After the dual shocks of COVID-19 and natural disasters, Timor-Leste’s economy is showing some signs of recovery and real GDP growth is expected to improve to 1.9 percent in 2021 according to the latest World Bank economic update, ‘Timor-Leste Economic Report: Steadying The Ship‘, released today.
The COVID-19 situation in the country has begun to improve as the vaccine rollout continues to accelerate and case numbers drop. 71 percent of the eligible population have already received one dose and 57 percent of the eligible population fully vaccinated. Disparity of vaccine coverage persists however, with an average of 30 percent of the eligible population vaccinated in many districts.
Receipts from sales and excise taxes rebounded while household credit expanded as public spending grew by 20.3 percent. Inflation increased to 3.6 percent in the second quarter of 2021, driven largely by rising food, beverage, alcohol, and tobacco prices. However non-oil GDP contracted by 8.6 percent in 2020 and the Government collected 11.3 percent less domestic revenue during the first half 2021.
“The COVID-19 crisis came on top of a period of low growth, suggesting deeper structural problems in the economy,” said Bernard Harborne, World Bank Country Representative for Timor-Leste. “Advancing the structural reform agenda can improve growth, competitiveness, and employment. Raising more fiscal revenues, the special focus of this issue, is a key step in ensuring a sustainable future for Timor-Leste”.
The economy is projected to expand further to 2.4 percent in 2022, driven by more manageable COVID-19 infections, and less restrictive public health measures. On the demand side, a gradual rebound in private consumption (2.9 percent) will drive economic growth in 2022. Private investment is likely to remain low while global trade is expected to pick up further, positively affecting both exports and imports.
The Timor-Leste Economic Report includes a special focus on Domestic Revenue Mobilization which highlights the importance of improving revenue mobilization to finance public spending on development and poverty reduction. The report recommends collecting more revenue by introducing value-added taxes and increasing income and excise tax rates to match regional norms. Revenue administration can be improved by modernizing the tax system. Estimates on the tax potential suggest that, if existing gaps in tax policy and administration are addressed, tax revenue collection could double from around 8 to 15 percent of GDP.