IMF Executive Board Concludes 2021 Article IV Consultation with Timor-Leste

WASHINGTON, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Timor-Leste.

Timor-Leste has been severely affected by the pandemic and by recent floods. Despite early success in containing the propagation of COVID-19, the recent surge in cases combined with the floods in early April will result only in a modest economic recovery in 2021. Real non-oil GDP growth in 2021 is projected at 1.8 percent, driven by higher government spending, rebounding private consumption, and the vaccination rollout that began in April. The current account deficit will continue to increase as oil revenues decline. Inflation is projected to pick up, reflecting the increase in government spending and in energy prices. Real non-oil GDP growth is projected to stabilize at around 3 percent in the medium term, as structural constraints weigh on growth potential.

In the near term, the focus should be on accelerating the ongoing rollout of vaccines and on providing relief to the most vulnerable. Once the pandemic is well contained, regaining a more solid fiscal footing should be a priority in order to preserve fiscal and external sustainability. Expenditure rationalization and revenue mobilization should underpin fiscal reforms. Structural reforms to improve the business environment, strengthen governance, raise labor productivity, and increase financial deepening, including through harnessing digitalization, would help promote private sector development, create jobs, and diversify the economy. Strengthening disaster risk management and preparedness is also crucial, given the country’s vulnerability to climate shocks.

Executive Board Assessment[2]

Executive Directors welcomed the authorities’ response to mitigate the impact of the shocks from the COVID-19 pandemic and floods. Directors noted that while a modest recovery is expected, significant challenges prevail, including the uncertainty from the pandemic. They emphasized that the immediate focus should be on accelerating the ongoing vaccine rollout and supporting the most vulnerable. In the medium and long term, policies are needed to support fiscal sustainability, develop the non-oil private sector economy, and generate jobs.

Directors welcomed the strong fiscal package to mitigate the adverse impact of the pandemic and floods and emphasized the need to report government spending in a transparent manner. They noted that once the pandemic abates, priority should be given to putting the fiscal position on a more solid footing. Given the drying up of active oil fields, fiscal consolidation should be underpinned by revenue mobilization and expenditure rationalization. This should help reduce excess withdrawals from the Petroleum Fund and secure fiscal sustainability. Directors encouraged that a medium-term fiscal reform strategy should be laid out in the 2022 budget.

Directors emphasized that ongoing reforms to strengthen public financial management are necessary to improve the quality of spending and enhance the fiscal framework. They recommended that public investment projects focus on high-return projects by making them subject to thorough cost-benefit analysis, including the Greater Sunrise project, and that the basic public financial management law is aligned with international best practices.

Directors underscored that structural reforms are needed to promote economic diversification, develop the private sector, and create jobs. In this context, they called for measures to improve the business environment, strengthen governance, raise labor productivity, increase financial deepening, including through harnessing digitalization. They also noted that strengthening disaster risk management is crucial to mitigate the impact of climate shocks and that improving data quality is vital to support policy making. Directors agreed that continued technical assistance by the Fund will be helpful.


Table 1. Timor-Leste: Selected Economic Indicators, 2016-22

Non-oil GDP at current prices (2019): US$1,674 billion

Population (2019): 1.293 million

Non-oil GDP per capita (2019): US$1, 295

Quota: SDR 25.6 mllion

2016

2017

2018

2019

2020

2021

2022

Est.

Proj.

Proj.

(Annual percent change)

Real sector

Real Non-oil GDP

3.4

-4.1

-1.1

1.8

-7.6

1.8

3.8

CPI (annual average)

-1.5

0.5

2.3

0.9

0.5

1.6

2.5

CPI (end-period)

0.0

0.6

2.1

0.3

1.2

2.0

3.0

(In percent of Non-oil GDP, unless otherwise indicated)

Central government operations

Revenue

56.1

53.0

58.5

52.5

58.2

58.8

56.1

Domestic revenue

12.1

11.9

12.2

11.2

11.6

11.7

11.7

Estimated Sustainable Income (ESI)

33.0

30.1

35.3

31.6

34.8

35.4

32.7

Grants

11.0

11.0

11.0

9.7

11.8

11.8

11.8

Expenditure

111.5

86.6

86.7

83.4

84.3

104.9

110.0

Recurrent

64.0

59.2

53.1

54.9

62.3

74.6

60.5

Net acquisition of nonfinancial assets

36.5

16.3

22.6

18.8

10.2

18.6

37.8

Donor project

11.0

11.0

11.0

9.7

11.8

11.8

11.8

Net lending/borrowing

-55.4

-33.6

-28.2

-30.9

-26.1

-46.1

-53.9

(Annual percent change, unless otherwise indicated)

Money and credit

Deposits

14.1

12.3

2.8

-7.5

10.1

3.8

6.9

Credit to the private sector

-1.8

24.8

-3.8

5.5

10.1

6.6

6.9

Lending interest rate (percent, end of period)

14.5

12.5

14.5

16.3

11.3

(In millions of U.S. dollars, unless otherwise indicated)

Balance of payments

Current account balance 1/

-544

-284

-191

133

-302

-513

-719

(In percent of Non-oil GDP)

-33

-18

-12

8

-19

-32

-41

Trade balance

-546

-615

-589

-566

-510

-558

-657

Exports 2/

20

17

25

26

17

29

33

Imports

567

631

613

592

527

587

691

Services (net)

-569

-343

-349

-357

-269

-318

-370

Primary Income

544

735

843

1,126

620

328

320

Secondary Income

26

-61

-96

-70

-143

-74

-79

Overall balance

-157

263

129

-18

0.2

-177

144

Public foreign assets (end-period) 3/

16,125

17,343

16,477

18,348

19,647

19,265

18,964

(In months of imports)

160

195

187

212

280

241

198

Exchange rates

NEER (2010=100, period average)

130.0

129.7

130.9

134.1

135.8

REER (2010=100, period average)

143.5

140.7

141.7

143.4

143.3

Memorandum items

Nominal Non-oil GDP (in millions of U.S. dollars)

1,651

1,599

1,560

1,674

1,565

1,625

1,738

Nominal Non-oil GDP per capita (in U.S. dollars)

1,354

1,286

1,230

1,295

1,187

1,210

1,269

(Annual percent change)

1.6

-5.0

-4.4

5.2

-8.3

1.9

4.9

Crude oil prices (U.S. dollars per barrel, WEO) 4/

43

53

68

61

41

59

55

Petroleum Fund balance (in millions of U.S. dollars) 5/

15,844

16,799

15,803

17,692

18,991

18,785

18,340

(In percent of Non-oil GDP)

960

1,050

1,013

1,057

1,213

1,156

1,055

Public debt (in millions of U.S. dollars)

77

106

145

193

218

279

330

(In percent of Non-oil GDP)

4.7

6.6

9.3

11.5

13.9

17.2

19.0

Population growth (annual percent change)

1.9

2.0

2.0

2.0

2.0

1.9

1.9

Sources: Timor-Leste authorities; and IMF staff estimates and projections.

1/ Excludes trade in goods and srvices of entities located in the Joint Petroleum Development Area which are considered non-resident entities until August 2019.

2/ Excludes petroleum exports, the income of which is recorded under the income account.

3/ Includes Petroleum Fund balance and the central bank’s official reserves.

4/ Simple average of UK Brent, Dubai, and WTI crude oil prices based on April 2021 WEO assumptions.

5/ Closing balance.



[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

Public Release. More on this here.