IMF Executive Board Concludes 2010 Article IV Consultation with the Democratic Republic of Timor-Leste

Public Information Notice (PIN) No. 11/31
March 8, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader

On January 28, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Timor-Leste.


The Timorese economy has grown fast over the past three years in an environment of improved security following the 2006 civil unrest. Driven by higher oil-financed public spending and a rebound in agriculture from the 2007 drought, non-oil growth averaged 11 percent during 2007–09. A recent estimate by the World Bank also shows a decline of poverty incidence from 50 percent in 2007 to 41 percent in 2009. With increased public spending, domestic price pressures have recently been rising and are particularly high in some segments of the economy, such as housing and construction.

The fiscal position strengthened in 2009, the non-oil fiscal deficit declined by 17 percentage points to 92 percent of non-oil GDP. This reflected a moderation of spending growth to 8 percent following a sharp increase of 130 percent in 2008. A supplemental 2010 budget raised the spending envelop by more than 30 percent to US$838 million, to be financed by withdrawals of US$811 million from the Petroleum Fund (PF). However, due to procurement delays actual public spending is expected to be around US$729 million, and the non-oil fiscal deficit is projected at about 100 percent of non-oil GDP.

Timor-Leste stands out as the most oil-dependent economy in the world. In 2009, petroleum income accounted for about 95 percent of total government revenue and almost 80 percent of gross national income (GNI). The PF assets reached US$6.8 billion or about ten times non-oil GDP in October 2010. The current account surplus has been driven by large oil income.

The financial sector remains at an embryonic stage of development. Three foreign bank branches dominate the financial sector, in addition to a small state-owned microfinance institution. A first insurance company has been established. Despite high bank deposit growth, private sector credit has remained stagnant, hampered by a large share of non-performing loans, weak contract enforcement, and unclear property rights.

The near-term outlook remains positive, supported by social and political stability and government spending. Preliminary data provided by the authorities indicate that GDP growth in 2010 is likely to be higher than the estimate in the Staff Report of 6 percent and closer to the government’s estimate of 9½ percent, potentially pointing to a higher growth projection in 2011. Staff expects GDP growth to stay high in the medium term. Inflation is projected to increase from 4½ percent to 6 percent in 2011, higher than the average of neighboring countries. Large uncertainties surround the medium-term outlook, including the path of oil prices and production, the magnitude and quality of public spending, and progress in business-enabling structural reforms.

Executive Board Assessment

Executive Directors welcomed Timor-Leste’s economic performance over the last three years and the progress made on poverty reduction and other social indicators. Following a slowdown caused by adverse weather, the medium-term outlook for growth is positive. Going forward, Timor-Leste’s key challenge remains to use its petroleum wealth wisely to build a strong non-oil economy and raise living standards.

Directors welcomed the government’s resolve to push ahead with its development policies. They noted that carefully selected infrastructure investment could have sufficiently high returns to justify temporary withdrawals from the PF in excess of the estimated sustainable income (ESI), and that the upward revision in the ESI has created room for additional capital expenditure. Most Directors observed, however, that spending at a slower-than-planned pace, consistent with the absorptive capacity of the economy, would stand a better chance of realizing high quality projects and crowding in private investment.

Directors praised the government’s emphasis on raising the country’s ability to plan, evaluate, and implement spending programs, so that any expansion of public works does not overwhelm administrative capacity. They supported plans to create a new agency, reporting directly to the Prime Minister, which will be in charge of major project evaluation and approval. Further improvements in public financial management and budget execution will also be important.

Directors welcomed the government’s efforts to make the regulatory environment more business-friendly. They noted that the introduction of a one-stop-shop for start-ups is a step in this direction. Accelerated reforms to enhance property rights, such as the pending land law, would also make it easier for the financial sector to extend credits to local businesses.

Directors observed that the official dollarization has helped keep inflation under control and should be maintained, supported by a fiscal policy that is mindful of external stability. Productivity-enhancing structural reforms and efforts to build labor skills would improve competitiveness in non-oil industries and services. Directors also noted that a slower-than-envisaged pace of public spending growth would help contain inflation pressures as supply-side limitations are approached.

Directors called for an intensification of the engagement between Fund staff and the authorities. Noting differences between the official and the more conservative staff’s growth projections, they encouraged a closer policy dialog and greater use of technical assistance, including to strengthen Timor-Leste’s economic statistics. A number of Directors also saw merit in reopening the resident representative office.

Democratic Republic of Timor-Leste: Selected Economic Indicators, 2005–11
  2005 2006 2007 2008 2009 2010 2011
    Prel. Proj. Proj.

Output and prices

GNI at current prices (US$ million)

695 972 1,689 2,851 2,401 2,704 3,019

Non-oil GDP at current prices (US$ million)

332 327 358 444 556 627 708

Real non-oil GDP growth (percentage change)

6.2 -5.8 9.1 11.0 12.9 6.1 7.3

   Including United Nations 1/

2.3 -3.4 18.2 10.6 9.1 5.0 6.2

Inflation (CPI, percentage change, end-period)

1.0 6.7 7.6 6.1 1.1 6.5 6.0

Inflation (CPI, percentage change, period average)

1.8 4.1 8.9 7.6 0.1 4.5 6.0
  (In percent of non-oil GDP)

Investment-saving balance

Gross investment 2/

21 23 29 63 55 48 70

Gross national savings

99 188 358 518 301 276 267

External savings

-79 -166 -329 -456 -245 -227 -197

Central government finances



128 205 382 551 342 338 334

   Domestic revenues

11 10 12 10 11 11 11

   Petroleum revenue

107 195 367 540 332 328 323


10 0 3 0 0 0 0

Expenditure (cash basis)

26 32 66 120 103 100 123

   Recurrent expenditure

19 27 51 81 65 72 73

   Capital expenditure

7 5 15 39 38 28 50

Overall balance

102 174 316 431 239 239 210

Non-oil fiscal balance

-5 -21 -51 -110 -92 -89 -113

Combined sources fiscal operations 3/

Domestic revenue and budget grants

24 13 17 12 13 13 13


67 73 98 163 144 133 154

   Recurrent expenditure

47 55 74 117 99 96 95

   Capital expenditure

20 18 24 46 45 37 59

Overall balance

-43 -60 -81 -151 -131 -121 -141

Money and credit


Broad money (end-period) 4/

23 31 40 43 48

Net domestic assets (end-period)

-24 -3 -48 -42 -30
  (In millions of U.S. dollars)

External sector

Current account

261 541 1,177 2,023 1,363 1,425 1,395

Merchandise exports 2/

8 9 7 14 9 11 14

Merchandise imports

112 101 176 311 385 575 802
  (In percent of non-oil GDP)

Current account

79 166 329 456 245 227 197

Merchandise exports 2/

2 3 2 3 2 2 2

Merchandise imports

34 31 49 70 69 92 113

Memorandum item:


Petroleum Fund balance (percent of non-oil GDP) 5/

112 310 583 945 968 1,076 1,169

Sources: Data provided by the Timor-Leste authorities; and IMF staff estimates.

1/ Includes locally paid compensation of UN peacekeeping mission staff.

2/ Excludes oil/gas sector.

3/ Includes autonomous agencies and quasi-fiscal expenditure by donors outside the central government budget. The revenue decline in 2005 reflects the creation of the Petroleum Fund to which all oil revenue now accrues. Income from the fund and donor assistance finances the deficit.

4/ Excludes currency holdings by the public, for which no data are available.

5/ End-period. Figure for 2004 refers to the Timor-Sea account, which preceded the August 2005 establishment of the Petroleum Fund.

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. 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:


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