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### Context and recent developments
- Petroleum-financed government spending supported double-digit growth in 2007–09 and contributed to progress in reducing poverty.
- Oil dependence and fiscal structure:
  - Oil wealth estimated at $24.3 billion or $22,000 per capita.
  - In 2009 petroleum income accounted for about 95 percent of total government revenue and almost 80 percent of GNI.
  - Petroleum Fund (PF) assets reached $6.5 billion at end-August 2010 (about ten times non-oil GDP).
- Social and macro conditions:
  - About 40 percent of the population lives in poverty; 2010 Human Development Report ranked Timor-Leste at 120 out of 169 countries (2009/10 data).
  - Non-oil GDP growth averaged 11 percent during 2007–09; staff expects non-oil GDP growth to drop to about 6 percent in 2010 due to adverse weather.
  - Private investment modest at about 10 percent of non-oil GDP.
  - World Bank estimate: poverty incidence declined from 50 percent in 2007 to 41 percent in 2009.
- Prices and wages:
  - Annual CPI inflation: fell from 12 percent in mid-2008 to 1 percent at end-2009; rose to 5.3 percent year on year in the September quarter of 2010. Dili annual inflation reached 7.5 percent in September 2010.
  - Public sector wages increased by 25 percent in each of the past two years; provisional Ministry of Finance survey indicates private sector wages rose by 9 percent in 2010.
- Public spending and fiscal outcomes:
  - After a 130 percent increase in 2008, spending grew by 8 percent to $604 million in 2009; capital expenditure accounted for most of the increase.
  - Non-oil fiscal deficit fell by 17 percentage points to 92 percent of non-oil GDP in 2009.
  - PF withdrawals in 2009 were $512 million in excess of the $408 million certified estimated sustainable income (ESI).
  - June 2010 supplemental budget raised 2010 spending envelope to $838 million (an increase of almost 40 percent over 2009), largely financed by $811 million of PF withdrawals. Staff estimates 2010 cash spending will be around $650 million due to procurement delays.
  - Petroleum-related revenue declined in 2009 but is expected to recover to $2.1 billion in 2010.
  - Overall fiscal surplus to non-oil GDP projected to decline from 430 percent in 2009 to 240 percent in 2010.
  - Current account surplus in percent of non-oil GDP declined by almost half to 245 percent in 2009.
- Financial posture:
  - Non-oil exports (coffee, tourism) remain insignificant relative to petroleum.

### Outlook, projections, and risks
- Near term projections:
  - GDP growth expected to increase to around 7⅓ percent in 2011, driven by government spending projected to increase by almost 40 percent in 2011.
  - Inflation expected to average 4½ percent in 2010 and to increase to 6 percent in 2011.
  - Private construction and commerce activity expected to be dynamic; agricultural recovery gradual.
- Medium-term and long-term:
  - Scaled-up public investment key driver; annual non-oil growth expected to re-accelerate in 2012 and to peak at 9¾ percent in 2013.
  - Long-term non-oil growth expected to gradually converge to around 6 percent when the private sector becomes the main driver of growth.
- Major uncertainties and risks:
  - Oil revenues sensitive to volatile international oil prices and production interruptions.
  - Uncertainty about the size, timing, and quality of capital spending.
  - Depth and pace of business-enabling reforms are difficult to predict.
  - Staff view: timing of large infrastructure projects should account for institutional weaknesses and administrative capacity constraints.

### Fiscal policy, spending plans, and staff assessments
- Government plans and staff comparisons:
  - Government fiscal projections foresee significant and front-loaded scaling up of public investment with moderate growth in current spending.
  - For 2011:
    - Draft budget envelope: $985 million (an increase of over 50 percent from staff-expected 2010 spending).
    - Staff expect 2011 cash expenditure to grow at a slower pace and reach about $900 million.
    - Draft budget foresees current spending growth of 4 percent (not accounting for recurrent costs associated with public investment).
    - Government plans to limit PF withdrawals to the 2011 ESI of $734 million; remaining financing to come from non-oil domestic revenue and the government’s cash balance built up from 2010 under-execution.
  - For 2012–13:
    - Authorities plan to increase public investment at an average rate of about 30 percent and maintain this level in 2014–15.
    - Government projects current spending to grow by only 4 percent per year over 2012–15 (without accounting for recurrent costs of capital spending).
- Staff projection if government plans largely implemented:
  - Required PF withdrawals would exceed the ESI by an annual average of about $300 million.
  - Staff expects a significantly reduced overall fiscal surplus of 107 percent of non-oil GDP in 2015.
  - Non-oil fiscal deficit averages 108 percent of non-oil GDP during 2012–15.
- Staff recommendation and preferred path:
  - Support for well-managed infrastructure investment but suggest a more-gradual-than-planned pace of growth in capital spending while lowering capacity constraints.
  - Given the need to build up capacity, staff advised an average spending growth of around 10 percent annually over the medium term.
  - Under the staff-advised spending path, withdrawals from the PF would be in line with the ESI levels on average over the medium term, with withdrawals below the ESI in early years and above the ESI in later years.

### Spending strategy, composition, and fiscal risks
- Spending strategy and rationale:
  - Staff supports government investment in public infrastructure, health and education if such spending has a sufficiently high rate of return, is well managed and efficiently and transparently implemented.
  - Present spending levels are stretching administrative capacities and creating bottlenecks; outsourcing can help ease administrative capacity constraints.
  - The ESI continues to serve as guidance for public spending that should anchor fiscal policy over the medium term; the PF framework does not preclude financing worthy investment projects even if that implies temporarily spending in excess of the ESI.
  - Change in oil-price assumption (moving from EIA low to average of EIA low and reference) raised the ESI from $502 million in 2010 to $734 million in 2011.
  - The sum of domestic revenues and higher ESI, projected at $835 million in 2011, forms a sustainable spending envelope for anchoring fiscal policy.
- Advantages of a more-moderate strategy:
  - Balanced and sustainable economic growth.
  - More gradual public investment—accompanied by strengthening PFM and business environment reforms—would raise the efficiency of public investment and likely crowd-in private investment.
  - Spending aligned with absorptive capacity would exert less inflationary pressure and reduce the risk of Dutch disease.
  - A binding medium-term budget constraint would improve incentives for cost control, prioritization and better planning.
- Composition and areas for restraint within current spending:
  - Restrain wage growth.
  - Phase out subsidies, including on rice and electricity.
  - Better target transfers to the most needy.
- Revenue mobilization:
  - Compliance weak despite low statutory tax rates—10 percent on income, and 2½ percent customs duty and sales tax.
  - In 2009 the domestic tax to non-oil GDP ratio was only 8 percent.
  - Staff welcomed efforts to strengthen tax administration; if measures prove insufficient to reach a short-term revenue target of $200 million (about 25 percent of non-oil GDP in 2012), staff advised considering higher tax rates and new taxes, including on land.
  - Staff cautioned that new tax breaks in the draft Investment Law go in the wrong direction.
- Borrowing and PF considerations:
  - Current development plans could be exclusively financed by withdrawals from the PF.
  - Planned change of PF investment strategy could increase returns from the historical annual return of 4½ percent.
  - Borrowing may come with transfer of knowledge; authorities intend to channel borrowing through the budget subject to parliament approval and to have borrowing substitute for withdrawals from the PF.
  - Staff cautioned against borrowing from international financial markets.
  - Joint World Bank-IMF DSA found Timor-Leste at low risk of debt distress, assuming limited borrowings from development partners over the next 20 years with average interest rate not more than 4½ percent; DSA highlights sensitivity to petroleum price and production shocks and recommends gradual and moderate borrowing.

### Public Financial Management (PFM) and institutional reforms
- PFM assessment findings:
  - Progress made but significant gaps remain: little project assessment capacity (especially capital side), weak planning and implementation capacity in line ministries, haphazard procurement, and absence of internal audits.
  - Draft SDP is a welcome first step; further work needed to improve medium-term budgeting and planning.
  - Ministry of Finance is developing a Strategic Plan for PFM.
  - Planned PF Law revisions keep transparency, accountability, inter-generational equity intact; staff noted value in specifying what “justifies” withdrawals from the PF in excess of ESI.
  - Ambiguity over who will manage the PF is likely to create uncertainty.
- Recommendations to address under-spending on multi-annual capital projects and capacity building:
  - Comprehensive budget modernization to enhance budget credibility (first-best).
  - Special investment funds (government-adopted second option) can be effective if adequate yet flexible controls are established to prevent extra-budgetary characteristics; government committed to allocate money into these funds through same budget rules, appropriate use to identified entity/project, link non-lapsing provisions to approved project lists, keep resources in the treasury single account and use the IFMIS system for the funds.
  - Planned centralization of project evaluation and approval in a new agency reporting to the Prime Minister and staffed by well-qualified professionals.

### Financial sector and structural reforms
- Financial sector status:
  - Financial sector embryonic: three foreign bank branches dominate, a small state-owned microfinance institution, and a newly established insurance company.
  - Despite bank deposit growth (30 percent in 2009), private sector credit stagnated since 2005; loan-to-deposit ratio about 20 percent.
  - Non-performing loan to asset ratio has remained at 18 percent since 2008, with provisioning sufficient.
  - Commercial banks’ lending rates cited by authorities: 15–20 percent.
- Policy recommendations:
  - Speed up passage of key legislation and regulations to stimulate development; unclear property rights and weak contract enforcement impede collateralization.
  - Strengthen financial supervision, coordinate with foreign banks’ home supervisors, continue data collection and analysis, and pursue on-site and off-site supervision.
  - Technical assistance interest noted by authorities.

### Statistics, data, and technical assistance
- Data challenges:
  - Availability, quality and timeliness of data continue to pose challenges.
  - With extensive TA from the Fund and development partners, Timor-Leste has made progress; historical non-oil GDP data provided for the first time.
  - Important data remain unavailable and national accounts quality has significant shortcomings.
  - Mission suggested allocating adequate resources to compile key economic statistics and participation in the General Data Dissemination System (GDDS) would be beneficial.
- IMF technical assistance highlights (since late 1999) include FAD, LEG, MCM, STA inputs across budgeting, tax, petroleum fund, banking supervision, statistics, and resident advisors.

### Debt sustainability analysis (DSA) and borrowing implications
- Baseline DSA findings:
  - Baseline shows all debt stock and debt service indicators are below policy-dependent indicative thresholds throughout projection period.
  - PV of debt-to-GDP ratio and PV of debt-to-revenue ratio expected to peak at 17 percent and 68 percent respectively by 2025 (thresholds: 30 percent and 200 percent).
  - PV of debt-to-exports ratio projected to peak at 67 percent in 2026 (threshold: 100 percent).
- Stress tests and scenarios:
  - A very large shock to exports (standard shock B2) could cause PV of debt-to-GDP ratio to peak at 37 percent and breach its threshold during 2018–27; PV of debt-to-exports ratio could breach thresholds from 2024.
  - Customized export shock of 60 percent (worst-case) finds Timor-Leste at low risk of debt distress: all debt stock and debt service ratios remain under indicative thresholds throughout projection period (scenario B6).
- Public DSA (net of PF assets):
  - Baseline shows public debt ratios remain well within indicative thresholds; net public debt projected to increase significantly around 2025 when oil income winds down.
- Policy implications:
  - With moderate borrowing envelope, Timor-Leste is at low risk of debt distress.
  - Recommended approach: adopt a gradual and moderate approach to borrowing from development partners; prefer concessional loans and use borrowing strategically to acquire technical assistance that builds capacity.

### Key quantitative projections and selected figures (preserved exactly as in source)
- ESI: $502 million in 2010; $734 million in 2011.
- Sum of domestic revenues and higher ESI projected at $835 million in 2011.
- Recommended average spending growth: around 10 percent annually over the medium term.
- Historical annual return on PF assets: 4½ percent.
- Short-term revenue target: $200 million (about 25 percent of non-oil GDP in 2012).
- Real non-oil GDP growth (percent):
  - 2008: 11.0; 2009: 12.9; 2010: 6.1; 2011: 7.3; 2012: 8.6; 2013: 9.7; 2014: 9.4; 2015: 8.2.
  - (Alternative Scenario row shows 2011–15 average 7.4)
- Expenditure of the whole government (US$ millions), Baseline:
  - 2008: 557; 2009: 604; 2010: 651; 2011: 898; 2012: 1,062; 2013: 1,205; 2014: 1,278; 2015: 1,271; 2015 (end): 1,143.
  - Alternative: 2008: 557; 2009: 604; 2010: 651; 2011: 724; 2012: 800; 2013: 892; 2014: 985; 2015: 1,088; 2015 (end): 898.
- Non-oil balance of the whole government (US$ millions), baseline series:
  - -487, -513, -557, -798, -946, -1,075, -1,133, -1,109, -1,012.
- Withdrawals from the PF (US$ millions), baseline:
  - 396, 512, 636, 734, 929, 1,045, 1,091, 1,054, 971.
  - Alternative withdrawals: 396, 512, 636, 624, 669, 732, 791, 855, 734.
- Estimated sustainable income (US$ millions), baseline:
  - 396, 408, 502, 734, 744, 745, 743, 740, 741.
  - Alternative: 396, 408, 502, 734, 747, 757, 765, 771, 755.
- Petroleum Fund assets (US$ millions), baseline:
  - 4,197; 5,377; 6,744; 8,271; 9,735; 10,834; 12,176; 13,524; 13,524.
  - Alternative: 4,197; 5,377; 6,744; 8,383; 10,116; 11,551; 13,227; 14,819; 14,819.
- Domestic tax to non-oil GDP ratio in 2009: 8 percent.
- Bank deposit growth in 2009: 30 percent.
- Loan-to-deposit ratio: about 20 percent.
- Non-performing loan to asset ratio since 2008: 18 percent.
- Commercial banks’ lending rates cited by authorities: 15–20 percent.
- Non-oil sector contribution to BoP income: about 3 percent.
- Selected macro indicators (exact figures from staff/PIN):
  - GNI at current prices (US$ million): 2005: 695; 2006: 972; 2007: 1,689; 2008: 2,851; 2009: 2,401; 2010 Prel.: 2,704; 2011 Proj.: 3,019.
  - Non-oil GDP at current prices (US$ million): 2005: 332; 2006: 327; 2007: 358; 2008: 444; 2009: 556; 2010 Prel.: 627; 2011 Proj.: 708.
  - Real non-oil GDP growth (percentage change): 2005: 6.2; 2006: -5.8; 2007: 9.1; 2008: 11.0; 2009: 12.9; 2010 Prel.: 6.1; 2011 Proj.: 7.3.
  - Inflation (CPI, percentage change, period average): 2009: 0.1; 2010 Prel.: 4.5; 2011 Proj.: 6.0.
  - Petroleum Fund balance (percent of non-oil GDP, end-period): 2005: 112; 2006: 310; 2007: 583; 2008: 945; 2009: 968; 2010 Prel.: 1,076; 2011 Proj.: 1,169.

### Institutional and cooperation notes
- Strategic Development Plan (SDP) 2011–2030:
  - SDP summary published April 2010; full SDP yet to be officially released.
  - SDP objectives: Aim to put Timor-Leste among the upper-middle-income countries by 2030; target non-oil economy growth: average rate of 12 percent per year during 2010–20 and 10 percent per year during 2020–30.
  - Plan to establish an Economic Planning and Investment Agency (EPIA) to design, budget, and implement the SDP.
- World Bank–IMF collaboration:
  - Joint work includes a first DSA (Joint mission October/November 2010) and coordinated PFM and public investment support.
  - Fund will continue to lead on macro issues; Bank will lead PFM and macro-critical structural reform issues.
- IMF relations and TA:
  - Membership: Joined 7/23/2002; Article VIII.
  - Quota: 8.20 SDR Million 100.00 percent of quota; Fund holdings of currency 8.20 SDR Million 100.00 percent.
  - Exchange rate arrangement: U.S. dollar adopted January 24, 2000; maintained after independence on May 20, 2002. Monetary authority does not undertake foreign exchange transactions.
  - Resident representative office: closed end-June 2009.

*Source: IMF staff report content provided.*

### 2010. The views expressed in the staff report are those of the staff team and do not

### INTERNATIONAL MONETARY FUND — DEMOCRATIC REPUBLIC OF TIMOR-LESTE: Staff Report for the 2010 Article IV Consultation

### Context
- Petroleum-financed government spending supported double-digit growth in 2007–09 and contributed to commendable progress in reducing poverty.
- Timor-Leste is highly oil dependent: oil wealth is estimated at $24.3 billion or $22,000 per capita; in 2009 petroleum income accounted for about 95 percent of total government revenue and almost 80 percent of GNI.
- About 40 percent of the population lives in poverty; the 2010 Human Development Report (based on 2009/10 data) ranked Timor-Leste at 120 out of 169 countries.
- The authorities outlined a Strategic Development Plan (SDP) for 2011–2030; implementing projects requires costed and prioritized plans that account for institutional and absorptive capacity constraints.

### Recent Developments
- Non-oil GDP growth averaged 11 percent during 2007–09.
- Staff expects non-oil GDP growth to drop to about 6 percent in 2010 due to adverse weather impacting harvests.
- Private investment remains modest at about 10 percent of non-oil GDP.
- World Bank estimate: poverty incidence declined from 50 percent in 2007 to 41 percent in 2009.
- Annual CPI inflation: fell from 12 percent in mid-2008 to 1 percent at end-2009; rose to 5.3 percent year on year in the September quarter of 2010. Dili annual inflation reached 7.5 percent in September 2010.
- Public sector wages increased by 25 percent in each of the past two years; provisional Ministry of Finance survey indicates private sector wages rose by 9 percent in 2010.
- Public spending: after a 130 percent increase in 2008, spending grew by 8 percent to $604 million in 2009; capital expenditure accounted for most of the increase.
- Non-oil fiscal deficit fell by 17 percentage points to 92 percent of non-oil GDP in 2009.
- Petroleum Fund (PF) withdrawals in 2009 were $512 million in excess of the $408 million certified estimated sustainable income (ESI).
- The original 2010 budget envisaged moderate spending growth; a June 2010 supplemental budget raised the 2010 spending envelope to $838 million (an increase of almost 40 percent over 2009), largely financed by $811 million of PF withdrawals. Staff estimates 2010 cash spending will be around $650 million due to procurement delays.
- Petroleum Fund assets reached $6.5 billion at end-August 2010 (about ten times non-oil GDP).
- Petroleum-related revenue declined in 2009 but is expected to recover to $2.1 billion in 2010.
- Overall fiscal surplus to non-oil GDP projected to decline from 430 percent in 2009 to 240 percent in 2010.
- Current account surplus in percent of non-oil GDP declined by almost half to 245 percent in 2009.
- Non-oil exports (coffee, tourism) remain insignificant relative to petroleum.

### Outlook and Risks
- Near term:
  - GDP growth expected to increase to around 7⅓ percent in 2011, driven by government spending projected to increase by almost 40 percent in 2011.
  - Inflation expected to average 4½ percent in 2010 and to increase to 6 percent in 2011.
  - Private construction and commerce activity expected to be dynamic; agricultural recovery gradual.
- Medium term:
  - Scaled-up public investment will be a key driver of growth; effectiveness may be limited by weak public financial management and a disproportionately small private sector.
  - Annual non-oil growth expected to re-accelerate in 2012 and to peak at 9¾ percent in 2013.
- Long term:
  - Non-oil growth expected to gradually converge to around 6 percent when the private sector becomes the main driver of growth.
- Major uncertainties:
  - Oil revenues sensitive to volatile international oil prices and production interruptions.
  - Uncertainty about the size, timing, and quality of capital spending.
  - Depth and pace of business-enabling reforms are difficult to predict.

### Policy Discussions — Fiscal Policy: The Pace of Public Spending Growth
- Challenge: enhance effectiveness of public spending and address supply and structural constraints (shortage of skilled labor, managerial capacity, limited absorptive capacity).
- Staff view: timing of large infrastructure projects should account for institutional weaknesses and administrative capacity constraints.

Findings on government plans and staff assessments:
- Government fiscal projections foresee significant and front-loaded scaling up of public investment with moderate growth in current spending.
- For 2011:
  - Draft budget envelope: $985 million (an increase of over 50 percent from staff-expected 2010 spending).
  - Staff expect 2011 cash expenditure to grow at a slower pace and reach about $900 million.
  - Draft budget foresees current spending growth of 4 percent (not accounting for recurrent costs associated with public investment).
  - Government plans to limit PF withdrawals to the 2011 ESI of $734 million; remaining financing to come from non-oil domestic revenue and the government’s cash balance built up from 2010 under-execution.
- For 2012–13:
  - Authorities plan to increase public investment at an average rate of about 30 percent and maintain this level in 2014–15.
  - Government projects current spending to grow by only 4 percent per year over 2012–15 (without accounting for recurrent costs of capital spending).
- Staff projection if government plans largely implemented:
  - Required PF withdrawals would exceed the ESI by an annual average of about $300 million.
  - Staff expects a significantly reduced overall fiscal surplus of 107 percent of non-oil GDP in 2015.
  - Non-oil fiscal deficit averages 108 percent of non-oil GDP during 2012–15.
- Staff recommendation (implicit from assessment):
  - Support for well-managed infrastructure investment but suggest a more-gradual-than-planned pace of growth in capital spending while lowering capacity constraints.

*Prepared by IMF staff for the 2010 Article IV Consultation (Approved December 3, 2010).*

### 14.      Staff recommended a more moderate increase in spending, accompanied by

### Staff recommended a more moderate increase in spending, accompanied by capacity building

### Spending strategy and rationale
- Staff supports government investment in public infrastructure, health and education if such spending has a sufficiently high rate of return, is well managed and efficiently and transparently implemented; such investment would raise economic growth and the standard of living of Timorese people.
- Present spending levels are stretching administrative capacities and creating bottlenecks; outsourcing can help ease administrative capacity constraints, and staff encouraged the authorities to take full advantage of the expertise provided by the World Bank, ADB, and bilateral donors, while noting that managing outsourcing is a challenge in itself.
- The ESI continues to serve as guidance for public spending that should anchor fiscal policy over the medium term; the PF framework does not preclude financing worthy investment projects even if that implies temporarily spending in excess of the ESI.
- Change in oil-price assumption: moving from the low oil price forecast published by the U.S. Energy Information Administration (EIA) to using the average of EIA low and reference case oil price raised the ESI from $502 million in 2010 to $734 million in 2011. The mid-price is still some $15 below market futures and can be considered prudent, as required by the PF law.
- The sum of domestic revenues and higher ESI, projected at $835 million in 2011, forms a sustainable spending envelope for anchoring fiscal policy.
- Given the need to build up capacity, staff advised an average spending growth of around 10 percent annually over the medium term.
- Withdrawals from the PF under this spending path would be in line with the ESI levels on average over the medium term, with withdrawals below the ESI in early years and above the ESI in later years.

### Advantages of the alternative (more moderate) strategy
- Key advantage: balanced and sustainable economic growth.
- A more gradual increase in public investment—accompanied by strengthening public financial management and accelerating reforms to improve the business environment—would raise the efficiency of public investment and likely crowd-in private investment.
- Short-run GDP growth may be slightly lower than in the baseline, but economic development would become more balanced, with a stronger role of the private sector, and yield higher long-run growth rates.
- Spending aligned with absorptive capacity would exert less inflationary pressure and reduce the risk of Dutch disease.
- The recommended spending path would maintain fiscal sustainability without reliance on oil revenues from Greater Sunrise.
- A binding medium-term budget constraint would improve budget process incentives for cost control, prioritization and better planning.

### Composition of public spending and fiscal risks
- The implications of higher public investment for recurrent spending need careful consideration to ensure scaling-up does not jeopardize fiscal sustainability.
- Composition should account for economic and social objectives.
- Within current spending, there is room to:
  - restrain wage growth,
  - phase out subsidies, including on rice and electricity,
  - better target transfers to the most needy.

### Revenue mobilization and tax policy
- Compliance with tax obligations is weak despite low statutory tax rates—10 percent on income, and 2½ percent customs duty and sales tax.
- In 2009 the domestic tax to non-oil GDP ratio was only 8 percent.
- Staff welcomed authorities’ efforts to strengthen tax administration, including improving taxpayer registration, following through on non-compliance, and building tax audit capacity.
- If measures prove insufficient to reach a short-term revenue target of $200 million (about 25 percent of non-oil GDP in 2012), staff advised considering higher tax rates and new taxes, including on land.
- Staff cautioned that new tax breaks in the draft Investment Law go in the wrong direction and may prove ineffective in raising private sector investment.

### Borrowing, debt sustainability, and the Petroleum Fund (PF)
- Current development plans could be exclusively financed by withdrawals from the PF.
- Development partners may offer financing at concessional terms or at interest rates below expected returns on PF assets; planned change of PF investment strategy could increase returns from the historical annual return of 4½ percent.
- Borrowing may come with transfer of knowledge; authorities intend to channel borrowing through the budget subject to parliament approval and to have borrowing substitute for withdrawals from the PF.
- Staff cautioned against borrowing from international financial markets.
- A joint World Bank-IMF DSA found Timor-Leste at low risk of debt distress, assuming limited borrowings from development partners over the next 20 years with average interest rate not more than 4½ percent; the DSA highlights sensitivity to petroleum price and production shocks and recommends gradual and moderate borrowing.

### Public Financial Management (PFM)
- Progress has been made but significant gaps remain: little project assessment capacity (especially capital side), weak planning and implementation capacity in line ministries, haphazard procurement, and absence of internal audits.
- The draft SDP is a welcome first step; further work needed to improve medium-term budgeting and planning.
- Ministry of Finance is developing a Strategic Plan for PFM.
- The PF remains cornerstone for managing oil-based financial resources; ESI is a useful benchmark and PF framework allows spending above ESI subject to parliament approval.
- Planned PF Law revisions keep basic principles—transparency, accountability, inter-generational equity—intact, but staff noted value in specifying what “justifies” withdrawals from the PF in excess of ESI (e.g., financial or social returns).
- Ambiguity over who will manage the PF is likely to create uncertainty.
- To address under-spending on multi-annual capital projects and capacity building, staff recommended:
  - Comprehensive budget modernization to enhance budget credibility (first-best).
  - Special investment funds (government-adopted second option) can be effective if adequate yet flexible controls are established to prevent extra-budgetary characteristics; government committed to allocate money into these funds through same budget rules, appropriate use to identified entity/project, link non-lapsing provisions to approved project lists, keep resources in the treasury single account and use the IFMIS system for the funds.
- Planned centralization of project evaluation and approval in a new agency reporting to the Prime Minister and staffed by well-qualified professionals can help address lack of administrative assessment capacity and improve cost/quality control and anti-corruption oversight.

### Authorities’ views (on spending and sequencing)
- Authorities emphasized urgency to scale up public investment quickly due to infrastructure left in shambles by years of conflict; state must play leading role in providing basic infrastructure (roads, electrical power, clean water) as prerequisite to attract private investment.
- Authorities argued front-loaded scaling up of public investment is consistent with long-term fiscal sustainability; such spending serves long-run interests even if requiring withdrawals from PF in excess of ESI in short run.
  - Once basic infrastructure is in place, large public spending can be reduced and withdrawals from the PF can return to sustainable levels.
  - Current ESI does not capture potential revenues from the Greater Sunrise field; more natural resources might be discovered.
- Authorities felt composition of public spending adequately reflects needs and cautioned that curbing wage growth, phasing out rice and electricity subsidies, and better targeting transfers could have ramifications for stability in a post-conflict fragile nation and preferred shifting focus to public capital.

### External stability and competitiveness
- Official dollarization has provided a strong nominal anchor; there is currently no obvious alternative and running independent monetary policy would be extremely difficult.
- Fiscal policy is key to competitiveness and external sustainability; external current account balance is driven largely by oil and gas revenue, with a small non-oil export sector contributing only about 3 percent to BoP income.
- Expediting business-enabling reforms is critical: improving land access, easing business start-up, enforcing contracts, enhancing access to finance. Progress includes establishment of a one-stop-shop for investors and passage of the Transitional Land Law by Cabinet (Parliamentary approval pending).

### Financial sector policy
- Financial sector remains embryonic; financial services reach only a small portion of the population.
- Composition: three foreign bank branches dominate, a small state-owned microfinance institution, and a newly established insurance company.
- Despite bank deposit growth (30 percent in 2009), private sector credit stagnated since 2005; surplus funds held mainly abroad; loan-to-deposit ratio about 20 percent.
- Non-performing loan to asset ratio has remained at 18 percent since 2008, with provisioning sufficient.
- Staff suggested speeding up passage of key legislation and regulations to stimulate development; unclear property rights and weak contract enforcement impede collateralization.
- Central bank law to safeguard Banking and Payments Authority’s autonomy and the anti-money laundering law were submitted to Parliament committees.
- Staff encouraged strengthened financial supervision, coordination with foreign banks’ home supervisors, continued data collection and analysis, and on-site and off-site supervision.
- Authorities noted commercial banks’ lending rates of 15–20 percent are disincentives for credit growth and expressed interest in technical assistance.

### Statistics and data
- Availability, quality and timeliness of data continue to pose challenges to policy formulation and surveillance.
- With extensive TA from the Fund and development partners, Timor-Leste has made progress; historical non-oil GDP data were provided for the first time.
- Important data remain unavailable and quality of national accounts has significant shortcomings that hamper analysis.
- Mission suggested allocating adequate resources to compile key economic statistics and participation in the General Data Dissemination System (GDDS) would be beneficial.

### Key fiscal and macroeconomic figures (selected from staff projections and tables)
- ESI: $502 million in 2010; $734 million in 2011.
- Sum of domestic revenues and higher ESI projected at $835 million in 2011.
- Recommended average spending growth: around 10 percent annually over the medium term.
- Historical annual return on PF assets: 4½ percent.
- Short-term revenue target: $200 million (about 25 percent of non-oil GDP in 2012).
- Real non-oil GDP growth (percent) series (2008–2015, as presented):
  - 2008: 11.0
  - 2009: 12.9
  - 2010: 6.1
  - 2011: 7.3
  - 2012: 8.6
  - 2013: 9.7
  - 2014: 9.4
  - 2015: 8.2
  - (Alternative Scenario row shows 2011–15 average 7.4)
- Expenditure of the whole government (US$ millions) series (2008–2015, baseline and alternative both shown):
  - Baseline: 2008: 557; 2009: 604; 2010: 651; 2011: 898; 2012: 1,062; 2013: 1,205; 2014: 1,278; 2015: 1,271; 2015 (end): 1,143
  - Alternative: 2008: 557; 2009: 604; 2010: 651; 2011: 724; 2012: 800; 2013: 892; 2014: 985; 2015: 1,088; 2015 (end): 898
- Non-oil balance of the whole government (US$ millions), baseline series: -487, -513, -557, -798, -946, -1,075, -1,133, -1,109, -1,012
- Withdraw from the PF (US$ millions) series (baseline): 396, 512, 636, 734, 929, 1,045, 1,091, 1,054, 971
  - Alternative scenario withdrawals: 396, 512, 636, 624, 669, 732, 791, 855, 734
- Change of government's cash balance (US$ millions) (selected): -48, 79, - , - , - , - , - , -
- Loan disbursement (US$ millions) (alternative scenario): 0, 17, 30, 42, 55, 29 (years aligned as in table)
- Estimated sustainable income (US$ millions) series (baseline): 396, 408, 502, 734, 744, 745, 743, 740, 741
  - Alternative scenario: 396, 408, 502, 734, 747, 757, 765, 771, 755
- Petroleum Fund assets (US$ millions) series (baseline): 4,197; 5,377; 6,744; 8,271; 9,735; 10,834; 12,176; 13,524; 13,524
  - Alternative scenario assets: 4,197; 5,377; 6,744; 8,383; 10,116; 11,551; 13,227; 14,819; 14,819
- Domestic tax to non-oil GDP ratio in 2009: 8 percent.
- Bank deposit growth in 2009: 30 percent.
- Loan-to-deposit ratio: about 20 percent.
- Non-performing loan to asset ratio since 2008: 18 percent.
- Commercial banks’ lending rates cited by authorities: 15–20 percent.
- Non-oil sector contribution to BoP income: about 3 percent.

*Source: IMF staff report content provided.*

### 36.      After three years of double-digit expansion, economic growth is likely to slow to

### _cr1165 - 36. After three years of double-digit expansion, economic growth is likely to slow to

### Growth outlook and inflation
- After three years of double-digit expansion, economic growth is likely to slow to about 6 percent in 2010, mainly because adverse weather has slashed agricultural production.
- Growth is expected to gradually gather speed and peak at around 9¾ percent in 2013–14, mainly driven by scaling up public investment, but also supported by dynamism in the non-oil private sector, including a recovery in agriculture.
- In the long term, growth is expected converge to about 6 percent given by supply-side fundamentals.
- Price pressures have been rising in 2010 and are particularly notable in some segments of the economy, such as construction, and in the skilled labor market.
- Inflation is expected to increase to 6 percent, somewhat above the average rate in neighboring countries.

### Use of oil wealth and public investment strategy
- Timor-Leste should use its oil wealth wisely to build a strong, sustainable non-oil economy that would permanently reduce poverty and raise living standards.
- If well selected and managed, investment in infrastructure could have sufficiently high returns to justify withdrawals from the PF in excess of sustainable income.
- However, the planned rapid expansion of public investment in infrastructure risks overstretching the country’s current ability to plan, evaluate, and implement given its institutional weaknesses and administrative capacity constraints.
- There are signs of rising inflation as the economy is reaching its absorptive capacity limit, due to the shortage of skilled labor and the small size of the private sector.

### Recommended pace of spending and expected outcomes
- A more-gradual-than-planned pace of spending increases is advisable.
- Recent rapid spending growth addressed pressing social needs and laid the foundation for peace after the 2006/7 civil unrest.
- By 2009, public spending per head has reached a level that is above many comparable countries.
- The revised higher ESI has created room for additional investment in a limited number of priority projects while gaining experience with the management of capital spending.
- Spending at a measured pace would stand a better chance of:
  - realizing high quality investment,
  - crowding in private investment,
  - achieving balanced and sustainable growth.

### Capacity building and business-enabling reforms
- Capacity constraints should be addressed and business-enabling reforms implemented.
- The government’s plan to address budget under-execution and to build administrative capacities (to “invest in investing”) is encouraging.
- A new agency, reporting directly to the Prime Minister, will be in charge of major project evaluation, approval, and quality control; it will be important that the agency recruits well-qualified staff.
- A more efficient administration and business friendlier regulations would make life easier for businesses.
- The introduction of a one-stop-shop for business is a welcome step.
- Reforms to enhance property rights, such as the pending land law, should be accelerated.
- Efficient collateralization would enable the financial sector to extend credits to local businesses.

### Fiscal policy, external stability, and competitiveness
- Fiscal policy should be mindful of competitiveness and external stability.
- Official dollarization has helped keep inflation under control and should be maintained.
- Dollarization needs to be supported by accelerating productivity-enhancing structural reforms and raising labor skills to improve competitiveness in non-oil industry and services.
- A slower pace of public spending growth would help to contain inflationary pressures.

### Institutional recommendation
- Staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

*Source: IMF staff report excerpt (text provided).*

### BOX 1. EXCHANGE RATE, COMPETITIVENESS, AND EXTERNAL SUSTAINABILITY ASSESSMENT

### BOX 1. EXCHANGE RATE, COMPETITIVENESS, AND EXTERNAL SUSTAINABILITY ASSESSMENT

### Exchange rate and competitiveness: key findings
- The real effective exchange rate is a poor indicator of Timor-Leste’s competitiveness.
- Lack of data prevents the estimation of equilibrium exchange rates.
- Petroleum and coffee, the country’s main sources of foreign income, are denominated in U.S. dollars.
- The CPI is poorly measured.
- Competitiveness indicators based on unit costs are not available.
- Wages, driven by the public sector, have been rising fast, while productivity has been lagging behind.
- Terms-of-trade have improved significantly.
- REER calculation notes: Index 2002=100; weights based on import shares during 2004-06: Indonesia: 55; Singapore: 18; Australia: 17; Vietnam: 5; Japan: 5. REER calculated using nonfood CPI as proxy for nontradable good prices.

### Business climate and competitiveness rankings
- The 2010 Doing Business ranking improved due to the 2008 cuts in business and income taxes.
- Timor-Leste remains among the lowest performers out of the 181 countries which participated in the survey.
- Timor-Leste fell back one rank on the 2010–11 Global Competitiveness ranking, and is at the bottom of the Asia-Pacific region.
- According to the GCI, the most problematic factors for doing business in Timor-Leste are:
  - access to financing
  - poor skills and work ethic
  - inefficient government bureaucracy
  - inadequate infrastructure
  - corruption

### External sustainability and current account assessment
- From a macroeconomic balance perspective the current account mirrors petroleum-financed public spending.
- In 2011, the current account surplus is expected to fall below its sustainable level, computed as the difference between petroleum income and the ESI.
- In the medium run, the current account surplus is projected to remain below its sustainable level by about 30 percent of GDP.
- Baseline projections and figures in the source show current account balances and sustainable current account balance measured in percent of non-oil GDP (figures presented in the source).

### Related macroeconomic context (from figures and tables)
- Non-oil exports remain very small; oil/gas revenue has dominated national income and the current account surplus.
- Rapidly rising public spending and an agricultural rebound have fueled high non-oil growth in the last three years.
- Inflation rose in 2008 along with food prices, but has abated somewhat.
- The source includes detailed time-series and projections for: REER and NEER indices (Index 2002=100); current account balances (in percent of non-oil GDP and in US$); medium-term baseline projections for growth indicators, balance of payments indicators, central government balances, combined sources expenditure and capital expenditure, and government revenue components.

### Select quantitative statements reproduced exactly from the source
- Timor-Leste is among the lowest performers out of the 181 countries which participated in the survey.
- Timor-Leste fell back one rank on the 2010–11 Global Competitiveness ranking.
- In the medium run, the current account surplus is projected to remain below its sustainable level by about 30 percent of GDP.
- REER weights: Indonesia: 55; Singapore 18; Australia 17; Vietnam 5; and Japan: 5.
- REER index base: Index 2002=100.

### Fund recommendations and policy actions (as stated)
- Monetary and Exchange Rate Policy
  - Official dollarization has helped keep inflation under control, and should be maintained.
  - Continued commitment to build up institutional capacity before any policy change.
- Fiscal Policy
  - Public spending should return to a sustainable path over the medium term, and be targeted to growth promotion and poverty reduction.
  - Spending growth in 2009 has been moderate and cash expenditures are expected to remain below sustainable levels in

*Source: BOX 1. EXCHANGE RATE, COMPETITIVENESS, AND EXTERNAL SUSTAINABILITY ASSESSMENT (extracted from the supplied content).*

### 2010. However, the authorities plan to step up capital spending

### _cr1165 - 2010. However, the authorities plan to step up capital spending

### Fiscal policy and public investment
- Authorities plan to step up capital spending in 2011-15 to promote growth and poverty reduction.
- Fiscal prudence is needed to support competitiveness and external sustainability.
- Public investment plan to 2015: five-year public investment budget in the order of 30 percent of GNP per year.
- Financing options for public investment include withdrawals from the PF in excess of the ESI or concessional borrowing.
- The government intends to keep current expenditure within the ESI.
- Recommendations and implementation gaps:
  - Introduce a medium-term expenditure framework.
  - Carefully prioritize and cost capital investment projects.
  - Capital investment projects should be carefully prioritized and costed.
  - Foreign borrowing should be subject to Parliamentary approval and proper justification.
  - The authorities are considering borrowing; parliamentary approval has been made a legal requirement.

### Strategic Development Plan (SDP) 2011–2030
- SDP summary published April 2010; full SDP yet to be officially released.
- Prime Minister initiated country-wide consultation immediately after publication.
- SDP objectives and targets:
  - Aim to put Timor-Leste among the upper-middle-income countries by 2030.
  - Target non-oil economy growth: average rate of 12 percent per year during 2010–20 and 10 percent per year during 2020–30.
- Framework of action to 2020: major public and private investment projects in human capital, infrastructure, and strategic sectors (agriculture, petroleum including downstream, tourism).
- Institutional measure: plan to establish an Economic Planning and Investment Agency (EPIA) to design, budget, and implement the SDP.
- Priority areas for public investment to 2015: health and nutrition, education and research, roads, power, seaports and airports, agriculture, petroleum, and tourism.
- Implementation constraints: details need to be worked out and administrative capacity constraints hamper public investment management.

### Petroleum Fund (PF) and Estimated Sustainable Income (ESI)
- PF Law defines the ESI as 3 percent of Timor-Leste’s total petroleum wealth (current PF balance plus the net present value of future petroleum receipts).
- Role of ESI:
  - Benchmark to guide budget withdrawals from the PF and inform policy discussions.
  - Actual withdrawals can exceed the ESI if the government delivers a detailed explanation to parliament why doing so is in the long-run interest of the country.
- ESI calculation and assumptions:
  - Calculated every year based on assumptions on petroleum output and prices; PF Law requires prudent assumptions because 70 percent of Timor-Leste’s oil wealth remains under the sea and there is no diversification across multiple projects.
  - Only projects with an approved development plan and firm investment commitment (Bayu Undan and Kitan) included in ESI calculation.
  - Greater Sunrise declared a commercial discovery but without an approved development plan; therefore not included in ESI under current policy.
  - Exclusion of Sunrise raises credibility concerns but its inclusion is complicated by material uncertainties.
  - Ministry of Finance should evaluate Sunrise’s potential effect on petroleum wealth and fiscal financing to manage expectations and inform policy discussions.
- Oil price methodology and impact on ESI:
  - Until 2010, oil price used for ESI was the “low” case from the U.S. Energy Information Administration (EIA) Annual Energy Outlook.
  - Authorities moved to using the average of the EIA low and reference cases to balance realism and prudence.
  - For 2011, the average price generates an ESI of $734 million compared to $548 million under the EIA low case price.

### Public Financial Management (PFM) assessments: Fiscal ROSC and PEFA (2010)
- Joint IMF, World Bank, and ADB exercises assessed strengths and weaknesses of Timor-Leste’s PFM system.
- Key strengths:
  - Well-structured, basic budget process.
  - Well-managed and supervised framework for the petroleum sector.
  - Comprehensive budget documentation and regular fiscal reporting.
  - Modern integrated financial management information system.
  - Efficient Treasury Single Account.
  - Gains in funding predictability, timeliness and quality of bank reconciliation and financial statements, legislative scrutiny, functionality of the treasury system, and external audit process.
- Substantial weaknesses identified:
  - Budget is not a good predictor of actual spending, mainly reflecting large supplementary budgets.
  - Budget Review in the Ministry of Finance has very little assessment capacity, especially on the capital side.
  - Budget planning and implementation capacity in line ministries is very weak.
  - Budget oversight of autonomous government agencies and public enterprises is weak and associated fiscal risks are not monitored.
  - Independent internal and external audit processes are lacking.
  - Procurement has been in a state of flux with less competitive instruments becoming more prevalent.
  - Budget is only weakly linked to policy objectives; implications of capital spending for recurrent budgets are ignored.
  - Ministry of Finance has little capacity to adequately review the rationale, costing, and impact of public investment.
  - A solid multi-year perspective on fiscal planning, expenditure policy, and budgeting is missing.
  - Tax compliance and tax audit remain major issues despite improved transparency in taxpayer obligations.

### Budget institutions: Index results
- Two indexes constructed: stage index (planning, approval, implementation) and category index (top-down procedures; rules and controls; sustainability and credibility; comprehensiveness; transparency).
- Scoring method: score 0–4; overall stage and category indexes are simple averages of sub-indexes.
- Index results and comparisons:
  - Timor-Leste overall stage index: 1.6 (lower than LICs average of 1.9).
  - Timor-Leste overall category index: 1.7 (lower than LICs average of 1.9).
  - Timor-Leste scores relatively strong on transparency and comprehensiveness; fiscal transparency close to the average of middle-income countries (MICs).
  - Important shortcomings: unclear fiscal targets; dual budget process where capital and current budgets are developed separately; inadequate analysis of fiscal risks.
  - Weak scores in fiscal rules and controls, and sustainability and credibility, reflecting absence of a solid medium-term fiscal perspective, large gaps in internal and external audit, and inadequate monitoring of fiscal risks.

### Financial sector policy and structural reforms
- Continued efforts needed to strengthen financial sector supervision and promote financial development.
- Banking supervision enhancements are ongoing.
- As part of improving financial sector supervision, authorities established the Credit Registry Agency.
- Structural reforms needed to promote financial development:
  - Reforms to enhance property rights.
  - Land Law progressing but other steps are still pending.

### IMF relations and technical assistance
- Fund relations (as of November 01, 2010):
  - Membership status: Joined 7/23/2002; Article VIII.
  - Quota: 8.20 SDR Million 100.00 percent of quota; Fund holdings of currency 8.20 SDR Million 100.00 percent; Reserve position in Fund 0.00 SDR Million 0.01 percent.
  - Net cumulative SDR allocation: 7.73 SDR Million 100 percent; Holdings 7.73 SDR Million 100 percent.
  - Outstanding purchases and loans: None. Latest financial arrangements: None. Projected obligations to Fund: None.
- Exchange rate arrangement:
  - U.S. dollar adopted January 24, 2000; maintained after independence on May 20, 2002. Monetary authority does not undertake foreign exchange transactions.
- Technical assistance highlights (since late 1999):
  - FAD: support to establish Central Fiscal Authority/Ministry of Planning and Finance; budget preparation; tax policy and administration; treasury and expenditure management; Petroleum Fund design (started operations August 2005); resident advisors for treasury and expenditure management; TA on petroleum fiscal issues and ESI calculation.
  - LEG: assistance on tax legislation, budget and financial management law, banking regulations, AML/CFT Law, Petroleum Fund Act, and tax consolidation.
  - MCM: assistance to establish Central Payments Office/BPA; payments system; banking supervision; insurance law; AML/CFT; investment unit for PF asset management; central bank preparation; payment systems modernization; petroleum fund accounting.
  - STA: missions on macroeconomic data, statistics division establishment, balance of payments, monetary and financial statistics, CPI basket update.
- Resident representative office: closed end-June 2009; originally established in Dili in August 2000.

*Source: IMF Staff.*

### ANNEX II. TIMOR-LESTE: WORLD BANK-IMF COLLABORATION

### ANNEX II. TIMOR-LESTE: WORLD BANK-IMF COLLABORATION

### Cooperation and coordination
- Country teams led by Mr. H. Rab (acting country manager) and Mr. W. Schule (IMF mission chief for Timor-Leste) maintain a close working relationship and active dialogue on macroeconomic and structural issues.
- Close cooperation areas include:
  - Macroeconomic developments and economic updates: regular sharing of information, including Fund comments on the Bank’s semi-annual economic updates.
  - Public Finance Management: World Bank participation in IMF-led PEFA and ROSC missions; Bank follow-up on recommendations including support to MOF on a Strategic Plan; regular coordination between Bank staff on the ground and the IMF’s Treasury Adviser at the Ministry of Finance.
  - External debt: close engagement on government plans to borrow; a first joint DSA was carried out during the Article IV mission in October/November 2010.
  - Export competitiveness study: Bank completed a trade diagnostic study for which the Fund provided analysis of external competitiveness and sustainability.

### Shared macroeconomic assessment
- Main macroeconomic challenge identified:
  - Manage the country’s petroleum wealth effectively and sustainably to develop a stronger non-oil economy and reduce poverty.
- To meet this challenge Timor-Leste needs:
  - A Strategic Development Plan to help prioritize public expenditure.
  - Strengthened public financial management.
  - Accelerated reforms to promote productivity and competitiveness.
- Note: The effectiveness of scaling up public investment depends critically on progress in the above areas.

### Macro-critical structural reform areas (identified)
- Strategic Development Plan:
  - Timor-Leste envisages a rapid scaling up of public investment. The SDP should help prioritize public expenditure, promote sustainable growth and fiscal sustainability.
- Public financial management reform:
  - Fiscal ROSC and PEFA missions and the Bank’s review of the Planning and Financial Management Capacity Building Program found solid progress but highlighted pressing issues around medium-term budgeting, expenditure (in particular public investment) management and procurement, and auditing. These areas are critical for the quality of expenditure.
- Promoting productivity and competitiveness:
  - Challenges to the non-oil economy include skills deficits; access to land; and the business environment, in particular access to finance and contract enforcement.

### Agreement on roles and forward cooperation
- Teams agreed to continue close cooperation going forward.
- Summary of responsibilities: the Fund will continue to lead on macro issues, and the Bank will continue to lead PFM and macro-critical structural reform issues.
- Appendix I outlines specific planned activities for the September 2010/2011 period (summary below).

### Appendix I — Planned joint activities (September 2010–August 2011) — selected items
- Joint work:
  - First DSA: Joint mission in October/November 2010; DSA write up November 2010.
- Bank work program (selected entries and provisional timing as presented):
  - Creditworthiness assessment — December 2010.
  - Export competitiveness study — October 2010.
  - PFM Capacity Building Program — Ongoing; Program close July 2011.
  - Support on Public Investment Management — December 2010 / April/May 2011 (timing entries as shown).
  - Support on MTFF — January/February 2011; Spring 2011.
  - Civil Service Review — December 2010; January 2011; February/March 2011; Spring 2011.
- Fund work program (selected entries and timing as presented):
  - Article IV Consultations — October/November 2010.
  - TA Balance of Payments Statistics — Missions in September, November, December 2010.
  - TA Government Finance Statistics — Mission February 2011.
  - TA Consumer Price Index — Mission November 2011.
  - TA Resident Treasury Advisor — September 2010––September 2011; Ongoing, Res. Treasury Advisor in coop. with World Bank’s PFMCBP.
  - TA Strategic Development Treasury — December 2010; February 2011; Spring 2011.

*Source: ANNEX II. TIMOR-LESTE: WORLD BANK-IMF COLLABORATION (from the provided content).*

### 1.      A young nation with a high incidence of poverty, Timor-Leste has been heavily

### _cr1165 - 1.      A young nation with a high incidence of poverty, Timor-Leste has been heavily

### Background and petroleum dependence
- Timor-Leste has been heavily dependent on petroleum resources since the start of offshore production in 2004.
- By 2009:
  - Petroleum revenue accounted for almost 80 percent of GNI.
  - Withdrawals from the Petroleum Fund (PF) accounted for about 95 percent of total government revenue (including grants).
- The Petroleum Fund (PF), established in 2005, had assets of $6.5 billion or ten times the non-oil GDP in August 2010; PF assets are invested entirely abroad.
- Timor-Leste currently has no public or external debt; withdrawals from the PF have been financing non-oil fiscal deficits.

### Rationale for a DSA and borrowing considerations
- The first joint DSA is undertaken amid authorities’ plans for double-digit non-oil GDP growth over the next two decades by scaling up public investment.
- Government considerations for external borrowing:
  - To substitute PF withdrawals and meet pressing development needs.
  - To access technical assistance from development partners to strengthen policy and institutional capacity and support complex infrastructure investments.
  - To diversify financing sources and build debt management capacity from scratch.
- Timor-Leste has a weak Country Policy and Institutional Assessment (CPIA) performance rating, corresponding to the lowest set of indicative debt thresholds.

### DSA measurement adjustments and repayment capacity
- To reflect the special features of the economy, the DSA uses:
  - GNI to capture the size of the wider economy.
  - Wider exports covering exports of non-oil goods and services plus oil-related income (including oil exports recorded as oil income in the balance of payments) and PF investment income net of interest payments abroad.
  - Total public sector revenue equals non-oil revenue plus estimated sustainable income (ESI) from petroleum.
- Borrowing capacity depends crucially on petroleum exports, accumulation of PF assets, and growth of the non-oil economy.

### Box 1 — The Estimated Sustainable Income (ESI) (key points preserved)
- The PF Law defines the ESI as 3 percent of Timor-Leste’s total petroleum wealth, including the current PF balance plus the net present value of future petroleum receipts.
- The ESI is a benchmark to guide budget withdrawals; actual withdrawals can exceed the ESI if the government provides a detailed explanation to parliament.
- The ESI is calculated annually based on assumptions on petroleum output and prices; the PF Law requires prudent assumptions because 70 percent of Timor-Leste’s oil wealth remains under the sea and there is no diversification across multiple projects.
- Only projects with an approved development plan and firm investment commitment (Bayu Undan and Kitan) have been included in the ESI calculation. Greater Sunrise, though a commercial discovery, lacks an approved development plan and is not included.
- The Ministry of Finance should evaluate Sunrise’s potential effect on petroleum wealth and fiscal financing to manage expectations and guide assessment of potential additional wealth.
- Until 2010, the oil price used for ESI was the “low” case from the U.S. Energy Information Administration (EIA) Annual Energy Outlook.
  - Authorities decided to use the average of the EIA low and reference cases.
  - For 2011, the average price generates an ESI of $734 million compared to $548 million under the EIA low case price.

### Baseline macroeconomic and petroleum sector assumptions (2011–30)
- Real sector:
  - Real non-oil GDP projected to grow at close to 9 percent on average over the medium term before gradually reverting to potential of 6 percent in the long run.
  - Historical average non-oil GDP growth during 2002–09 was 5 percent.
  - Staff projects non-oil GDP growth to decelerate from an annual average rate of 11 percent during 2007–09 to about 6–7 percent in 2010–11.
  - Inflation expected to remain at 6 percent throughout the medium-term before declining gradually to 4 percent in the long run.
- Fiscal sector:
  - Tax revenue projected to stay broadly stable at 7½–8½ percent of non-oil GDP.
  - Capital expenditure rises from an average of 33 percent of non-oil GDP in 2009–10 to an average of 54 percent during 2011–15 before declining gradually to 20 percent in the long-run.
  - Staff projects current expenditure to average at 68 percent of non-oil GDP during 2011–15 before declining gradually to about 30 percent by 2030.
  - Staff expects the non-oil fiscal deficit to rise from 92 percent of non-oil GDP in 2009 to an average of 105 percent during 2010–15 before declining to 34 percent in 2030.
  - Financing prolonged large non-oil deficits will require withdrawals from the PF consistently above the ESI.
- External sector:
  - Exports of non-oil goods and services projected to grow at an average of about 12 percent annually.
  - Declining petroleum income expected to worsen the current account from a surplus of 245 percent of non-oil GDP in 2009 to a deficit of 26 percent of non-oil GDP by 2024; current account deficits financed largely by PF withdrawals.
- External financing assumptions:
  - Assumed borrowing around $900 million during 2011–30 from bilateral and multilateral donors to fund the development program.
  - Around 40 percent of the loans will be on highly concessional terms.
  - Other loans assumed to carry a 5 year grace period, 25 year maturity, and an interest rate of 4½ percent.
  - Concessional loans projected to wind down because Timor-Leste’s per capita GNI is above thresholds for Low Income Country eligibility.
- Petroleum production and price assumptions:
  - Projections based on two active fields, Bayu Undan and Kitan; Bayu Undan expected to cease production by 2025 and Kitan by 2017.
  - Total production expected to peak at close to 70 million barrels of oil equivalent in year 2012 before winding down by 2025.
  - Petroleum price projections based on average of EIA’s low case and reference case prices (May 2010); a 10 percent decline in 2011 from $76 to $68 per barrel, then prices rise at an average rate of between 3 and 4 percent per year in nominal terms.

### Investment management, institutional capacity, and structural constraints
- Rapid scale-up in public investment since 2006/07 increased government-managed capital investment nearly tenfold; all channeled through the national budget.
- Limited investment management capacity has strained project quality, implementation, and ex post monitoring.
- Government plans:
  - Establish an Infrastructure Fund and a new agency (ADN) for project appraisal, design, and monitoring.
  - Procurement for large projects (more than $1 million) managed by a Procurement Technical Secretariat.
  - Staffing with well qualified professionals, and consideration of outsourcing options.
- Complementary reforms needed to maximize investment impact:
  - Simplify business start-up, strengthen contract enforcement, increase access to finance.
  - Invest in skills, improve access to land, ensure access to energy, liberalize telecommunications.
  - Public finance management reforms.

### External DSA — baseline and stress test findings
- Baseline scenario:
  - All debt stock and debt service indicators are below their policy-dependent indicative thresholds throughout the projection period.
  - PV of debt-to-GDP ratio and PV of debt-to-revenue ratio expected to peak at 17 percent and 68 percent respectively by 2025 (thresholds: 30 percent and 200 percent).
  - PV of debt-to-exports ratio projected to peak at 67 percent in 2026 (threshold: 100 percent).
  - Debt service ratios rise over time but remain considerably below thresholds.
- Standard alternative scenarios and stress tests:
  - A very large shock to exports (B2) generated by the standard DSA template would cause:
    - PV of debt-to-GDP ratio to peak at 37 percent and breach its threshold during 2018–27.
    - PV of debt-to-exports ratio to breach thresholds from 2024 when oil income winds down.
  - All debt ratios remain below thresholds under standard shocks to GNI growth, deflator, and non-debt creating flows (B1, B3, B4).
  - Combination of one-half standard deviation shocks (B5) yields more favorable debt dynamics but is judged unrealistic.
  - Historical scenario (A1) shows extremely favorable debt dynamics relative to baseline because it counterfactually continues large petroleum income from Bayu Undan throughout the projection period.
  - Less favorable loan terms scenario (A2) worsens indicators relative to baseline, but ratios remain below thresholds.
  - A one-time 30 percent depreciation stress test is not applicable due to official dollarization.

### Customized export shock and robustness
- Standard DSA export shocks based on last eight years’ volatility may be unrepresentative due to very high historical volatility; standard shock could imply an unrealistic negative shock of about 140 percent.
- An appropriate export shock mimics realistic oil price shocks of 30–40 percent observed in the last 10 years.
- Under a customized export shock of 60 percent to the baseline (a worst-case scenario almost doubling typical oil price shocks observed in last 10 years):
  - Timor-Leste is found to be at low risk of debt distress.
  - All debt stock and debt service ratios remain under indicative thresholds throughout the projection period (scenario B6).

### Public DSA findings
- With only external borrowing by the government, public debt DSA mirrors external debt DSA.
- Public DSA conducted on a net debt basis (gross public debt minus PF assets).
- Baseline: all three debt stock and debt service ratios projected to rise eventually but stay well within indicative thresholds.
- Net public debt is not vulnerable to standardized DSA stress tests due to substantial PF assets providing a significant cushion.
- Net public debt is projected to increase significantly around 2025 when oil income winds down.
- Emphasis on limiting the borrowing envelope and exercising fiscal prudence with PF spending.

### Conclusions and policy recommendations
- With a moderate borrowing envelope, Timor-Leste is at low risk of debt distress:
  - All debt stock and debt service ratios projected to stay below indicative thresholds under baseline and stress tests.
  - Public DSA suggests overall public sector debt dynamics are sustainable with moderate borrowing.
- Key vulnerabilities:
  - High dependence on a single commodity (petroleum) makes Timor-Leste vulnerable to shocks related to petroleum production and prices.
- Recommended approach:
  - Adopt a gradual and moderate approach to borrowing from development partners.
  - Be fiscally prudent to minimize the risk of debt distress.
  - Use borrowing strategically to access technical assistance that addresses capacity constraints in appraisal, selection, and implementation of infrastructure projects and to build debt management capacity.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1165.pdf*

### 16.      A key challenge for Timor-Leste is to use its petroleum wealth effectively and

### A key challenge for Timor-Leste is to use its petroleum wealth effectively and sustainably to develop non-oil economy

### Policy diagnosis and recommendations
- Main constraint on scaling-up public investment: weak policy and institutional capacity rather than availability of financing.
- Public expenditure should be commensurate with:
  - the government’s capacity to plan, implement, and review investment projects;
  - the ability of private sector producers to take advantage of public capital.
- Close cooperation recommended with the World Bank, the Asian Development Bank, and other development partners to help prioritize, sequence, and manage expenditures.
- Financing decision (borrowing vs. withdrawals from the Petroleum Fund (PF)) is of second order:
  - A gradual approach to borrowing is advisable to allow time for building up debt management capacity from scratch.
  - Preference should be given to concessional loans rather than commercial loans to contain the risk of debt distress.

### Public and publicly guaranteed external debt indicators (selected findings)
- PV of PPG external debt (in percent of exports, selected values shown in tables):
  - 0.5, 1.6, 2.7, 4.5, 18.3, 51.5
- PV of PPG external debt (in percent of government revenues, selected values shown in tables):
  - 1.5, 4.1, 7.8, 12.6, 47.5, 55.6
- Debt service-to-exports ratio (in percent, selected values shown in tables):
  - 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.1, 0.6, 4.5
- PPG debt service-to-revenue ratio (in percent, selected values shown in tables):
  - 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.1, 0.2, 1.5, 4.9

### Fiscal and macroeconomic key statistics (selected series exactly as presented)
- Government revenues (excluding grants, in percent of GDP):
  - 20.7, 16.3, 20.8, 22.0, 27.6, 26.6, 28.3, 25.2, 24.8, 21.7, 18.7, 22.1
- Net non-interest current account deficit (selected values appearing in the table):
  - -69.7, -71.0, -56.8, -29.4, 36.4, -52.7, -46.2, -41.9, -31.5, -34.3, -33.0, -15.2, 32.3, 5.4
- Exports (selected values appearing in the table):
  - 81.8, 86.2, 79.0, 78.9, 78.6, 77.1, 72.1, 71.5, 68.7, 56.4, 20.2
- Imports (selected values appearing in the table):
  - 29.7, 28.0, 39.0, 38.9, 43.7, 45.6, 48.7, 42.3, 40.7, 44.8, 55.2
- Net FDI (negative = inflow, selected values appearing in the table):
  - -0.5, -1.4, -1.3, -2.9, 2.9, -1.3, -1.2, -1.1, -1.1, -1.0, -1.0, -3.6, -9.6, -5.7
- Grant-equivalent financing (in percent of GDP, selected values appearing in the table):
  - 0.0, 0.0, 0.1, 0.2, 0.3, 0.3, 0.3, 0.0, 0.1
- Grant element of new public sector borrowing (in percent, selected values appearing in the table):
  - 36.8, 27.7, 23.0, 21.0, 20.2, 21.5, 12.7, 0.0, 8.2

### Public sector debt and dynamics (selected figures exactly as presented)
- PV of public sector debt (selected values appearing in the table, in percent of GDP):
  - -123.5, -147.2, -223.9, -249.4, -274.0, -301.5, -348.8, -344.0, -368.7, -414.9, -213.6
- PV of public sector debt-to-revenue and grants ratio (in percent, selected values appearing in the table):
  - -579.1, -900.6, -1077.9, -1132.9, -991.9, -1131.4, -1233.7, -1362.9, -1487.5, -1,914.3, -1141.8
- Primary deficit (selected values appearing in the table):
  - -7.0, 3.2, 4.4, 1.7, 3.9, 2.0, 2.1, 6.3, 10.6, 11.0, 10.1, 7.0, 16.1, 22.5, 19.3
- Primary (noninterest) expenditure (selected values appearing in the table):
  - 14.3, 19.5, 25.1, 24.1, 29.7, 32.9, 38.9, 36.3, 34.9, 37.7, 41.2
- Gross financing need (Billions of U.S. dollars, selected values appearing in the table):
  - -1.2, -2.1, -1.4, -1.5, -1.4, -1.4, -1.0, -1.2, -1.2, -0.8, 1.5
- Total gross financing need (selected values appearing in the public sector table):
  - -7.0, 3.2, 4.4, 2.0, 2.1, 6.3, 10.6, 11.1, 10.1, 16.4, 23.4

### Key macroeconomic assumptions and projections (selected series exactly as presented)
- Real GDP growth (in percent, selected values appearing in tables):
  - 57.4, 51.0, -24.0, 27.0, 29.8, 5.8, 6.1, 1.9, -8.7, 8.2, -1.7, 2.0, 5.4, 4.1, -0.3
- GDP deflator in US dollar terms (change in percent, selected values appearing in tables):
  - 10.4, 11.8, 10.8, 5.4, 5.0, 6.4, 5.2, 4.8, 5.1, 5.0, 5.1, 5.3, 4.7, 4.2, 4.2
- Effective interest rate (percent, selected values appearing in the table):
  - 1.2, 1.2, 2.2, 2.4, 2.5, 1.9, 2.8, 2.9, 2.8
- Growth of exports of goods & services (US dollar terms, in percent, selected values appearing in the table):
  - 103.1, 77.9, -22.8, 58.6, 63.1, 12.4, 11.2, 4.8, -10.2, 12.8, -0.7, 5.0, 10.0, 3.1, -3.6
- Growth of imports of goods & services (US dollar terms, in percent, selected values appearing in the table):
  - 50.6, 59.5, 17.3, 10.9, 31.0, 12.2, 25.3, 11.7, 2.5, -1.3, -0.6, 8.3, 5.8, 6.4, 5.8
- Nominal GDP (Billions of US dollars, selected values appearing in the table):
  - 1.7, 2.9, 2.4, 2.7, 3.0, 3.2, 3.1, 3.5, 3.6, 4.4, 6.2

### Scenario and stress-test framework (methodology and selected results)
- Stress tests and sensitivity analysis cover: real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.
- A more adverse financing scenario assumes the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.
- Bound tests include shocks such as:
  - Real GDP growth at historical average minus one standard deviation
  - Export value growth at historical average minus one standard deviation
  - US dollar GDP deflator at historical average minus one standard deviation
  - Net non-debt creating flows at historical average minus one standard deviation
  - Combination of B1–B4 using one-half standard deviation shocks
  - Customized export shock
- Sensitivity analysis tables report projected changes in:
  - PV of debt-to-GDP ratio
  - PV of debt-to-exports ratio
  - PV of debt-to-revenue ratio
  - Debt service-to-exports ratio
  - Debt service-to-revenue ratio
  (Selected scenario outcome values are provided throughout the tables and figures in the source.)

*Statement by the IMF Staff Representative on the Democratic Republic of Timor-Leste, January 19, 2011*

### 1.      This statement provides information that has become available since the Staff

### _cr1165 - 1.      This statement provides information that has become available since the Staff

### Overview
- This statement provides information that has become available since the Staff Report was circulated to the Executive Board on December 3, 2010.
- The information does not alter the thrust of the staff appraisal.

### Growth and sectoral performance
- Timor-Leste’s economic growth picked up in the second half of 2010.
- Preliminary data provided by the authorities indicate that GDP growth in 2010 is likely to be higher than the estimate in the Staff Report of 6 percent and closer to the government’s estimate of 9½ percent.
- Agriculture:
  - Bad weather conditions in 2010 appear to have had a more limited impact on agricultural output than expected.
  - Preliminary estimates indicate that total agricultural production grew by ½ percent in 2010, rather than declined by 5 percent as estimated by staff.
- Industry and services:
  - Preliminary government estimates of activity in industry and services show stronger-than-expected growth of 16 percent in 2010.
  - Activity was particularly strong in the transport and communication, financial services, and the small manufacturing sectors.

### Petroleum revenue and sustainable income (ESI)
- Government revenue from petroleum was higher than budgeted because of higher-than-projected oil prices.
- US$ 2.2 billion was collected in petroleum revenue for 2010, 30 percent above the mid-year 2010 budget estimate.
- If higher oil prices persist, sustainable income (ESI) from petroleum could be revised up by 3 to 5 percent when the annual recalculation is made in April.

### Government spending and fiscal position
- The Ministry of Finance has revised upwards its estimate of government cash spending in 2010 to US$729 million, about 20 percent higher than in 2009.
- Spending remained below the sum of expected 2010 domestic revenue and the estimated sustainable income (ESI) from petroleum by about US$100 million.

### Inflation
- The Banking and Payments Authority (BPA) reported an increase in CPI inflation for Dili to 9.1 percent year-on-year in November 2010.
- The rate increased from the 7.5 percent reported in the Staff Report for September.

*Source: IMF staff statement circulated to the Executive Board on December 3, 2010.*

### 6.      As noted in the staff appraisal, a higher ESI creates room for additional spending.

### _cr1165 - 6.      As noted in the staff appraisal, a higher ESI creates room for additional spending.

### Executive summary and key findings
- A higher estimated sustainable income (ESI) has created room for additional capital expenditure, supporting government investment in public infrastructure, health, and education.
- Staff supports investment while emphasizing the need to reduce administrative and absorptive capacity constraints to realize high-quality projects and to crowd in private investment.
- Higher-than-expected inflation underlines the need for fiscal restraint.
- Directors noted that carefully selected infrastructure investment could justify temporary withdrawals from the Petroleum Fund (PF) in excess of the ESI, but spending at a slower-than-planned pace, consistent with absorptive capacity, is preferable.

### Economic performance and near-term outlook
- Non-oil growth averaged 11 percent during 2007–09.
- Recent World Bank estimate: poverty incidence declined from 50 percent in 2007 to 41 percent in 2009.
- Preliminary data indicate GDP growth in 2010 likely higher than the Staff Report estimate of 6 percent and closer to the government’s estimate of 9½ percent.
- Staff projection: inflation rising from 4½ percent to 6 percent in 2011.
- Staff expects GDP growth to stay high in the medium term; large uncertainties include oil prices and production, magnitude and quality of public spending, and progress in structural reforms.

### Fiscal position, Petroleum Fund, and ESI
- Supplemental 2010 budget raised the spending envelope by more than 30 percent to US$838 million, financed by withdrawals of US$811 million from the PF.
- Due to procurement delays, actual public spending expected around US$729 million; projected non-oil fiscal deficit about 100 percent of non-oil GDP.
- In 2009 petroleum income accounted for about 95 percent of total government revenue and almost 80 percent of gross national income (GNI).
- Petroleum Fund assets reached US$6.8 billion or about ten times non-oil GDP in October 2010.
- Directors noted the upward revision in the ESI has created room for additional capital expenditure.
- Staff report projects ESI at $734 million in 2011, rising to $740 million by 2015 (Baseline Scenario) and to $771 million in the Alternative Scenario (authorities argue these are conservative given crude oil price assumptions).

### Public spending, absorptive capacity, and public financial management (PFM)
- Staff supports government investment in infrastructure, health, and education, while urging reduction of administrative and absorptive capacity constraints.
- Spending at a measured pace increases likelihood of high-quality investment and crowding in private investment.
- Directors praised government emphasis on planning, evaluating, and implementing spending programs and supported creation of a new agency reporting to the Prime Minister for major project evaluation and approval.
- Further improvements in public financial management and budget execution are deemed important.
- Authorities report a Strategic Plan for PFM finalized in early 2010 and implementation in accounting systems, procurement practices, internal audit, and staff capacity building.

### Monetary and inflation considerations
- Official dollarization has helped keep inflation under control and should be maintained, supported by fiscal policy mindful of external stability.
- Directors noted that a slower-than-envisaged pace of public spending growth would help contain inflation pressures as supply-side limitations are approached.

### Financial sector and structural reforms
- Financial sector remains embryonic: three foreign bank branches dominate, plus a small state-owned microfinance institution; a first insurance company has been established.
- Despite high bank deposit growth, private sector credit has been stagnant due to a large share of non-performing loans, weak contract enforcement, and unclear property rights.
- Directors welcomed efforts to make the regulatory environment more business-friendly, including a one-stop-shop for start-ups and pending land law to enhance property rights.
- Productivity-enhancing structural reforms and labor-skill building would improve competitiveness in non-oil industries and services.

### Authorities’ views and disagreements with staff projections
- Authorities estimated non-oil GDP growth in 2010 at 9.5 percent (staff had projected around 6 percent).
- Authorities report actual cash spending in 2010 at $731.9 million, representing a rate of execution of 87.3 percent (staff earlier suggested $650 million).
- Authorities expect close to double-digit growth in 2011 and sustained higher long-run non-oil growth once infrastructure and human capital investments augment productive capacity.
- Authorities requested upper and lower bounds for projections: for 2011 range of projected growth 6.1-7.3 percent; average for 2012-2015 7.8-9.0 percent (authorities argue upper bound could be double-digit).
- Authorities contest staff crude oil price assumptions (staff: $68 per barrel in 2011 rising to $81 by 2015); authorities note oil prices have approached $90 per barrel.

### Policy recommendations and Director guidance
- Support carefully selected infrastructure investment financed temporarily by PF withdrawals in excess of ESI where returns justify it.
- Favor spending paced with absorptive capacity to realize high-quality projects and crowd in private investment.
- Strengthen public financial management, budget execution, procurement, and project evaluation (including creation of a project evaluation agency reporting to the Prime Minister).
- Maintain official dollarization and fiscal policy mindful of external stability.
- Intensify Fund engagement and technical assistance, including to strengthen economic statistics; many Directors saw merit in reopening the resident representative office.

### Selected economic indicators (excerpted exact figures from source)
- GNI at current prices (US$ million): 2005: 695; 2006: 972; 2007: 1,689; 2008: 2,851; 2009: 2,401; 2010 Prel.: 2,704; 2011 Proj.: 3,019.
- Non-oil GDP at current prices (US$ million): 2005: 332; 2006: 327; 2007: 358; 2008: 444; 2009: 556; 2010 Prel.: 627; 2011 Proj.: 708.
- Real non-oil GDP growth (percentage change): 2005: 6.2; 2006: -5.8; 2007: 9.1; 2008: 11.0; 2009: 12.9; 2010 Prel.: 6.1; 2011 Proj.: 7.3.
- Inflation (CPI, percentage change, period average): 2009: 0.1; 2010 Prel.: 4.5; 2011 Proj.: 6.0.
- Petroleum Fund balance (percent of non-oil GDP, end-period): 2005: 112; 2006: 310; 2007: 583; 2008: 945; 2009: 968; 2010 Prel.: 1,076; 2011 Proj.: 1,169.
- Central government revenues (percent of non-oil GDP): 2009: 342; 2010 Prel.: 338; 2011 Proj.: 334.
- Central government expenditure (cash basis, percent of non-oil GDP): 2009: 103; 2010 Prel.: 100; 2011 Proj.: 123.
- Non-oil fiscal balance (percent of non-oil GDP): 2009: -92; 2010 Prel.: -89; 2011 Proj.: -113.
- Current account (US$ million): 2009: 1,363; 2010 Prel.: 1,425; 2011 Proj.: 1,395.
- Merchandise imports (US$ million): 2009: 385; 2010 Prel.: 575; 2011 Proj.: 802.

*Source: IMF Public Information Notice (PIN) No. 11/31 — IMF Executive Board conclusion of the 2010 Article IV Consultation with the Democratic Republic of Timor-Leste (March 8, 2011).*

### 2015. The price is already close to $90 per barrel and the outlook is bullish given

### _cr1165 - 2015. The price is already close to $90 per barrel and the outlook is bullish given

### Oil price outlook and fiscal/external implications
- The price is already close to $90 per barrel.
- A higher price of oil than projected will mean:
  - a higher ESI,
  - a larger balance in the Petroleum Fund,
  - a higher surplus in the current account.

### Economic recovery, growth prospects, and drivers
- The staff report for the 2010 Article IV Consultation recognizes the post-conflict strong economic recovery since 2006, with:
  - significant reduction in the incidence of poverty,
  - major strides in key social indicators.
- The authorities contend the report is "excessively biased on the pessimistic side" regarding the strong potential for a double-digit growth rate in the medium- to long-run.
- The current momentum is expected to be boosted by:
  - infrastructure development (financed mostly by oil revenues),
  - human capital development (financed mostly by oil revenues),
  - emergence of a nascent and dynamic private sector, especially industry and services.
- As this potential gets recognition by international markets, foreign direct investment could flow into Timor-Leste.
- The transition from conflict to development amid recent peace, stability, and growth holds out the prospect that Timor-Leste will join the rank of upper middle-income countries within the next two decades, as envisioned by the SDP.

### Human development and social indicators
- UNDP 2010 Human Development Report ranks Timor-Leste at 120 out of 169 countries, based on 2009/2010 data.
- This represents an improvement from 162 out of 182 countries based on 2007 data in UNDP 2009 Human Development Report.
- In the process, Timor-Leste has moved from a low level of human development to a medium level of human development.
- The MEASURE Demographic and Health Surveys (DHS) 2009-10 project — funded by the US Agency for International Development (USAID) — reveals a significantly more positive assessment on key social and human development indicators.

### Policy stance and international engagement
- The authorities express determination to continue implementing a very ambitious reform agenda to develop the country and benefit current and future generations.
- The authorities view the strategy as already paying off and believe good results mean it is possible to reach goals faster.
- Despite recent achievements in poverty reduction and growth, the authorities acknowledge a challenging path ahead and invite the international community’s involvement in the current strong momentum.

*Excerpt from the authorities' comments responding to the staff report for the 2010 Article IV Consultation.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1165.pdf_