Statement of an IMF Staff Mission at the Conclusion of the 2008 Article IV Discussions with Timor-Leste

Press Release No. 08/95
April 30, 2008

An International Monetary Fund (IMF) mission led by Ms. Susan Creane, Deputy Division Chief in the Asia and Pacific Department, visited Dili, Timor-Leste, during April 16-30, 2008, to conduct the annual Article IV consultation discussions. The mission met with the Minister of Finance, the Head of the Banking and Payments Agency (BPA) and other senior officials from the government and BPA, and representatives from the private sector and civil society to discuss recent economic developments and the medium-term economic outlook.

The mission issued the following statement in Dili:

"The domestic security situation has undermined the macroeconomy, while oil/gas revenues have continued to rise. Following negative growth in 2006, the peak year for the recent civil unrest, non-oil growth rebounded in 2007, driven mainly by government and donor spending. Private activity was subdued by the security situation and a drought affecting agriculture. Inflation climbed to almost 9 percent in 2007, more than double the average in 2006, mainly reflecting higher global food prices. Timor-Leste's external competitiveness has remained broadly unchanged since early 2006, as reflected in the stable real effective exchange rate.

"The discussions considered the policies needed to manage the rapidly growing oil/gas revenue to alleviate immediate social and security problems, and at the same time, develop a strong non-oil economy while maintaining low inflation. The mission appreciates the need for the new government to address the short-term priorities, including food security. These can be achieved within the existing sustainable spending level, given weak administrative capacity and other constraints. Budgets should also be consistent with both administrative implementation capacity and the ability of the economy to absorb additional spending, in order to avoid waste and inflation. The mission believes that Timor-Leste continues to be well served by the long-term saving policy supported by the Petroleum Fund, which has the flexibility to meet exceptional needs.

"The most pressing challenge facing the new government is improving budget execution, especially of investment spending. In that light, the mission is encouraged by proposals aimed at easing budget execution constraints and welcomes the authorities' intention to rapidly update the National Development Plan to set-out and cost the medium-term policy priorities.

"Given that over the longer-term, growth and job creation must come from the non-oil private sector, an acceleration of reforms is needed now to establish an environment conducive to private investment and activity, including through laws to strengthen land, property and contract rights and to streamline business regulation. The mission welcomes recent initiatives to reinvigorate the financial sector, including the development of a credit registry and strengthened bank supervision by the BPA. The mission also supports the maintenance of the current monetary and exchange rate regime to preserve macroeconomic stability.

"The IMF mission wishes the government and the people of Timor-Leste every success and stands ready to assist in their efforts to build a strong economy in support of poverty reduction and rapid human development."



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