## 1tlsea2021001 — Real Sector Developments ## Source details **Canonical URL:** [1tlsea2021001 — Real Sector Developments](https://www.imf.org/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf.json) --- ### Pre-COVID-19 Context - Progress since independence in 2002: stable democracy, young and fast-growing population, transparent elections, rebuilt basic public infrastructure (roads, ports, airports, water and sanitation), reduced poverty, and saved a significant fraction of oil revenues in the Petroleum Fund. - Institutional progress: network of functional public institutions built from scratch. - Key medium-term challenges: - Drying up of oil revenues from active fields that have been the main source of funding for government spending. - Large and pressing development needs, wide-ranging institutional capacity building gaps, high dependence on oil revenues. - One-third of the population suffers chronic food insecurity. - Significant gaps in health and education. - Non-oil private sector underdeveloped with lack of good jobs and high youth unemployment. ### Recent Developments (COVID-19 and floods) - COVID-19 epidemiology and response: - 44 confirmed cases and no deaths in 2020 amid severe restrictions. - Cumulative infections increased from a low of 113 on February 28 to 8,728 on June 21, 2021. - Vaccination: joined "COVAX Facility" for free access to vaccine for 20 percent of its population; inoculations started April 7; 127,074 people (17 percent of the adult population) vaccinated by June 20. Rollout sequencing: first phase (April) frontline workers, immigration officers, people with comorbidities; second phase (July) people over 60, healthcare workers, community leaders, teachers, market workers; third phase (October) remaining adult population. - Natural disaster: - Early April 2021 floods left about 16,000 people without homes and sheltering in refugee centers; Tropical Cyclone Seroja floods on April 4 resulted in 45 deaths, serious infrastructure damage; livestock, rice fields, and coffee plantations destroyed. - Macro outcomes in 2020: - Real non-oil GDP estimated to have declined 7.6 percent in 2020 (largest output contraction since independence in 2002). - Government COVID-19-related spending: 12.3 percent of non-oil GDP. - Fiscal deficit declined to 26 percent of non-oil GDP (from 31 percent of non-oil GDP in 2019) due to unchanged government revenues, spike in current spending, and fall in public investment following delays in passing the 2020 budget. - Inflation pressures muted. - Private sector credit growth doubled to more than 10 percent year over year in 2020. - External sector in 2020: - Current account moved from a surplus in 2019 to a deficit in 2020. - Underlying current account (actual deficit adjusted for temporary factors) estimated at -23 percent of non-oil GDP in 2020, about 7 percent of non-oil GDP below the "norm" backed out from setting consumption as an annuity of total wealth (Annex III). - Real exchange rate estimated to be overvalued by about 32 percent. - COVID-19 spending breakdown (percent of 2020 non-oil GDP; Source: Ministry of Finance): - Adequate quarantines 0.3 - Contact tracing 0.1 - Isolation and treatment 1.3 - Social support to affected population 8.7 - o.w. cash transfers to households 4.2 - o.w. transfers to social security 2.7 - o.w. basic consumption basket 0.5 - o.w. wage subsidy for private sector 0.4 - o.w. electricity subsidy 0.2 - o.w. credit moratorium 0.3 - Prevention and mitigation of COVID 0.5 - Food production 0.1 - Rice purchase for food security 1.1 - Total 12.3 ### Financial Sector Developments - Credit and forbearance: - Credit growth doubled to 10 percent year over year in 2020, driven by lending to individuals in public administration jobs and to a lesser extent by loans to businesses. - Credit moratorium introduced for 3 months in August 2020; 23 percent of total bank loans restructured. Scheme reintroduced for 2021 with extended duration of 9 months. - Credit guarantee scheme extended to cover micro enterprises in addition to small and medium enterprises. - Financial soundness indicators (In percent; memorandum items in millions of U.S. dollars): - Capital adequacy ratio (BNCTL only): Dec-17 32.9, Dec-18 27.7, Dec-19 28.6, Dec-20 27.9 - Non-performing loans to total gross loans: Dec-17 13.5, Dec-18 5.6, Dec-19 5.6, Dec-20 2.0 - Provision for loan losses to total gross loans: Dec-17 16.7, Dec-18 8.1, Dec-19 6.4, Dec-20 2.1 - Return on assets: Dec-17 1.4, Dec-18 1.1, Dec-19 1.7, Dec-20 2.3 - Return on equity (BNCTL only): Dec-17 13.9, Dec-18 6.8, Dec-19 5.1, Dec-20 4.3 - Liquid assets to total assets: Dec-17 80.5, Dec-18 80.5, Dec-19 91.1, Dec-20 79.5 - Total assets: 1,170; 1,240; 1,384; 1,474 - Total loans: 227; 222; 250; 281 - Assessment and supervision: - Capital adequacy and liquidity ratios remain comfortably above regulatory thresholds; nonperforming loan ratios low at 2 percent at end-2020. - Supervisory measures: introduction of an online reporting system for all financial institutions; recommendation to intensify banking supervision in light of credit moratorium risks. ### Authorities’ Views on Real and Financial Sectors - Authorities project real non-oil GDP growth in 2021 at 2.0 percent, driven by public investment and a rebound in coffee exports. - Priorities in 2021: strengthen pandemic- and flood-related economic relief measures and support the recovery. - Challenges: targeting vulnerable populations due to many being unbanked; delayed census and poverty survey now planned for 2022 and 2023. - Vaccine support: Australia and China providing 630,000 and 100,000 vaccines, respectively. - Authorities acknowledge risks from COVID-19-related financial sector easing measures but consider supervision adequate; noted disproportionate pandemic impact on one of the two other deposit taking institutions operating in rural areas. ### Public Investment Efficiency and Oil Withdrawals - Withdrawals from Petroleum Fund: sustained excess withdrawals since 2010; framework allows frontloading of public investment financed with “excess withdrawals” with no limits, eroding government wealth. - Public Investment Efficiency Gap (2008–14) for Timor-Leste: Efficiency gap of 54 percent (source: 2016 Public Investment Management Assessment). ### Key Risks (Annex I highlights) - Prolonged rise in COVID-19 infections and delays with vaccines: Relative Likelihood Medium; Time Horizon ST, MT; Expected Impact High. Recommended: provide relief to vulnerable households and intensify public health measures. - Political fragmentation: Relative Likelihood High; Time Horizon ST, MT; Expected Impact Medium. Recommended: prioritize reforms to improve the business environment and diversify the economy. - Development of Greater Sunrise or other oil fields: Relative Likelihood Low-Medium; Time Horizon MT; Expected Impact High. Recommended: carefully assess benefits, costs, and risks before investment decisions. - Over investment in low-return projects and higher frequency/severity of natural disasters: Relative Likelihood Medium; Expected Impact High/Medium. Recommended: strengthen project appraisal and invest in disaster resilience. ### Fiscal strategy and Petroleum Fund dependence - Goal: stop relying on excess withdrawals from the Petroleum Fund to secure fiscal sustainability, underpinned by fiscal consolidation. - Eliminating excess withdrawals would warrant a reduction of the fiscal deficit of about 30 percent of non-oil GDP. - Recommendation: lay out a fiscal strategy to stop relying on excess withdrawals in the 2022 budget and increase impediments to authorize excess withdrawals (e.g., requiring a special majority from Parliament rather than a simple one). ### Trade-offs across exit timelines (5/10/15 years) - If excess withdrawals are eliminated in 5/10/15 years: - Estimated Sustainable Income in 2026: 26.7/25.8/25.1 percent of non-oil GDP. - Average annual growth during 2022–26: 1.8/2.4/2.6 percent. - Observations: - Growth cost differential across scenarios widens as the fiscal multiplier increases. - Estimated Sustainable Income differential across scenarios widens as the investment return of the Petroleum Fund lowers. - Conclusion: case for faster fiscal consolidation is stronger for a lower fiscal multiplier and for a lower investment return of the Petroleum Fund. - Policy note: accompany fiscal consolidation with structural reforms to tap growth potential. ### Staff’s illustrative fiscal consolidation scenario (10-year halt of excess withdrawals) - Core features: - Gradual reduction of excess withdrawals until halted in 10 years. - Fiscal deficit (percent of non-oil GDP) declines much faster than under the baseline, averaging 3 percent of non-oil GDP in 2027–41. - Reduction supported by revenue mobilization and expenditure rationalization. - Public investment averages 16 percent of non-oil GDP in 2022–26; requires better selection of investment projects than in the baseline. - Real non-oil GDP growth averages 2.4 percent in 2022–26 (lower than baseline) owing to output costs of fiscal consolidation. - Petroleum Fund balance averages $21.4 billion in 2027–41, higher than under the baseline. - Fiscal multiplier note: estimated at 0.1. ### Key baseline vs. fiscal consolidation scenario figures (selected, preserved as in source) - Total revenue: baseline 46.4; consolidation 47.1 (2020). - Domestic revenue: baseline 11.6; consolidation 11.7 (2020); scenario averages: 13.5 percent of non-oil GDP in 2022–26 and 17.5 percent of non-oil GDP in 2027–41. - Estimated Sustainable Income: 34.8/35.4/27.5/10.1/29.5/17.1 (as shown in staff table). - Petroleum Fund balance examples (staff estimates table): $18,991; $18,785; $17,553; $10,415; $18,880; $21,392. - Real non-oil GDP growth (staff table): -7.6; 1.8; 2.8; 3.0; 2.4; 2.9 (periods as shown). ### Revenue mobilization and expenditure rationalization (policy recommendations) - Revenue mobilization: - Domestic revenues averaged 12 percent of non-oil GDP during 2015–19. - Policy actions: revise tax procedure code; adopt a Value-Added Tax; revise excise tax rates (unchanged since 2008 and many set as value per unit); consider scope to increase statutory income tax rate; strengthen tax administration with technical assistance from PFTAC. - Empirical note: staff’s consolidation scenario aligns with actual increases in tax revenues—between 7–20 percentage points of GDP over a decade—in four fragile states that introduced tax reforms. - Expenditure rationalization: - Government expenditure averaged 74 percent of non-oil GDP in 2015–19. - Areas for savings: goods and services averaged 22 percent of non-oil GDP in 2015–19; transfers averaged 25 percent of non-oil GDP in 2015–19 (including pensions to veterans, old-age and disability pensions, capitalization of banks, support to SOEs) — review and prioritize. - Better selection of investment projects to improve public investment efficiency. ### Public Financial Management (PFM) reforms - Identified weaknesses: - Limited budget credibility: significant adjustments to budget allocations, budget revisions, and systematic under-execution. - Medium-term expenditure projections not anchored by fiscal sustainability considerations. - Fragmentation: separate preparation of public investment budget (Ministry of Planning) and current spending budget (Ministry of Finance) leads to inconsistency and unfunded recurrent costs of capital projects. - Projects lack rigorous appraisal; cost-benefit and risk assessments not systematic. - Public investment efficiency gap in Timor-Leste ~54 percent (compared with 24 percent for emerging market economies and 30 percent for emerging and developing Asia). - Proliferation of autonomous agencies whose spending is less scrutinized and less transparent. - Recommendations: - Strengthen annual budget process: strategic top-down elements, tighter expenditure controls, enhanced fiscal reporting and transparency with IMF FAD and PFTAC technical support. - Consolidate capital and current budget preparations in the Ministry of Finance; require full project appraisal. - Upgrade the draft law replacing Law 13/2009 to international best practices: support macro-fiscal management, introduce strategic planning, strengthen accountability, ensure coherence across the budget cycle. - Stem proliferation of autonomous agencies and channel spending through the budget. ### Digital fiscal tools and transparency - Adoption of digital tools offers upside: higher revenues, more efficient spending, greater transparency. - Recent implementations: - Online tax payments platform via the P24 system — expected to improve tax collection efficiency and compliance. - Plans to implement a unique digital ID for all citizens — could improve targeting of social assistance, reduce fraud, eliminate duplication of payments. ### Structural reforms to bolster medium-term growth prospects - Key constraints: - Human Capital Index in 2020 was 0.45. - Agriculture’s share in non-oil GDP declined from 28 percent in 2000 to 17 percent in 2019. - Low female labor force participation and high youth unemployment: 45 percent of young people are neither employed nor studying. - Policy priorities: - Strengthen human capital formation: increase spending in health and education (spending in health and education accounts for 16 percent of the 2021 budget). - Raise agricultural productivity: increase public investment in climate-resilient agricultural practices and technology (spending in agriculture accounts for 2 percent of the budget). - Improve institutions, business environment, governance: continue anti-corruption measures (new anti-corruption law adopted September 2020), improve justice system capacity especially for commercial issues, simplify licensing, strengthen property rights, land registration, contract enforcement, and insolvency frameworks. - Labor market reforms: close gender gaps, improve skills and training, assess public employment and wage-setting impacts on the private sector. ### Tourism, financial inclusion, and access to credit - Tourism: underdeveloped with potential for labor-intensive, high-value, eco-sustainable, digitally enabled tourism; need better connectivity and digital marketing. - Financial inclusion: - Establishment of R-TIMOR and P24; authorization of two electronic money wallet services in 2018–19. - Share of population excluded from financial services decreased from close to 40 percent in 2018 to 16 percent in 2020. - Access to credit: - Private sector credit to GDP ratios remain low; lending rates by commercial banks usually higher than 10 percent. - Constraints: banks reluctant to lend despite a credit guarantee scheme in 2019; lack of land registration prevents use of property as collateral. - Recommendation: digitalization to generate alternative borrower information to expand credit to those without collateral or limited credit history. ### Financial sector regulatory and supervisory framework (Annex and staff recommendations) - Prudential standards and risk assessment methodologies are "still basic" and need enhancement to capture emerging risks including cybersecurity and data/consumer protection. - Central bank initiated drafting prudential standards and credit risk management regulation including treatment of expected credit losses under IFRS 9; work should continue with PFTAC support. - Recommendation: Upgrade prudential standards, risk assessment methodologies, and supervisory tools; increase digital financial literacy; continue AML/CFT reporting (cash transactions over $1,000 to the Financial Information Unit). ### ICT, connectivity, and digital reforms - Mobile phone network coverage: "more than 95 percent coverage". - Internet access: "less than 30 percent of the population using the internet". - Timor-Leste has "the second slowest internet speed in the world and the slowest in the region". - Authorities plan to install a submarine fiber-cable through Australia’s northern territory to replace slow satellite connection. - Recommendation: invest in ICT and digital infrastructure to reduce digital divide and support private sector development. ### Reform scenario, growth, and external sector projections - Reform scenario combines gradual fiscal consolidation with structural reforms: higher quality of government spending; facilitating doing business; addressing digital infrastructure bottlenecks; increasing financial access; building human capacity; strengthening justice sector. - Medium term (2021–26): Real non-oil GDP growth is "broadly similar to the baseline" as structural reform compensates for the growth cost of fiscal consolidation. - Long term: With sustained improvements, growth is projected to "hover around 5–6 percent", "significantly higher than under the baseline", driven by higher private investment, development of the non-oil private sector, reduced imports, and a larger exports base. ### Disaster risk management and preparedness - Failures during floods: no early warnings, lack of building codes preventing construction along riverbanks, deforestation contributing to landslides. - Recommendation: prioritize strengthening disaster risk management, contingency funding, climate-resilient infrastructure, territorial planning, and urban/housing development especially along riverbanks. ### Currency regime - The U.S. dollar as legal tender "continues to serve Timor-Leste well." - Tradeoff: use of the U.S. dollar can reduce external competitiveness when the currency appreciates against trading partners. - Assessment: Dollarization "remains appropriate" given limited financial sector development, low institutional capacity, and U.S. dollar-denominated major exports (coffee and petroleum). - Central bank will review advantages and disadvantages of the current regime versus alternatives. ### Statistics and data quality - Data provision to the IMF is "broadly adequate for surveillance" and an upgrade compared to the 2019 Article IV. - Main concerns: inconsistencies between national accounts and balance of payments on petroleum-related transactions; unreliability of trade statistics; weaknesses in compilation and dissemination of government financial statistics; delays in releasing financial soundness indicators data. - Authorities plan to change the General Directorate of Statistics into a public institute with autonomy. ### Annex II — The Greater Sunrise Project (summary) - Maritime boundary treaty ratified August 2019 removed a key impediment for development. - Resource estimates: 6.6 trillion cubic feet of gas and 273 million barrels of oil/condensate, estimated at a value of $56 billion (Timor Gap estimate). - Bayu Undan comparison: 3.4 trillion cubic feet of gas, 350 million barrels of oil/condensate, yielded $23 billion in cumulative oil revenues to Timor-Leste during 2006–20. - Petroleum Fund worth $19 billion by end-2020. - Development options include pumping gas to Timor-Leste (huge investment) or to Darwin, Australia (Timor-Leste would get 80 percent of upstream revenue under that option); no credible independent cost-benefit analyses exist. ### Annex III — External Sector Assessment (selected figures) - Net international investment position: $20 billion (1,277 percent of non-oil GDP) by end-2020. - External assets: $20.7 billion (1,326 percent of non-oil GDP); external liabilities: $0.8 billion (49 percent of non-oil GDP). - Petroleum Fund asset composition (end 2020): Direct investment 4%, Equity securities 36%, Debt securities 60%. - Petroleum Fund portfolio: portfolio investment $18.3 billion (1,168 percent of non-oil GDP); direct investment $0.7 billion (45 percent of non-oil GDP); currency and deposits $1 billion (65 percent of non-oil GDP); foreign reserves $0.7 billion (42 percent of non-oil GDP). - Current account: improved from -33 percent of non-oil GDP in 2016 to 8 percent in 2019; declined to -19 percent of non-oil GDP in 2020. - Assessment: Current account gap in 2020 estimated at -7 percent of non-oil GDP; underlying current account -23 percent of non-oil GDP; current account norm estimated at -16 percent of non-oil GDP (method: annuity of total wealth, implicit real return 3 percent). - Reserves: $645 million at end-2020, about 8 months of imports of goods and services. ### Annex IV — Fiscal Framework (selected) - Petroleum Fund established in 2005; annual transfers guided by Estimated Sustainable Income (ESI) set at 3 percent of government wealth. - ESI is a benchmark, not a legal obligation; transfers in excess of the ESI are allowed with Parliamentary justification. - Withdrawals averaged around 5.2 percent of government wealth during 2010–20, higher than the 3 percent ESI. - Parliament has yet to reject a request for excess withdrawals. ### Annex V — Governance issues (selected) - Corruption was a key concern pre-COVID-19; pandemic heightened importance of stronger governance. - Strengths: governance of the petroleum sector is strong; anti-corruption framework enhanced, Anti-Corruption Commission established. - Weaknesses: fragmentation, proliferation of autonomous agencies, limited technical/human/financial resources, low budget transparency and oversight. - Procurement problems: procurement process lengthy and inefficient; online procurement portal intermittent and incomplete; procurement safeguards relaxed in April 2021 for emergency medical supplies. ### Anti-corruption law (September 2020) — overview and enforcement gaps - Law includes publicity and transparency in public procurement; online declaration of income, assets, and interests for public servants and household members; post-employment prohibition for two years for related private-sector activities; prohibition from public office for 5–10 years for convicted individuals. - Enforcement constraints: lack of human and financial capacity for the Anti-Corruption Commission; scope to strengthen punishment regimes and asset recovery processes; asset declaration limited to the Court of Appeals. ### Debt, DSA, and reform scenario (selected) - Petroleum Fund balance at end-2020: $19 billion (1,213 percent of non-oil GDP), covering 271 months of goods and services imports. - Average return on Petroleum Fund assets during 2016–20: 7.2 percent. - Outstanding public external debt: $218 million (13.9 percent of non-oil GDP) in 2020. - Baseline projections: - Real non-oil GDP projected to recover modestly at 1.8 percent in 2021; growth to hover 2–4 percent in 2021–26; long term 3 percent (2027–2041). - Fiscal deficit projected to increase from 26 percent of non-oil GDP in 2020 to 46 percent in 2021; remain around 43 percent over 2021–26. - Petroleum Fund under baseline: falls to $16.9 billion (746 percent of non-oil GDP) by 2026; to $1.8 billion (28 percent of non-oil GDP) by 2041; assumes annual nominal investment return around 5 percent. - Reform scenario policy package: - Domestic revenue mobilization to 15 percent of non-oil GDP by 2026; adopt VAT by 2023 to generate ~3 percent of GDP over medium term; long-term domestic revenue target about 20 percent of non-oil GDP with further tax reforms. - Expenditure moderation: government spending broadly constant in nominal terms at 2019 level for a decade starting 2022. - Target to halt Petroleum Fund excess withdrawals by 2032; Petroleum Fund preserved and gradually increase to close to $24.6 billion in long run. - Under reform, long-term growth projected to hover around 5–6 percent (2027–2041). - DSA vulnerabilities: - Mechanical debt distress rating “high” (benchmarks breached) but staff applied judgment to rate risk of debt distress as “moderate” because of large Petroleum Fund buffers. - Under extreme primary balance shock, PV of debt-to-Petroleum Fund assets reaches close to 59 percent towards the end of projection periods. - Policy recommendations: - Gradually reduce excess Petroleum Fund withdrawals to zero; implement expenditure rationalization; mobilize domestic revenue; protect Petroleum Fund wealth; pair fiscal reforms with structural reforms; strengthen public debt management and debt recording; improve monitoring of fiscal risks. *International Monetary Fund staff report excerpt (Timor-Leste).* ### 1. Real Sector Developments ____________________________________________________________________ 22 ### 1. Real Sector Developments ### Pre-COVID-19 Context - Timor-Leste made significant progress since independence in 2002: stable democracy, young and fast-growing population, transparent elections, rebuilt basic public infrastructure (roads, ports, airports, water and sanitation), reduced poverty, and saved a significant fraction of oil revenues in the Petroleum Fund. - Institutional progress: network of functional public institutions built from scratch. - Key medium-term challenges: - Drying up of oil revenues from active fields that have been the main source of funding for government spending. - Large and pressing development needs, wide-ranging institutional capacity building gaps, high dependence on oil revenues. - One-third of the population suffers chronic food insecurity. - Significant gaps in health and education. - Non-oil private sector remains underdeveloped with lack of good jobs and high youth unemployment. ### Recent Developments (COVID-19 and floods) - COVID-19 containment in 2020: 44 confirmed cases and no deaths in 2020 amid severe restrictions on contact with the outside world. - From a low of 113 on February 28, cumulative infections increased to 8,728 on June 21, 2021. - Early April 2021 floods left about 16,000 people without homes and sheltering in refugee centers. - Economic impact in 2020: - Government COVID-19-related spending: 12.3 percent of non-oil GDP (see detailed program breakdown). - Real non-oil GDP estimated to have declined 7.6 percent in 2020 (largest output contraction since independence in 2002). - Fiscal deficit declined to 26 percent of non-oil GDP (from 31 percent of non-oil GDP in 2019) due to unchanged government revenues, spike in current spending, and fall in public investment following delays in passing the 2020 budget. - Inflation pressures muted. - Private sector credit growth doubled to more than 10 percent year over year in 2020. - External sector in 2020: - Current account moved from a surplus in 2019 to a deficit in 2020. - Underlying current account (actual deficit adjusted for temporary factors) estimated at -23 percent of non-oil GDP in 2020, about 7 percent of non-oil GDP below the "norm" backed out from setting consumption as an annuity of total wealth (Annex III). - Real exchange rate estimated to be overvalued by about 32 percent. - Vaccine rollout: - Timor-Leste joined the "COVAX Facility" for free access to vaccine for 20 percent of its population. - Inoculations started on April 7; 127,074 people (17 percent of the adult population) vaccinated by June 20. - Rollout sequencing: first phase (April) frontline workers, immigration officers, people with comorbidities; second phase (July) people over 60 years old, healthcare workers, community leaders, teachers, market workers; third phase (October) remaining adult population. - COVID-19 related spending breakdown (percent of 2020 non-oil GDP): - Adequate quarantines 0.3 - Contact tracing 0.1 - Isolation and treatment 1.3 - Social support to affected population 8.7 - o.w. cash transfers to households 4.2 - o.w. transfers to social security 2.7 - o.w. basic consumption basket 0.5 - o.w. wage subsidy for private sector 0.4 - o.w. electricity subsidy 0.2 - o.w. credit moratorium 0.3 - Prevention and mitigation of COVID 0.5 - Food production 0.1 - Rice purchase for food security 1.1 - Total 12.3 - Source: Ministry of Finance. ### Financial Sector Developments - Credit growth doubled to 10 percent year over year in 2020, driven by lending to individuals in public administration jobs and to a lesser extent by loans to businesses. - Credit moratorium introduced for 3 months in August 2020; 23 percent of total bank loans restructured. Scheme reintroduced for 2021 with extended duration of 9 months. - Credit guarantee scheme extended to cover micro enterprises in addition to small and medium enterprises. - Key financial soundness indicators (In percent; memorandum items in millions of U.S. dollars): - Capital adequacy ratio (BNCTL only): Dec-17 32.9, Dec-18 27.7, Dec-19 28.6, Dec-20 27.9 - Non-performing loans to total gross loans: Dec-17 13.5, Dec-18 5.6, Dec-19 5.6, Dec-20 2.0 - Provision for loan losses to total gross loans: Dec-17 16.7, Dec-18 8.1, Dec-19 6.4, Dec-20 2.1 - Return on assets: Dec-17 1.4, Dec-18 1.1, Dec-19 1.7, Dec-20 2.3 - Return on equity (BNCTL only): Dec-17 13.9, Dec-18 6.8, Dec-19 5.1, Dec-20 4.3 - Liquid assets to total assets: Dec-17 80.5, Dec-18 80.5, Dec-19 91.1, Dec-20 79.5 - Total assets: 1,170; 1,240; 1,384; 1,474 - Total loans: 227; 222; 250; 281 - Capital adequacy and liquidity ratios remain comfortably above regulatory thresholds; nonperforming loan ratios low at 2 percent in end-2020. - Supervisory measures: introduction of an online reporting system for all financial institutions; recommendation to intensify banking supervision in light of credit moratorium risks. ### Authorities’ Views on Real and Financial Sectors - Authorities project real non-oil GDP growth in 2021 at 2.0 percent, driven by public investment and a rebound in coffee exports. - Priorities in 2021: strengthen pandemic- and flood-related economic relief measures and support the recovery. - They highlighted challenges in targeting vulnerable populations due to many being unbanked and delayed census and poverty survey now planned for 2022 and 2023. - Noted support to vaccination program from Australia and China providing 630,000 and 100,000 vaccines, respectively. - Acknowledge risks from COVID-19-related financial sector easing measures but maintain that supervision remains adequate; noted disproportionate pandemic impact on one of the two other deposit taking institutions operating in rural areas. ### Public Investment Efficiency and Oil Withdrawals - Withdrawals from Petroleum Fund: sustained excess withdrawals since 2010; framework allows frontloading of public investment financed with “excess withdrawals” with no limits, eroding government wealth. - Public Investment Efficiency Gap (2008–14) for Timor-Leste: Efficiency gap of 54 percent (source: 2016 Public Investment Management Assessment). ### Key Risks - Intensification of the pandemic or delays in vaccination could derail the near-term recovery. - Failure to reach political consensus on structural reforms could undermine medium-term private sector development. - Development of the Greater Sunrise fields is an upside risk if realized; downside risk if project fails to attract private investment and government makes big investments. - Natural disasters and international food price evolution are risks to infrastructure, agriculture, and inflation outlook. *Source: 1tlsea2021001 - 1. Real Sector Developments* ### 18. Once the pandemic is over, putting ### 18. Once the pandemic is over, putting the fiscal position on a more solid footing should be a priority ### Fiscal strategy and Petroleum Fund dependence - Goal: stop relying on excess withdrawals from the Petroleum Fund to secure fiscal sustainability, underpinned by fiscal consolidation. - Eliminating excess withdrawals would warrant a reduction of the fiscal deficit of about 30 percent of non-oil GDP. - Recommendation: lay out a fiscal strategy to stop relying on excess withdrawals in the 2022 budget and increase impediments to authorize excess withdrawals (e.g., requiring a special majority from Parliament rather than a simple one). ### Trade-offs across exit timelines (5/10/15 years) - If excess withdrawals are eliminated in 5/10/15 years: - Estimated Sustainable Income in 2026: 26.7/25.8/25.1 percent of non-oil GDP. - Average annual growth during 2022–26: 1.8/2.4/2.6 percent. - Observations: - The growth cost differential across scenarios widens as the fiscal multiplier increases. - The Estimated Sustainable Income differential across scenarios widens as the investment return of the Petroleum Fund lowers. - Conclusion: case for faster fiscal consolidation is stronger for a lower fiscal multiplier and for a lower investment return of the Petroleum Fund. - Policy note: accompany fiscal consolidation with structural reforms to tap the country’s growth potential. ### Staff’s illustrative fiscal consolidation scenario (10-year halt of excess withdrawals) - Core features: - Gradual reduction of excess withdrawals until halted in 10 years. - Fiscal deficit (in percent of non-oil GDP) declines much faster than under the baseline, averaging 3 percent of non-oil GDP in 2027–41. - Reduction supported by revenue mobilization and expenditure rationalization. - Public investment averages 16 percent of non-oil GDP in 2022–26; requires better selection of investment projects than in the baseline. - Real non-oil GDP growth averages 2.4 percent in 2022–26 (lower than baseline) owing to output costs of fiscal consolidation. - Petroleum Fund balance averages $21.4 billion in 2027–41, higher than under the baseline, generating higher sustainable sources of revenue. - Fiscal multiplier note: estimated at 0.1. ### Key baseline vs. fiscal consolidation scenario figures (selected) - Total revenue: baseline 46.4; consolidation 47.1 (2020), projection examples shown for periods 2022–26 and 2027–41. - Domestic revenue: baseline 11.6; consolidation 11.7 (2020); scenario averages: 13.5 percent of non-oil GDP in 2022–26 and 17.5 percent of non-oil GDP in 2027–41. - Estimated Sustainable Income: 34.8/35.4/27.5/10.1/29.5/17.1 across periods shown in staff table (preserved as in source). - Total expenditure and composition: examples provided in staff table; government expenditure averages 64.2 percent of non-oil GDP in 2022–26 and 37.5 percent of non-oil GDP in 2027–41 under consolidation (close to 15 percentage points lower than baseline). - Petroleum Fund balance examples: $18,991; $18,785; $17,553; $10,415; $18,880; $21,392 (from staff estimates table). - Real non-oil GDP growth: -7.6; 1.8; 2.8; 3.0; 2.4; 2.9 (periods as shown in staff table). ### Revenue mobilization and expenditure rationalization (policy recommendations) - Revenue mobilization: - Domestic revenues averaged 12 percent of non-oil GDP during 2015–19. - Policy actions: revise tax procedure code; adopt a Value-Added Tax; revise excise tax rates (unchanged since 2008 and many set as value per unit); consider scope to increase statutory income tax rate; strengthen tax administration with technical assistance from PFTAC. - Empirical note: staff’s consolidation scenario aligns with actual increases in tax revenues—between 7–20 percentage points of GDP over a decade—in four fragile states that introduced tax reforms. - Expenditure rationalization: - Government expenditure averaged 74 percent of non-oil GDP in 2015–19. - Target: gradually align government expenditure with sustainable sources of revenue. - Areas for savings: goods and services averaged 22 percent of non-oil GDP in 2015–19 (driven by professional services, temporary job contracts, payments to consultants/advisors); transfers averaged 25 percent of non-oil GDP in 2015–19 (pensions to veterans, old-age and disability pensions, capitalization of banks, support to SOEs) — review and prioritize. - Better selection of investment projects to improve public investment efficiency. ### Public financial management (PFM) reforms - Identified weaknesses: - Limited budget credibility: significant adjustments to budget allocations, budget revisions, and systematic under-execution. - Medium-term expenditure projections not anchored by fiscal sustainability considerations. - Fragmentation: separate preparation of public investment budget (Ministry of Planning) and current spending budget (Ministry of Finance) leads to inconsistency and unfunded recurrent costs of capital projects. - Projects lack rigorous appraisal; cost-benefit and risk assessments not systematic. - Public investment efficiency gap in Timor-Leste ~54 percent (compared with 24 percent for emerging market economies and 30 percent for emerging and developing Asia). - Proliferation of autonomous agencies whose spending is less scrutinized and less transparent. - Recommendations: - Strengthen annual budget process: strategic top-down elements, tighter expenditure controls, enhanced fiscal reporting and transparency with IMF FAD and PFTAC technical support. - Consolidate capital and current budget preparations in the Ministry of Finance; require full project appraisal. - Upgrade the draft law replacing Law 13/2009 to international best practices: support macro-fiscal management, introduce strategic planning, strengthen accountability, ensure coherence across the budget cycle. - Stem the proliferation of autonomous agencies and channel spending through the budget. ### Digital fiscal tools and transparency - Adoption of digital tools offers upside: higher revenues, more efficient spending, greater transparency. - Recent implementations: - Online tax payments platform via the P24 system — expected to improve tax collection efficiency and compliance. - Plans to implement a unique digital ID for all citizens — could improve targeting of social assistance, reduce fraud, eliminate duplication of payments. ### Authorities’ views and ongoing reforms - Authorities concur with shifting focus towards fiscal sustainability post-pandemic while noting tradeoffs of frontloading spending for infrastructure and diversification. - Planned/adopted measures: - Introduce Value-Added Tax and revised tax procedure code. - Implement program-based budgeting to facilitate prioritization. - Improve cost-benefit analysis of public investment projects and review autonomous agencies. - Ongoing PFM reform aims: - Increase budget stability via a strong multi-year element linked to the Multiannual Strategic Plan. - Establish a Medium-Term Fiscal Framework, approved and revised annually by Parliament. - Overhaul budgeting and reporting to increase transparency and frequency. - Adopt a chart of accounts and budget classifications based on international standards. ### Structural reforms to bolster medium-term growth prospects - Key constraints: - Significant human capital gaps: Human Capital Index in 2020 was 0.45 (a next-generation worker would be 45 percent as productive as under complete education and full health). - Low agricultural productivity despite large agricultural employment: agriculture’s share in non-oil GDP declined from 28 percent in 2000 to 17 percent in 2019. - Impediments to private investment: restricted access to credit, obstacles to doing business, weak governance, limited digital infrastructure. - Low female labor force participation and high youth unemployment: 45 percent of young people are neither employed nor studying. - Policy priorities: - Strengthen human capital formation: increase spending in health and education (spending in health and education accounts for 16 percent of the 2021 budget). - Raise agricultural productivity: increase public investment in climate-resilient agricultural practices and technology (spending in agriculture accounts for 2 percent of the budget). - Improve institutions, business environment, governance: continue anti-corruption measures (new anti-corruption law adopted September 2020), improve justice system capacity especially for commercial issues, simplify licensing, strengthen property rights, land registration, contract enforcement, and insolvency frameworks. - Labor market reforms to close gender gaps, improve skills and training, assess public employment and wage-setting impacts on the private sector. ### Tourism, financial inclusion, and access to credit - Tourism: - Underdeveloped but with potential for labor-intensive, high-value, eco-sustainable, digitally enabled tourism aligned with post-COVID preferences. - Need for better connectivity and digital marketing. - Financial inclusion: - Progress: establishment of R-TIMOR and P24; authorization of two electronic money wallet services in 2018–19. - Outcome: share of population excluded from financial services decreased from close to 40 percent in 2018 to 16 percent in 2020. - Access to credit: - Private sector credit to GDP ratios remain low; lending rates by commercial banks usually higher than 10 percent. - Constraints: banks reluctant to lend despite a credit guarantee scheme in 2019; lack of land registration prevents use of property as collateral. - Recommendation: digitalization to generate alternative borrower information to expand credit to those without collateral or limited credit history. _International Monetary Fund staff report excerpt (Timor-Leste)._ ### 33. Upgrading the financial sector regulatory and supervisory framework and expanding ### 1tlsea2021001 - 33. Upgrading the financial sector regulatory and supervisory framework and expanding ### Financial sector regulatory and supervisory framework - Timor-Leste’s prudential standards and risk assessment methodologies are described as "still basic" and need enhancement to capture emerging risks including those related to cybersecurity and data/consumer protection. - The central bank has initiated drafting prudential standards and credit risk management regulation including treatment of expected credit losses under IFRS 9; this work should continue with support from PFTAC. - Recommendation: Upgrade prudential standards, risk assessment methodologies, and supervisory tools to address cybersecurity, data protection, consumer protection, and expected credit loss treatment. ### Digital financial literacy and inclusion - Increasing digital financial literacy is crucial to expand the safe use of financial services. - The central bank is focusing on financial literacy programs in elementary schools and launched the “Digital Village Program” to enhance safe financial inclusion. - AML/CFT steps: the central bank introduced a new threshold for money transfer operators and e-wallet providers to report cash transactions over $1,000 to the Financial Information Unit and implemented new supervisory tools to assess compliance with AML/CFT requirements. ### Information and communication technology (ICT) and connectivity - Mobile phone network coverage: "more than 95 percent coverage". - Internet access: "less than 30 percent of the population using the internet". - Timor-Leste has "the second slowest internet speed in the world and the slowest in the region", cited as an impediment to private sector development. - Authorities plan to install a submarine fiber-cable through Australia’s northern territory to replace slow connection via satellite. - Recommendation: Invest in ICT and digital infrastructure to reduce the digital divide and support private sector development. ### Reform scenario, growth, and external sector projections - Staff’s reform scenario combines gradual fiscal consolidation (paragraph 20) with structural reforms: higher quality of government spending; facilitating doing business; addressing digital infrastructure and connectivity bottlenecks; increasing financial access; building human capacity; closing labor skill gaps; and strengthening the justice sector. - Medium term (2021–26): Real non-oil GDP growth is "broadly similar to the baseline" as structural reform compensates for the growth cost of fiscal consolidation. - Long term: With sustained improvements, growth is projected to "hover around 5–6 percent", "significantly higher than under the baseline", driven by higher private investment, development of the non-oil private sector, reduced imports, and a larger exports base. - Note: "This growth performance would be closer to the average one by emerging and developing countries in 2010–19." ### Disaster risk management and preparedness - Natural disasters (floods, landslides) are common; Tropical Cyclone Seroja floods on April 4 resulted in 45 deaths, serious infrastructure damage, and 16,000 people seeking shelter; livestock, rice fields, and coffee plantations were destroyed. - Failures highlighted: no early warnings, lack of building codes preventing construction along riverbanks, and deforestation contributing to landslides. - Recommendation: Prioritize strengthening disaster risk management, contingency funding, climate-resilient infrastructure, territorial planning, and urban/housing development especially along riverbanks. ### Currency regime - The U.S. dollar as legal tender "continues to serve Timor-Leste well." - Tradeoff noted: use of the U.S. dollar can reduce external competitiveness when the currency appreciates against trading partners. - Assessment: Dollarization "remains appropriate" given limited financial sector development, low institutional capacity, and U.S. dollar-denominated major exports (coffee and petroleum). - The central bank will review advantages and disadvantages of the current regime versus alternatives. ### Statistics and data quality - Data provision to the IMF is "broadly adequate for surveillance" and an upgrade compared to the 2019 Article IV. - Main areas of concern: - Inconsistencies between national accounts and balance of payments on petroleum-related transactions. - Unreliability of trade statistics. - Weaknesses in compilation and dissemination of government financial statistics. - Delays in releasing financial soundness indicators data. - Authorities plan to change the General Directorate of Statistics into a public institute with autonomy. - IMF stands ready to provide technical assistance; authorities appreciate ongoing IMF technical assistance on public financial management draft law, balance of payments statistics, VAT implementation, and tax administration. ### Authorities’ views (selected) - Prioritize investment in people, especially youth: increased public expenditures in 2021 for health and education; adoption of the Economic Recovery Plan. - Support for job opportunities abroad via worker programs with Australia and Korea; need to expand worker vocational training centers. - Agriculture: 2021 budget supports irrigation, water supply, harvesting storage; Economic Recovery Plan prioritizes renewal of coffee plantations with new techniques. - Anti-corruption: new anti-corruption law expected to strengthen fight against corruption; Anti-Corruption Commission constrained by human and financial resources; implementing second cycle of United Nations Convention Against Corruption to complete "by end-2021". - Business environment improvements planned: (1) streamline business registration and licensing, including electronic certification; (2) strengthen judicial system with extrajudicial dispute resolution (arbitration, mediation); (3) transform internet connectivity via submarine fiber-cable. - Tourism: develop a new tourism policy and master plan in 2021, with a focus on eco-tourism linked to coffee and rice fields. - Collateral regime, contract enforcement, and credit registry information noted as obstacles to credit expansion. ### Staff appraisal and recommendations (selected) - Immediate priority: contain adverse impact of COVID-19 and accelerate vaccine rollout; provide relief to the most vulnerable. - Fiscal stance: Post-COVID and with oil revenues declining, "fiscal consolidation is warranted" to ensure long-term fiscal and debt sustainability. - Concern: The 2021 budget envisages frontloading of government spending, large fiscal imbalances persisting in the long term, and depletion of the Petroleum Fund balance. - Recommendation: Lay out a fiscal reform strategy in the 2022 budget to avoid a "fiscal cliff". - Public financial management: Strengthen PFM, focus public investment on high-return projects subject to cost-benefit analysis, align PFM draft law with international best practices with IMF technical support, enhance budget credibility and fiscal transparency. - Structural reforms: Improve business environment, strengthen governance, raise labor productivity, increase financial deepening (including via digitalization), and improve agriculture productivity to support diversification, private sector development, job creation, and the external position. - Strengthen disaster risk management and preparedness given vulnerability to climate shocks. - Improve data quality to support policymaking. - Proposed scheduling: Next Article IV consultation on the standard 12-month cycle. *Source: Democratic Republic of Timor-Leste — INTERNATIONAL MONETARY FUND (extracted chapter).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Key Risks, Likelihoods, Horizons, and Policy Actions - Prolonged rise in COVID-19 infections and delays with vaccines - Relative Likelihood: Medium - Source: External - Time Horizon: ST, MT - Expected Impact: High - Main impacts: Restrict mobility and economic activity. - Recommended policy actions: Provide relief to vulnerable households and intensify public health measures. - Large swings in energy prices - Relative Likelihood: Medium - Source: External - Time Horizon: ST, MT - Expected Impact: Low - Main impacts: Oil revenues from active oil fields are projected to decline fast amid lower oil production. The magnitude of potential oil revenues from untapped oil fields will depend on future oil prices. - Recommended policy actions: Contain government spending pressures, mobilize domestic revenue, and align spending with sustainable revenues. - Risk asset prices fall sharply - Relative Likelihood: Medium - Source: External - Time Horizon: ST, MT - Expected Impact: Medium - Main impacts: The Petroleum Fund invests its assets in equities (40 percent) and bonds (60 percent). Although the investment portfolio is well diversified, a decline in risk asset prices caused by a reassessment of market fundamentals (e.g., in response to pandemic developments) could result in big losses. - Recommended policy actions: Mobilize domestic revenue to reduce the reliance on the PF to finance government spending. - Political fragmentation - Relative Likelihood: High - Source: Domestic - Time Horizon: ST, MT - Expected Impact: Medium - Main impacts: Lack of political consensus could impede reforms warranted to strengthen medium-term growth prospects. - Recommended policy actions: Prioritize reforms to improve the business environment and help diversify the economy. - Development of Greater Sunrise or other oil fields - Relative Likelihood: Low-Medium - Source: Domestic - Time Horizon: MT - Expected Impact: High - Main impacts: Significant oil revenues could support higher social spending and inclusive growth. Large public investment could deplete the PF more quickly. - Recommended policy actions: Carefully assess benefits, costs, and risks from various development options before making investment decisions. - Over investment in projects with low returns - Relative Likelihood: Medium - Source: Domestic - Time Horizon: ST, MT - Expected Impact: High - Main impacts: Large capital-intensive projects could yield low economic and social benefits and have large opportunity costs. - Recommended policy actions: Strengthen project appraisal by developing a standard methodology and verifying that it is consistently applied across line ministries. - Higher frequency and severity of natural disasters related to climate change - Relative Likelihood: Medium - Source: Domestic - Time Horizon: MT - Expected Impact: Medium - Main impacts: Floods have resulted in lower agricultural production, damage to roads, and displacement of communities. - Recommended policy actions: Invest in infrastructure helping to limit the adverse impact of floods, establish contingency plans, and early warnings systems. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf* --- ### Annex II. The Greater Sunrise Project ### Background and Potential Revenues - Maritime boundary treaty between Timor-Leste and Australia ratified by both governments in August 2019 removed a key impediment for development of the Greater Sunrise fields. - Greater Sunrise discovered in 1974; remained undeveloped in part because of maritime boundary disputes. Agreement set a stable legal framework for joint development and revenue sharing. ### Resource Estimates and Comparison with Bayu Undan - Timor Gap estimates Greater Sunrise holds 6.6 trillion cubic feet of gas and 273 million barrels of oil/condensate, estimated at a value of $56 billion. - Bayu Undan fields had 3.4 trillion cubic feet of gas, 350 million barrels of oil/condensate, and yielded $23 billion in cumulative oil revenues to Timor-Leste during 2006–20. - The Petroleum Fund was worth $19 billion by end-2020. - Oil revenues from Bayu Undan are expected to vanish after 2023. ### Development Strategy and Options - The 2011 Strategic Development Plan proposed a shift from an extraction-only model to a diversified industrial complex (Tasi Mane) including: - A $12 billion liquefied natural gas plant and a petrochemical plant. - A renovated airport and a 160-kilometer highway. - Best development option is unclear; no credible independent cost-benefit analyses exist. - Development options include: 1. Pumping the gas to Timor-Leste, entailing huge investments costs, 70 percent of the upstream revenue, and benefits from developing a refining industry. 2. Pumping the gas to an existing liquefied natural gas plant in Darwin, Australia, under which Timor-Leste would get 80 percent of the upstream revenue. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf* --- ### Annex III. External Sector Assessment ### Summary Assessment - The external sector position in Timor-Leste in 2020 was substantially weaker than implied by fundamentals and desirable policies. - Weakness reflects large fiscal imbalances and the underdevelopment of the non-oil economy. - Fiscal consolidation and structural reforms to promote private sector development and diversification should help improve competitiveness and reduce the current account gap. ### Foreign Assets and Liabilities - Net international investment position was $20 billion (1,277 percent of non-oil GDP) by end-2020, $1.3 billion higher than by end-2019. - External assets: $20.7 billion (1,326 percent of non-oil GDP). - External liabilities: $0.8 billion (49 percent of non-oil GDP). - Petroleum Fund asset composition (end 2020; percent of total assets): Direct investment 4%, Equity securities 36%, Debt securities 60%. - Petroleum Fund assets include portfolio investment $18.3 billion (1,168 percent of non-oil GDP), direct investment $0.7 billion (45 percent of non-oil GDP), currency and deposits $1 billion (65 percent of non-oil GDP), and foreign reserves $0.7 billion (42 percent of non-oil GDP). - Foreign direct investment liabilities: $0.4 billion (26 percent of non-oil GDP); loans: $0.24 billion (15 percent of non-oil GDP); other liabilities: 8 percent of non-oil GDP. - Net international investment position increased by $3.1 billion during 2015–20, explained by $1.7 billion flows from the financial account and $1.4 billion from valuation effects. - Assessment: Net international investment position is projected to decline in 2021 and in the medium term under current policies as large and persistent current account deficits will steadily erode it. ### Current Account - Current account balance improved from -33 percent of non-oil GDP in 2016 to 8 percent in 2019, driven by growing oil revenues. - Current account balance excluding oil revenues averaged -43 percent of non-oil GDP during 2016–19. - Current account balance declined to -19 percent of non-oil GDP in 2020 amid significantly lower oil revenues. - Current account excluding oil revenues was -40 percent of non-oil GDP in 2020, around 3 percentage points higher than the 2016–19 average of -43 percent of non-oil GDP. - Oil revenues from active fields are expected to decline fast before vanishing in 2023. - Assessment: Current account gap in 2020 estimated at -7 percent of non-oil GDP. Underlying current account was -23 percent of non-oil GDP and the current account norm was estimated at -16 percent of non-oil GDP. - Method for preferred estimate: Backed out from setting a norm for consumption as an annuity of total wealth. Total wealth = net foreign assets + present value of oil revenues. - Net foreign assets by end-2019: $18.7 billion. - Present value of oil revenues by end-2019: $0.5 billion. - Total wealth: $19.1 billion. - Assuming implicit real return on total wealth is 3 percent, current account deficit (excluding oil revenues) norm in 2020 was around $574 million (37 percent of non-oil GDP). - Oil revenues were $326 million (21 percent of non-oil GDP). - Hence estimated current account norm was -16 percent of non-oil GDP. - Alternate EBA-Lite regression estimate: - Current account gap: -43.0 percent of non-oil GDP. - Current account norm: 25.0 percent of non-oil GDP. - Policy gap: -8.6 percent of non-oil GDP. - EBA-Lite residual (unexplained): 34.3 percent of non-oil GDP; residual mean squared error during 2006–20: 224 percent. - 90-percent confidence band around EBA-Lite’s current account norm of 25.0 percent of non-oil GDP encompasses the preferred estimate of -16 percent of non-oil GDP. ### Real Exchange Rate (REER) - REER appreciated by about 1 percent during 2016–19 amid a nominal effective exchange rate appreciation of about 3 percent. - In 2020, REER and the nominal effective exchange rate appreciated 1.0 and 1.4 percent year over year, respectively. - Assessment: Using a standard trade elasticity of -0.22, a current account gap at -7 percent of GDP is equivalent to a REER gap of about 32 percent. ### Capital and Financial Accounts - Portfolio inflows have been the main source of financing of current account deficits since 2016; they consist of withdrawals from the Petroleum Fund. - FDI inflows since 2016 have been small, averaging 2 percent of non-oil GDP. - Assessment: No major vulnerabilities exist related to capital flows in the short and medium term given the large size of the Petroleum Fund. Nonetheless, the current account deficit projected under the baseline is unsustainable in the long term. ### FX Intervention and Reserves Level - Reserves were $645 million at end-2020, amounting to about 8 months of imports of goods and services, 74 percent of broad money, 296 percent of external debt, and 41 percent of non-oil GDP. - Assessment: Template to Assess Reserve Adequacy in Credit-Constrained Economies suggests optimal reserves around 12 months of imports, higher than the traditional metric of 3 months. The template’s benefits function reflects the very large fiscal deficit for Timor-Leste. The template neglects that Timor-Leste has a Petroleum Fund worth 238 months of imports. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf* --- ### Annex IV. The Fiscal Framework in Timor-Leste ### Structure and Principles - Two main components: the Petroleum Fund and a guideline focused on long-term fiscal sustainability. - Petroleum Fund established in 2005 and invests its assets abroad. All oil revenues go into the fund. - Transfers from the fund to the budget are guided by maintaining the real value of government wealth: annual transfers = Estimated Sustainable Income (ESI), set at 3 percent of government wealth. - Government wealth = financial assets in the fund + net present value of petroleum wealth under the ground. - ESI updated annually. - In fiscal accounting, the ESI is considered a revenue item above the line and excess withdrawals are considered financing below the line. ### Flexibility and Practice - The ESI is a benchmark, not a legal obligation. Transfers in excess of the ESI are allowed if government provides justification approved by Parliament. - Rationale for flexibility: low-income country with large upfront investment needs and limited financing sources. - Withdrawals from the Petroleum Fund averaged around 5.2 percent of government wealth during 2010–20, higher than the 3 percent ESI. - Although excess withdrawals have been the norm since 2008, the Petroleum Fund balance has increased steadily driven by large oil revenues and strong investment returns. - Note: The Greater Sunrise fields do not have approved development plans yet and hence are not part of the baseline. - Parliament has yet to reject a request for excess withdrawals. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf* --- ### Annex V. Governance Issues in Timor-Leste: Macroeconomic Implications ### Governance Overview - Corruption was a key concern even before COVID-19 given the economic importance of public services and contracts; the pandemic heightened the importance of stronger governance. - Additional budget allocated for COVID-19, but bottlenecks in public financial management, procurement, and supply chains have hindered a faster response. - Continued efforts to strengthen institutions, the business environment, and governance are important to limit corruption vulnerabilities and lower obstacles to job-creating investment. ### Strengths and Weaknesses - Governance of the petroleum sector is strong. - Steps taken to improve anti-corruption framework include establishment of the Anti-Corruption Commission. - Institutional framework suffers from fragmentation and weak coordination, formation of autonomous agencies, and a deficit of technical, human, and financial resources. - Lack of corruption awareness and understanding of published budget documents among the public is a challenge. - Timor-Leste ranks much lower than comparator countries in budget transparency and oversight, with no significant improvements over recent years. - Governance vulnerabilities persist in fiscal areas (e.g., procurement in practice), regulatory framework (doing business), and rule of law (e.g., contract enforcement and property rights). ### Business Environment Constraints - Corruption and difficulty obtaining business licensing and permits are major constraints to businesses. - World Bank Enterprise Survey findings: laws and regulations not well-coordinated; renewing licenses is very time consuming; corruption is a serious issue. - Corruption is especially acute in the fiscal sector and discourages private investment (e.g., potential bribery in securing government contracts, procurement process, getting construction permits, electrical connections, and operating licenses). *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf* ### 3. The new anti-corruption law is a step in the right direction. ### 3. The new anti-corruption law is a step in the right direction. ### Overview of the law - Adopted in September 2020, it describes the general measures to prevent corruption and the income, assets, and interests declaring regime. - The law includes: - publicity and transparency in public procurement procedures. - an online declaration of income, assets, and interests for all individuals in public service and their household members. - prohibition for public officials to exercise any activity in the private sector directly related with roles performed in office for a period of two years after the end of the term as public official. - prohibition from taking or being in public offices for a period of 5–10 years for those convicted of a crime enshrined in this law, punishable by imprisonment. - It also changes the penal code with the creation of the new categories of illegal acts and the concentration of all corruption crimes in a single legal diploma. - Police and judicial authorities may accept anonymous complaints, with protection for the identity of whistle-blowers and protection against reprisals. ### Enforcement gaps and limitations - Lack of sufficient human and financial capacity constrains enforcement, including the investigative capacity of the Anti-Corruption Commission. - While the law strengthens prevention measures, there is scope to strengthen: - punishment regimes, and - the asset recovery process. - Asset declaration is limited to the Court of Appeals—and thus could be expanded to be made more accessible to the general public. ### Procurement process (Box 1) — key issues and reforms - Legal and system context: - The Decree Law on the Procurement (Law No. 10/2005) provides the procurement framework. - The Ministry of Finance launched an online Procurement Portal in 2011 to increase transparency. - The Audit Chamber, under the Court of Appeals, reviews government procurements above $5 million. - Operational problems: - Recent assessments indicate the procurement process is lengthy and inefficient, hindering budget execution and service delivery. - The online procurement portal functions intermittently and lacks information on many important contracts, including the largest ones in the last few years. - COVID-19 implications: - Inefficiencies have been especially problematic in public health sector delivery, including during the pandemic. - Bottlenecks in public financial management and procurement hindered a faster health response to the COVID crisis. - Procurement safeguards were relaxed in April 2021 to procure emergency medical supplies in a timely manner, with assistance from UNDP and World Health Organization. - Suggested procurement improvements: - Further upgrades could facilitate public spending, increase competitiveness and transparency, and lower vulnerabilities to corruption. - Procurement plans should be included in the budget cycle and presented in the budget books. - Transparency requirements should be clearly laid out in the public financial management law, e.g., requiring that government procurement data on resolution of complaints and annual procurement statistics will be published. - Digitalization: ensure the electronic procurement system is updated frequently and reflects full and accurate information, including publishing the contracts and the beneficial ownership information of awarded companies on a regular basis. ### Public governance and institutional priorities - Improving public governance requires multi-front efforts, including: - strengthening institutions to promote integrity and accountability, - addressing areas of key weaknesses and higher risk such as procurement and business licensing, - implementing effective internal controls and independent external scrutiny. - Legal and institutional actions needed: - strengthen the legal and institutional oversight framework, - raise the capacity of the Anti-Corruption Commission and court system to ensure effective implementation of the new anti-corruption law, - enhance corruption awareness and public understanding of accountability and effectiveness of public spending. - Leadership and ethics: - Heads of agencies, ministries, and public enterprises must promote ethical behavior by setting a clear tone at the top. ### IMF role and support - The IMF stands ready to provide technical support on the implementation of the new anti-corruption law and provide specific recommendations on how to strengthen the public financial management framework. *Source: 1tlsea2021001 - 3. The new anti-corruption law is a step in the right direction.* ### 1. The coverage of public sector debt used in this report is public and publicly ### 1tlsea2021001 - 1. The coverage of public sector debt used in this report is public and publicly ### Coverage of public sector debt - The coverage of public sector debt used in this report is public and publicly guaranteed debt. - Timor-Leste’s public and publicly guaranteed external debt is held entirely by the central government. - The coverage of public sector debt includes state-owned enterprise debt. - Under the Public Debt Regime Law, state-owned enterprises are not allowed to borrow for themselves and can only obtain financing via on-lending from the Ministry of Finance. - The public sector only borrows externally, given a lack of domestic financing sources. - The debt definition of the debt sustainability analysis is currency-based and the legal tender is the U.S. dollar. - Domestically issued local currency-denominated debt held by non-residents and/or locally-issued FX-denominated debt held by residents are insignificant and data is not available. ### Background on debt — key statistics and developments - Petroleum Fund balance at end-2020: $19 billion (1,213 percent of non-oil GDP), covering 271 months of goods and services imports. - Petroleum Fund balance increased by $1.3 billion in 2020: investment income $1.9 billion; oil revenues $0.3 billion; transfers to the budget $0.9 billion. - Average return on Petroleum Fund assets during 2016–20: 7.2 percent. - Fiscal deficit: fell from 31 percent of non-oil GDP in 2019 to 26 percent in 2020 due to delays in passing the 2020 budget. - Outstanding public external debt: $218 million (13.9 percent of non-oil GDP) in 2020; $145 million (9.3 percent of non-oil GDP) in 2018. - External loans signed since 2012 to mid-2020: $475 million — all concessional loans from the Asian Development Bank, the World Bank Group, and Japan International Cooperation Agency, mainly to finance road infrastructure projects. - Asian Development Bank share of total external debt in 2020: nearly 60 percent. ### Macroeconomic forecasting framework and assumptions - This debt sustainability analysis is based on macroeconomic projections underlying the 2021 Article IV consultation. - Two scenarios considered to illustrate policy impacts: baseline and reform. - COVID-19-related disruptions and delays in passing the 2020 budget generated an output drop of 7.6 percent in 2020 — the largest since independence in 2002. - Floods in early April 2021: left about 16,000 people without homes and sheltering in refugee centers. - GDP growth performance in 2017–19 was worse than previously estimated; 2019 growth was 1.8 percent. - Oil production from active fields is projected to cease in 2023. - Vaccine rollout: began April 7; 127,074 people (17 percent of the adult population) vaccinated by June 20. Rollout sequencing: first phase (April) frontline workers, immigration officers, people with comorbidities; second phase (July) people over 60, healthcare workers, community leaders, teachers, market workers; third phase (October) remaining adult population. - Inflation: expected to gradually pick up in 2021–23 and then converge to 2 percent over the medium and long term. - External financing: consists of concessional loans from official creditors; private external borrowing assumed negligible. - Grant element of loans: assumed to decline moderately over the medium term. - Assumption: no off-budget debt is accumulated including by state-owned enterprises in line with existing legislation. ### Baseline fiscal scenario — projections and assumptions - Real non-oil GDP projected to recover modestly at 1.8 percent in 2021. - Growth projected to hover in the range of 2–4 percent in 2021–26; long term (2027–2041) growth projected to stabilize at around 3 percent — significantly lower than 4.8 percent projected in the previous debt sustainability analysis. - Fiscal balance projected to remain in a deficit of about 43 percent over 2021–26. - Fiscal deficit projected to increase from 26 percent of non-oil GDP in 2020 to 46 percent in 2021. - Fiscal deficit projected to narrow gradually to about 31 percent on average over 2027–41. - Baseline fiscal scenario assumes capital spending in 2021–25 is, on average, 70 percent of the planned amount in the 2021 budget. - Government revenues projected to decline from 46 percent of non-oil GDP in 2020 to 41 percent on average over 2021–26 and to 22 percent on average over 2027–41. - Domestic revenues currently at 12 percent of non-oil GDP; assumed to grow in line with nominal non-oil GDP under current policies. - Recurrent spending projected to increase by 3.8 percent each year in line with historical trends. - Capital spending in 2027–41 projected to increase in line with inflation. - Net external borrowing projected at about 2.9 percent of non-oil GDP each year during 2021–26. - Outstanding external debt projected to increase from 14 percent of non-oil GDP in 2020 to 25 percent in 2026. - Petroleum Fund projected path under baseline: - Falls to $16.9 billion (746 percent of non-oil GDP) by 2026. - Falls to $1.8 billion (28 percent of non-oil GDP) by 2041. - Assumes an annual nominal investment return on the Petroleum Fund of around 5 percent. ### Realism tools and historical context - Realism tools suggest macroeconomic and fiscal assumptions are reasonable; no significant differences between past and projected debt-creating flows. - A smaller primary deficit in 2015–20 than projected under the previous debt sustainability analysis largely explains unexpected changes in debt. - The three-year primary balance adjustment (between 2021 and 2023) is projected to be 23 percent. - Private investment plunged from 11 percent of non-oil GDP in 2017 to 2 percent in 2019; projected to recover gradually from 2021–22 onwards. - Timor-Leste’s fiscal multiplier is estimated to be close to 0.1 (in the range 0.08–0.17 in the literature). ### Reform scenario — policy measures and projected impacts - Policy package to safeguard long-term fiscal sustainability includes: - Domestic revenue mobilization: - Achieve domestic revenue of 15 percent of non-oil GDP by 2026. - Adopt a value-added tax (VAT) by 2023 to generate additional revenue of about 3 percent of GDP over the medium term. - Strengthen tax compliance through tax administration reforms. - Further tax reforms (revision of excise tax rates, increase in statutory income tax rate, adopting a property tax) to increase domestic revenue to about 20 percent of non-oil GDP in the long term. - Expenditure moderation: - Government spending level broadly constant in nominal terms at the 2019 level for a decade starting in 2022 to gradually reduce it as percent of non-oil GDP. - Focus on enhancing quality of government spending and prioritizing spending via findings from the World Bank Public Expenditure Review. - Public investment projects to be subject to thorough and rigorous cost-benefit analysis. - Target to halt Petroleum Fund excess withdrawals by 2032: - More moderate spending and higher domestic revenue to gradually unwind fiscal imbalances and reliance on Petroleum Fund excess withdrawals. - Petroleum Fund balance will gradually increase to close to $24.6 billion in the long run. - Fiscal deficits over the medium-term would be 25 percent of non-oil GDP, instead of 43 percent under the baseline. - Petroleum Fund preserved (in real terms) and generates permanent investment income to support government expenditures. - External borrowing under reform: projected to be the same as the baseline (continued concessional borrowing to finance public investment and preserve Petroleum Fund wealth). - Structural reforms to improve business environment, raise productivity, and promote private sector development: - Facilitate ease of doing business, address digital infrastructure and connectivity bottlenecks, increase financial access, build human capacity, close labor skill gaps, strengthen the justice sector to improve governance and reduce corruption vulnerabilities. - Macro-fiscal and external sector outlook under reform: - Real non-oil GDP projected broadly similar to baseline in medium term (2021–26). - Long term (2027–2041) growth projected to hover around 5–6 percent under reform, significantly higher than baseline, driven by higher private investment and development of the non-oil private sector. - Current account balance deficit over medium and long term projected to be considerably smaller compared to baseline, reflecting higher exports and lower imports. ### Debt-carrying capacity and stress-test thresholds - Debt-carrying capacity assessed to be weak according to the Composite Indicator index of 2.67 (based on April 2021 World Economic Outlook and 2019 Country Policy and Institutional Assessment). - Debt sustainability analysis thresholds applicable for Timor-Leste: - Present value of external debt-to-GDP ratio: 30 percent - Present value of external debt-to-exports ratio: 140 percent - External debt service-to-exports ratio: 10 percent - External debt service-to-revenue ratio: 14 percent - Present value of public debt-to-GDP ratio: 35 percent - This is a downgrade from the previous debt sustainability analysis (previous classification: “medium”), driven by lower 10-year average of real GDP growth and world economic growth. *Source: IMF staff estimates and projections, as presented in the provided content unit.* ### 11. The size of the shock to non-debt creating flows foreign-direct-investment-to-GDP ### 11. The size of the shock to non-debt creating flows foreign-direct-investment-to-GDP ### Customization of shocks to non-debt creating flows and exports - A large one-off outflow in foreign direct investment equivalent to $621 million in 2020 reflects Petroleum Fund’s investment in Timor-Gap to purchase the 56 percent stake in the Greater Sunrise joint venture. - To prevent this one-off deviation from inflating the foreign direct investment-to-GDP ratio shock: - The historical average and the standard deviation correspond to 2010–19 (i.e., excludes 2020). - The customization implied that: - the historical average of the net non-debt creating flows foreign-direct-investment-to-GDP ratio is revised up from -1.5 to 2.5; - the standard deviation is reduced from 13.5 to 2.3; - the initial standard deviation of 47.3 of the export shock was scaled down to 9.5. - To prevent the structural oil production cycle from inflating the export shock and to account for the fact that petroleum production will cease in 2023, the export stress test was customized in line with the 2019 Article IV debt sustainability analysis. ### Contingent liabilities (tailored stress test settings) - The default shock to contingent liabilities from state-owned enterprises debt and Public Private Partnerships is reduced to zero because: - the former is already included in the baseline public debt; - the latter is negligible. - Contingent liabilities from financial market stress is set at the default value of 5 percent of GDP, consistent with the average cost to the government of a financial crisis in a low-income country since 1980. ### Commodity price shocks and export composition - Timor-Leste’s share of commodity exports in total exports was 82 percent on average over 2018–20. - Petroleum production from active fields is projected to end in 2023; the share of commodity exports is projected to decline to less than 40 percent on average over 2021–23. - Commodity price shocks were tailored by adjusting the share of fuel in total exports of goods and services to match the projected decline. ### Natural disaster sensitivity analysis - A natural disaster stress test was added using default settings that assume: - a one-off shock in 2022 of 10 percentage points to debt-GDP ratio; - real GDP growth lowered by 1.5 percentage points; - exports growth lowered by 3.5 percentage points. - These assumptions are more severe than literature estimates; a recent study estimated the negative impact of natural disasters on Timor-Leste’s real GDP growth in the range of 0.04 percent to 0.12 percent. ### External Debt Sustainability Analysis (baseline and stress results) - Under the baseline scenario: - the present value of external debt in percent of exports breaches the critical threshold of 140 percent between 2023 and 2033; - the debt-service-to-exports ratio breaches the critical threshold of 10 percent between 2022 and 2035; - all other indicators remain well below their relevant thresholds for the next 20 years. - Debt dynamics reflect: - increase in debt service payments as grace periods on existing loans come to an end; - the government’s strategy of increasing public external borrowing via concessional loans to reduce Petroleum Fund withdrawals to finance expanded public investment. - Present value of external debt (non-oil GDP basis) projection: - 10 percent in 2020; - 16.8 percent in 2026; - 9.3 percent by 2041. - Increased use of concessional loans reduces Petroleum Fund withdrawals in the short term but planned spending and limited domestic revenue make large excess withdrawals from the Petroleum Fund unavoidable, further eroding Petroleum Fund wealth. ### Vulnerability to shocks (standardized stress tests) - A shock to the primary balance is the most extreme shock to the debt trajectory and causes breaches of: - the debt-service-to-exports threshold; - the present value of debt-to-GDP threshold; - the present value of debt-to-exports threshold. - Timor-Leste’s high vulnerability to shocks reflects very small exports and revenue bases and exposure to high debt service payment risks if Petroleum Fund assets are not taken into account. - Historically the government has relied on excess withdrawals from the Petroleum Fund rather than debt financing; further reliance on the Petroleum Fund for debt servicing would hasten Petroleum Fund depletion. ### Public Debt Sustainability Analysis - Under the baseline scenario: - the present value of total public and publicly guaranteed debt-to-GDP ratio remains below the threshold level for the next 20 years; - this indicator is vulnerable to commodity price shocks and is expected to breach the threshold under the stress scenario starting in 2023. - The present value-to-revenue ratio and the debt service-to-revenue ratio are most sensitive to commodity price shocks. ### Reform scenario outcomes - Fiscal and structural reforms significantly improve debt dynamics: - paths of debt burden indicators are better compared with baseline; - the size and duration of the breach of the present value of external debt in percent of exports and the debt-service-to-exports ratio is considerably smaller; - the Petroleum Fund balance will be preserved, providing a large and sustainable buffer for long-term debt sustainability. - External concessional loans under the reform scenario are projected to be broadly in line with the baseline. ### Risk rating, vulnerabilities, and policy implications - Mechanical debt distress rating from the DSA is “high” because: - present value of debt-to-exports and debt-service-to-exports breach benchmarks under the baseline. - Judgment was applied to upgrade the rating to “moderate” because: - Timor-Leste has large, liquid, and accessible net foreign assets in the form of the Petroleum Fund, which mitigates medium-term debt carrying capacity concerns; - outstanding public debt was 1.1 percent of the Petroleum Fund balance by end-2020; - the present value of debt does not exceed more than one-third of the projected value of the Petroleum Fund over the next 20 years under the baseline. - Under the most extreme shock (primary balance shock) the present value of debt-to-exports breaches the threshold and the present value of debt-to-Petroleum Fund assets reaches close to 59 percent towards the end of the projection periods. - The risk of debt distress is assessed as “moderate” with limited space to absorb shocks; this is a downgrade from the previous rating of “low” risk due to: - worse initial conditions (higher present value of debt and higher debt service); - lower debt carrying capacity (lower critical thresholds). ### Policy recommendations and capacity building - To ensure long-term fiscal sustainability and preserve the Petroleum Fund as an endowment fund, the authorities should: - gradually reduce excess withdrawals from the Petroleum Fund to zero; - implement expenditure rationalization; - mobilize domestic revenue; - commit to protecting Petroleum Fund wealth. - Fiscal reforms should be paired with structural reforms to: - improve the business environment and governance; - improve competitiveness and strengthen the external sector position; - help restore Timor-Leste’s debt carrying capacity back to medium. - Public debt management needs strengthening: - Embed greater external borrowing in a suitable institutional framework with best-practice debt management policies and procedures; - Strengthen the organization and capacity of the debt management unit, including preparing a medium-term debt management strategy and upgrading debt recording software; - Produce comprehensive and realistic debt servicing projections for existing debt in the near term; - Improve monitoring and reporting of fiscal risks such as contingent liabilities related to credit guarantees, pensions, public corporations, and public-private partnerships. *Source: IMF staff estimates and analysis as presented in the chapter "11. The size of the shock to non-debt creating flows foreign-direct-investment-to-GDP."* ### 22. The authorities consider the risk of debt distress to be contained and remain ### 22. The authorities consider the risk of debt distress to be contained and remain ### Authorities' assessment and commitments - The authorities consider the risk of debt distress to be contained and remain committed to long-term fiscal sustainability. - The Petroleum Fund is described as a source of confidence for the economy and should be preserved to ensure intergenerational equity. - Authorities are committed to implementing measures to substantially raise collection of domestic revenues and ensure debt sustainability over time. - The authorities have requested technical assistance in the design of the VAT implementation plan, tax administration and Public Financial Management. ### Fiscal reforms, Petroleum Fund, and recent pandemic/flood response - Fiscal reform plans in the pipeline include the introduction of the value-added tax (VAT) and a revised tax procedures code. - Recent implementation of program-based budgeting will facilitate prioritization of government spending. - COVID-19 and floods required additional fiscal policy support in 2021: - As of end-June 2021: total cases 9,055 and deaths 21. - Vaccination rollout: 15.7 percent of the population received at least one dose; 2 percent fully vaccinated (as of end-June 2021). - Australia and China pledged 630,000 and 100,000 doses, respectively; COVAX secured additional doses for 20 percent of the population. - The 2021 budget was rectified in April 2021. The fiscal deficit is projected to increase from 26 percent of non-oil GDP in 2020 to 46 percent of GDP in 2021. - Petroleum Fund balances and approach: - 2018 Petroleum Fund balance: US$ 15.8 billion. - Baseline projection for 2020–2023 at last Article IV: US$ 14.5 billion. - At end-May 2021 Petroleum Fund balance: US$ 19.5 billion, or about 11 times last year’s GDP. - Authorities are working on segmentation of the Petroleum Fund into separate liquid and growth portfolios to reduce investment risk and encourage medium-term fiscal planning. ### Debt sustainability assessment and key DSA figures - Given very low indebtedness and substantial buffers, staff finds the risk of debt distress for the foreseeable future to be very low; total external debt consists entirely of concessional loans and is only one percent of the existing Petroleum Fund balance. - The authorities note staff changed Timor-Leste’s risk of debt distress assessment from low to moderate; authorities consider this downgrade temporary and emphasize planned fiscal adjustments. - Selected DSA baseline series (external debt, percent of GDP; public sector indicators): - External debt (nominal, percent of GDP): 2018 = 9.3; 2019 = 11.5; 2020 = 13.9; 2021 = 17.2; 2022 = 19.0; 2023 = 20.5; 2024 = 22.1; 2025 = 23.4; 2026 = 24.6; 2031 = 23.2; 2041 = 12.7. - Public sector debt (percent of GDP): matches external debt series above (9.3; 11.5; 13.9; 17.2; 19.0; 20.5; 22.1; 23.4; 24.6; 23.2; 12.7). - PV of PPG external debt-to-GDP ratio (selected projected values): 10.1; 12.2; 13.3; 14.2; 15.1; 16.0; 16.8; 16.3; 9.3. - Nominal GDP (Million of U.S. dollars): 2018 = 1,560; 2019 = 1,674; 2020 = 1,565; 2021 = 1,625; 2022 = 1,738; 2023 = 1,854; 2024 = 1,967; 2025 = 2,103; 2026 = 2,253; 2031 = 3,177; 2041 = 6,321. - Real GDP growth (percent): 2018 = -1.1; 2019 = 1.8; 2020 = -7.6; 2021 = 1.8; 2022 = 3.8; 2023 = 2.6; 2024 = 2.0; 2025 = 2.8; 2026 = 3.0; 2031 = 3.0; 2041 = 1.4. - Government revenues (excluding grants, percent of GDP): 2018 = 47.5; 2019 = 42.8; 2020 = 46.4; 2021 = 47.1; 2022 = 44.3; 2023 = 41.5; 2024 = 39.0; 2025 = 36.8; 2026 = 34.7; 2031 = 25.7; 2041 = 13.8. - Gross external financing need (Million of U.S. dollars): 143.8; -204.3; 927.2; 445.0; 654.9; 705.2; 708.5; 725.5; 749.6; 927.7; 1,305.4 (series corresponds to table years). - The residual in debt-creating flows is financed through excess withdrawals from the Petroleum Fund. ### Sensitivity analysis and realism tools (high-level) - Sensitivity analyses and bound/tailored tests in the DSA examine impacts on PV of debt-to-GDP, PV of debt-to-exports, debt service-to-exports, and debt service-to-revenue under alternative shocks (real GDP growth, primary balance, exports, other flows, depreciation, combination scenarios, and tailored tests such as natural disaster, commodity price, market financing). - Qualification of the moderate category is illustrated for 2021–2031 against thresholds where, for PV debt/GDP and PV debt/exports thresholds x = 20 percent and y = 40 percent; for debt service/exports and debt service/revenue thresholds x = 12 percent and y = 35 percent. ### Monetary, financial system, and structural policy actions - The dollarized monetary regime continues to act as an anchor; inflation has been low and close to trading partners’ inflation. - The financial system remained stable through the crisis; authorities are vigilant about credit costs and nonperforming loans when the credit moratorium expires. - Financial inclusion improvements: - 2020 Financial Inclusion Report: access to formal credit markets tripled in the last two years; about 68 percent of the adult population have access to financial services. - Central Bank (BCTL) initiatives: “Digital Village Program” for e-Wallet access in rural areas; modernization of payments system and digitalization; tax payments via ATM launched March 2021. - Regulatory improvements: enhanced reporting standards for the insurance sector (solvency margins, governance, licensing, supervision). - Structural reforms underway: - Streamlining business registration and licensing (electronic certification, quicker licensing for low-risk businesses). - Developing extrajudicial dispute resolution (arbitration, mediation). - Enhancing internet connectivity via submarine fiber-cable through Australia’s northern territory. - Anti-corruption measures: Law on Measures to Prevent and Fight Corruption enacted August 2020. - Institutional and capacity development: - Draft PFM Law, Medium-Term Fiscal Framework, and Budget Framework Law being advanced to strengthen multi-year budgeting, fiscal predictability, and budget classification aligned with international standards. - Plans to change the General Directorate of Statistics into an autonomous institute. - Continued engagement with the Fund, World Bank, UNDP; technical assistance requested for VAT implementation plan and tax administration. ### Sustainable development, disaster preparedness, and concluding remarks - Authorities are committed to sustainable development and have taken measures to develop climate-resilient infrastructure, strengthen contingency funds, and improve territorial planning after the April 4, 2021 floods (over 40 dead or missing; around 16,000 displaced). - The authorities emphasize ongoing efforts to diversify the economy, mobilize non-oil revenues, and use Petroleum Fund resources prudently to support development needs sustainably. - The Greater Sunrise fields (6.6 trillion cubic feet of gas and 273 million barrels of oil) could substantially change the outlook, but exploration and revenue model remain to be developed. - Authorities express appreciation for IMF engagement and technical assistance and reaffirm commitment to reforms for the benefit of current and future generations. *Source: Country authorities; and IMF staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tlsea2021001.pdf_