as well.
Finally, a system to track price movements of key staple
commodities should be established, and, over time, policies to
stimulate domestic food production should be considered.
RECTOR