Tim Dodd, Dili – With independence only a month off, how bad is the economic problem facing East Timor?

Here's an indicator. Even after two years of heavy spending by cash-rich UN workers and aid staff in Dili's hotels, restaurants and retail stores, this year East Timor's real GDP will still be less than it was in 1998, the year Indonesia's campaign of destruction caused the economy to collapse by 34 per cent.

And in the rural areas where three-quarters of East Timorese live, people are still worse off because they did not gain the benefit of the service industry revival in the capital.

In the past two years, East Timor's Dili-driven economic growth was spectacular, up 15 per cent in 2000 and 18 per cent in 2001 in real terms. But now, with independence, the numbers of highly paid international workers are on their way out, leaving East Timor with a difficult economic outlook.

This year, the International Monetary Fund projects that East Timor's real economic growth will be zero. "It's a tough year ahead," says one foreign official in Dili who has closely observed East Timor's progress towards statehood since the independence referendum in 1999.

Not only is the flow of cash from free-spending aid workers drying up. The original pledges of aid from other countries and multi-lateral organisations, worth more than $1 billion, are running out and now East Timor is competing with urgent calls for assistance from new world trouble spots like Afghanistan and Argentina for access to the international aid pot.

East Timor's problem is that there is a two- to three-year gap which has to be bridged in the Government's budgeting between the end of current assistance programs and the beginning of significant revenue from the Timor Gap gas projects. So far, East Timor's aid has been solely through grants and it will begin life as an independent nation debt-free.

The Government, led by Chief Minister Mari Alkatiri, says it wants to avoid receiving loans. But international donors, including Australia, who will gather in Dili for meetings just before the May 20 independence day, may not see it that way. Although there is willingness to offer more grants, they may not cover the full budget gap that is emerging, forcing the new country to accept loans, albeit at concessional rates.

The exodus of foreign workers is also leaving a skills gap. Half of the senior jobs in the Government are still unfilled and the UN is to bear the cost of 100 foreign managers who will remain after independence. It is asking other donors to fund 200 more.

But many East Timorese would rather be without them. Ten locals could be employed for the cost of one foreigner, complains Soraya Beatrix Soares, a university-educated East Timorese who returned from Java with her architect husband to join the new country. Her husband is working on a school building project funded by the World Bank.

She says she realises that East Timorese don't have all the skills but believes locals could have done more in the reconstruction projects under supervision and thus acquired more expertise.