## _cr16183 ## Source details **Canonical URL:** [_cr16183](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16183.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16183.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16183.pdf.json) --- ### Executive Board assessment and overall judgment - Directors commended progress in nation building and economic and social development, but noted difficult policy challenges from the fall in oil revenue and large development needs. - Emphasis on achieving fiscal sustainability and economic diversification. - Directors recommended continued fiscal consolidation: strengthen non-oil revenue, rationalize current spending, and adhere to a medium-term adjustment plan. - Priority to capital spending on high-return infrastructure projects through rigorous investment appraisal, aligned with implementation capacity and debt sustainability. - Support for preserving the assets of the Petroleum Fund and greater use of concessional financing for large infrastructure projects to reduce reliance on Petroleum Fund withdrawals. - Welcomed plans to introduce a value-added tax to help raise non-oil revenues. - Supported efforts to improve financial inclusion while safeguarding financial stability; called for strengthening regulatory and supervisory capacity, improving central bank functions, and a strategy to resolve legacy non-performing loans. - Directors concurred that the use of the U.S. dollar as legal tender has served Timor-Leste well and supported further financial sector and institutional development as a precondition to any potential change in the monetary and exchange rate regime. - Directors stressed that medium-term growth critically depends on economic diversification; priorities include boosting the private sector by building infrastructure, improving the business climate, enhancing competitiveness, improving social conditions, and investing in human capital. - Called for continued improvement in statistical capacity and data quality and timeliness; encouraged leveraging IMF technical assistance and other development partners. ### Medium-term outlook, risks, and scenario dependence - Growth projection: - Real non-oil GDP growth of "5.5 percent" is supported by increasing public spending and foreign direct investment, conditional on prioritization of government expenditures and structural reforms that catalyze non-oil private sector growth. - Main medium- to long-term risks: - Higher fiscal spending. - Public investments not yielding adequate returns and enhanced growth. - Inadequate mobilization of domestic revenues. - Debt sustainability assessment: - Deterioration with a moderate risk of debt distress reflecting government plans to tap concessional borrowing to finance front-loaded public investments. - Petroleum Fund (PF) trajectory: - PF provides a short-run buffer, but fiscal trends under existing capital expenditure plans are unsustainable and the PF will be depleted in the long term at the current rate of withdrawals. ### Key policy recommendations (condensed) - Fiscal policy - Scale back plans to front-load public investment. - Rationalize recurrent spending. - Mobilize non-oil revenues (including introduction of a value-added tax). - Adhere to a medium-term fiscal consolidation plan. - Debt management - Support the authorities’ plan to tap concessional borrowing for frontloaded capital expenditures to help preserve PF assets as an endowment fund, while strengthening debt management capacity. - Implement bold fiscal consolidation measures to safeguard long-term fiscal and debt sustainability. - Financial policy - Promote financial inclusion while safeguarding financial stability. - Strengthen regulatory and supervisory capacity and central bank functions. - Develop and implement a strategy to fully resolve legacy non-performing loans. - Structural reforms - Develop human capital, boost competitiveness, and improve the business environment to enable private sector diversification and growth. - Statistics and technical assistance - Improve statistical capacity and the quality and timeliness of data. - Leverage IMF and development partner technical assistance. ### Selected quantitative findings and indicators (preserved exactly as reported) - Growth and inflation - Real total GDP: 5.3 (2012), -13.9 (2013), -15.8 (2014), -0.6 (2015), -8.8 (2016), -12.9 (2017), -3.9 (2018), -9.4 (2019), -9.2 (2020), -8.8 (2021). - Real non-oil GDP: 6.4 (2012), 2.8 (2013), 5.5 (2014), 4.3 (2015), 5.0 (2016), 5.5 (2017), 6.0 (2018), 6.5 (2019), 5.5 (2020), 5.5 (2021). - CPI (annual average): 10.9 (2012), 9.6 (2013), 0.8 (2014), 0.6 (2015), 1.5 (2016), 3.8 (2017), 4.0 (2018), 4.0 (2019), 4.0 (2020), 4.0 (2021). - Central government operations (in percent of GDP) - Revenue: 61.1 (2012), 66.1 (2013), 63.2 (2014), 61.5 (2015), 63.1 (2016), 52.6 (2017), 49.0 (2018), 46.0 (2019), 42.7 (2020), 40.0 (2021). - Domestic revenue: 2.0 (2012), 2.7 (2013), 3.9 (2014), 6.5 (2015), 8.0 (2016), 7.6 (2017), 7.3 (2018), 7.2 (2019), 7.1 (2020), 7.3 (2021). - Petroleum revenue (incl. PF interest): 55.5 (2012), 58.7 (2013), 53.2 (2014), 48.9 (2015), 48.3 (2016), 41.1 (2017), 37.7 (2018), 34.8 (2019), 31.5 (2020), 28.7 (2021). - Grants: 3.7 (2012), 4.7 (2013), 6.2 (2014), 6.1 (2015), 6.8 (2016), 4.0 (2017), 4.0 (2018), 4.0 (2019), 4.0 (2020), 4.0 (2021). - Expenditure: 22.0 (2012), 24.0 (2013), 37.4 (2014), 57.3 (2015), 73.5 (2016), 73.1 (2017), 69.1 (2018), 67.2 (2019), 65.0 (2020), 58.5 (2021). - Recurrent expenditure: 10.4 (2012), 13.1 (2013), 20.9 (2014), 39.1 (2015), 49.3 (2016), 45.8 (2017), 43.8 (2018), 43.1 (2019), 42.2 (2020), 40.9 (2021). - Capital expenditure: 7.9 (2012), 6.3 (2013), 10.2 (2014), 11.7 (2015), 17.4 (2016), 23.3 (2017), 21.3 (2018), 20.1 (2019), 18.8 (2020), 13.6 (2021). - Donor project: 3.7 (2012), 4.7 (2013), 6.2 (2014), 6.1 (2015), 6.8 (2016), 4.0 (2017), 4.0 (2018), 4.0 (2019), 4.0 (2020), 4.0 (2021). - Overall balance: 39.1 (2012), 42.1 (2013), 25.9 (2014), 4.2 (2015), -10.4 (2016), -20.5 (2017), -20.1 (2018), -21.2 (2019), -22.4 (2020), -18.5 (2021). - Non-oil overall balance (in percent of non-oil GDP): -86.0 (2012), -70.5 (2013), -86.9 (2014), -82.8 (2015), -83.3 (2016), -81.8 (2017), -73.5 (2018), -66.1 (2019), -59.7 (2020), -49.5 (2021). - Money and credit - Deposits (annual percent change): 26.5 (2012), 22.4 (2013), 19.6 (2014), 22.8 (2015), 21.6 (2016), 21.3 (2017), 21.9 (2018), 21.6 (2019), 21.6 (2020), 21.7 (2021). - Credit to the private sector (annual percent change): 20.5 (2012), 13.6 (2013), 5.5 (2014), 10.5 (2015), 13.3 (2016), 13.7 (2017), 12.5 (2018), 13.2 (2019), 13.1 (2020), 12.9 (2021). - Lending interest rate (percent, end-period): 12.2 (2012), 12.4 (2013), 12.9 (2014), 13.5 (2015). - Balance of payments and external - Current account balance (in millions of U.S. dollars): 2,736 (2012), 2,391 (2013), 1,096 (2014), 431 (2015), 41 (2016), -281 (2017), -315 (2018), -334 (2019), -359 (2020), -241 (2021). - Current account balance (in percent of GDP): 40.2 (2012), 42.7 (2013), 25.1 (2014), 16.5 (2015), 2.0 (2016), -11.9 (2017), -12.2 (2018), -12.2 (2019), -12.2 (2020), -7.8 (2021). - Trade balance (in millions of U.S. dollars): -638 (2012), -679 (2013), -749 (2014), -684 (2015), -710 (2016), -844 (2017), -892 (2018), -901 (2019), -917 (2020), -892 (2021). - Exports (in millions of U.S. dollars): 33 (2012), 18 (2013), 15 (2014), 9 (2015), 17 (2016), 20 (2017), 21 (2018), 24 (2019), 26 (2020), 28 (2021). - Imports (in millions of U.S. dollars): 672 (2012), 696 (2013), 764 (2014), 692 (2015), 728 (2016), 864 (2017), 914 (2018), 925 (2019), 943 (2020), 920 (2021). - Services (net, in millions of U.S. dollars): -920 (2012), -437 (2013), -388 (2014), -414 (2015), -486 (2016), -648 (2017), -647 (2018), -646 (2019), -637 (2020), -524 (2021). - Petroleum revenue (in millions of U.S. dollars): 3,775 (2012), 3,286 (2013), 2,319 (2014), 1,281 (2015), 1,014 (2016), 972 (2017), 976 (2018), 955 (2019), 925 (2020), 889 (2021). - Overall balance (in millions of U.S. dollars): 422 (2012), -197 (2013), -376 (2014), 127 (2015), 8 (2016), 6 (2017), 3 (2018), 1 (2019), 1 (2020), 1 (2021). - Public foreign assets (end-period, in millions of U.S. dollars): 12,659 (2012), 15,639 (2013), 16,849 (2014), 16,655 (2015), 16,552 (2016), 16,247 (2017), 15,944 (2018), 15,600 (2019), 15,226 (2020), 14,816 (2021). - Public foreign assets (in months of imports): 91 (2012), 156 (2013), 165 (2014), 169 (2015), 153 (2016), 122 (2017), 115 (2018), 110 (2019), 106 (2020), 110 (2021). - Memorandum items (levels) - GDP at current prices (in millions of U.S. dollars): 6,807 (2012), 5,595 (2013), 4,361 (2014), 2,620 (2015), 2,100 (2016), 2,368 (2017), 2,589 (2018), 2,746 (2019), 2,933 (2020), 3,094 (2021). - Non-oil GDP (in millions of U.S. dollars): 1,295 (2012), 1,319 (2013), 1,371 (2014), 1,412 (2015), 1,480 (2016), 1,782 (2017), 2,037 (2018), 2,323 (2019), 2,647 (2020), 2,948 (2021). - Oil GDP (in millions of U.S. dollars): 5,512 (2012), 4,276 (2013), 2,990 (2014), 1,207 (2015), 620 (2016), 587 (2017), 552 (2018), 423 (2019), 286 (2020), 147 (2021). - GDP per capita: 5,673 (2012), 4,974 (2013), 3,807 (2014), 2,244 (2015), 1,769 (2016), 1,959 (2017), 2,104 (2018), 2,192 (2019), 2,300 (2020), 2,384 (2021). - Crude oil prices (U.S. dollars per barrel, WEO): 105 (2012), 104 (2013), 96 (2014), 51 (2015), 35 (2016), 41 (2017), 45 (2018), 48 (2019), 49 (2020), 51 (2021). - Petroleum Fund balance (in millions of U.S. dollars, closing balance): 11,775 (2012), 14,952 (2013), 16,539 (2014), 16,218 (2015), 16,106 (2016), 15,795 (2017), 15,489 (2018), 15,144 (2019), 14,769 (2020), 14,359 (2021). - Petroleum Fund balance (in percent of non-oil GDP): 909 (2012), 1,134 (2013), 1,206 (2014), 1,148 (2015), 1,088 (2016), 887 (2017), 760 (2018), 652 (2019), 558 (2020), 487 (2021). - Public debt (in millions of U.S. dollars): 0 (2012), 6 (2013), 22 (2014), 46 (2015), 153 (2016), 326 (2017), 541 (2018), 777 (2019), 1,059 (2020), 1,219 (2021). ### Fiscal policy: Budgetary plans, scenarios, and staff baseline - 2016 developments and 2016 Budget: - Non-oil real GDP growth estimated at "4¼ percent" in 2015 (down from "5½ percent" in 2014). - Total real GDP estimated to have contracted by "0.6 percent" in 2015. - Petroleum revenue fell by "40 percent" in 2015; revenue at "$1.45 billion (excluding grants)" with expenditure at "$1.34 billion", staff estimates an overall surplus of "4.2 percent of GDP" in 2015. - Excess withdrawal from the PF in 2015 was more than six times the level in the previous year; PF balance declined to "$16.2 billion" as of end-2015. - 2016 Budget: Approved expenditure of "$1,562.2 million (excluding donor projects)"—if fully executed this would represent an expenditure increase of "17 percent (11 percent of 2016 GDP)" compared to the estimated outturn for 2015; capital expenditure about "49 percent higher" than the 2015 estimated outturn. - Budget, Baseline, Adjustment scenarios (principal features) - 2016 Budget Framework: - Full implementation of 2017–20 frontloaded infrastructure spending; Total capital budget amounts to US$3.4 billion (130 percent of GDP). - Under the budget scenario, financing mainly met through excess withdrawals from the PF, amounting to US$4.6 billion during 2017-20, or 28 percent of the balance of the PF at end-2015. This is in addition to ESI withdrawals amounting to about $2 billion. - Overall fiscal deficit averaging 30 percent of GDP. - Baseline: - 2017–20 capital outlay reduced by a third and spread over 5 years. - PF withdrawal capped at US$1.3 billion per annum. - Lower excess withdrawal from the PF reduced to about $3.0 billion (one-third lower than planned for 2017-20). - PF balance projected to decline to about two-thirds of its current value by 2030. - Adjustment Scenario (staff recommendation): - Total spending (excluding grants) should be capped at around US$1.4 billion per annum between 2017 and 2026 (representing a total expenditure reduction from 65 percent of GDP in 2017 to 29 percent in 2026), and remain broadly constant at 26 percent of GDP thereafter. - Proposed lower capital expenditure would amount to one-half of the budgeted amount and focus on high-priority, high-return infrastructure projects. - PF drawdown should be minimized by greater use of concessional borrowing while maintaining debt sustainability. - Government should cease making PF withdrawals in excess of the ESI at the latest by 2026. - Limited immediate financing for essential capital spending assumed at $325 million per year or 10 percent of GDP. - Staff projects a tax revenue increase equivalent to about 5 percentage point of non-oil GDP is needed for tax revenue to reach 13 percent in 2021; the increase should be achieved largely through revenue mobilization by the VAT. ### Improving spending efficiency and revenue mobilization - Spending efficiency - Overall allocation to health and education increased up to 2015, but health expenditure appears low relative to peers and returns on higher education spending need improvement. - More detailed sector-level analysis of social spending and outcomes recommended to improve resource allocation. - Government should exercise strong wage restraint to avoid losing cost competitiveness. - Domestic non-oil revenue mobilization (urgent) - Fiscal Reform Commission working to introduce a VAT and review income tax and other taxes to raise domestic non-oil revenues from an average of 11 percent of non-oil GDP in 2011–15 to 15 percent of non-oil GDP by 2020. - Staff recommendations: - VAT: Implement a single-rate VAT with exemptions restricted to a minimum and a sufficiently high registration threshold at the start to exclude most small businesses; tax rate choice driven by revenue mobilization needs and should go beyond replacing current service tax, sales tax, and customs duties. - Other taxes: Raise excise duties on tobacco and petroleum products and raise the income tax rate from 10 to 15 percent could yield additional tax revenue of close to 2 percent of GDP. - Review and streamline existing tax holidays on investment. ### Petroleum Fund (PF) policy and financing options - PF preservation and fiscal rules - PF should be preserved as an endowment fund; ESI functions as an annual withdrawal limit intended to preserve PF assets in real terms. - Some drawdown for infrastructure is justified, but assets need preservation to provide investment income for future generations. - Adoption of adjustment scenario policies would facilitate return to strict compliance with the ESI within a feasible timeframe. - Consider revising aspects of the PF legal framework to strengthen the withdrawal rule and reduce discretion. - Use of concessional loans - Greater use of concessional borrowing to finance large infrastructure projects welcomed to preserve the PF. - External loans could meet financing gap if borrowing cost is lower than opportunity cost of tapping the PF (measured by PF’s expected investment return) and guided by the Debt Sustainability Analysis (DSA). - PF projections and recent trends - PF expected to peak in nominal terms in 2016 and declines thereafter if annual PF withdrawal remains at about US$1.3 billion for the next 10 years against an average projected ESI of US$537 for 2015–20. - PF balance at end-2015: US$16.2 billion or 169 months of imports of goods and services. - As at end-2015, 40 percent of the PF’s investment was invested in equities; PF wealth declined for the first time in 2015 on account of valuation losses. ### Debt sustainability and borrowing - Risk assessment - Risk of external debt distress has increased to moderate. - Baseline fiscal scenario does not entail breaches of any DSA threshold, but stress tests resulted in breaches for all but one indicator. - Deterioration reflects authorities’ plan to increase concessional borrowing to finance higher frontloaded capital expenditures compared to plans in the 2014 DSA. - Key DSA assumptions and projections - Real non-oil GDP growth: projected in the range of 5–6½ percent over the medium term; stabilizes at around 5.5 percent for 2021–35. - Inflation: expected to increase steadily to about 4 percent over the medium term and maintained at that level in the long run. - Selected quantified projections (exact figures): - Real GDP Growth (in percent) medium term: 5.5 (2015-2021), long term: 5.5 (2022-2035). - Overall fiscal balance (in percent of GDP) Current DSA Medium Term: -15.5; Long Term: -10.5. - Current account (in percent of GDP) Current DSA Medium Term: -5.4; Long Term: -15.8. - Borrowing (in millions of USD, period average) Current DSA Medium Term: 171; Long Term: 379. - Financing gaps (2017–21) by scenario (in millions of U.S. dollars) - 2016 Budget Framework (Total 2017–21 funding gap): 6,547 - Excess PF Withdrawal (Total 2017–21): 5,621 - Borrowing (Total 2017–21): 6 - Baseline Scenario (Total 2017–21 funding gap): 4,890 - Excess PF Withdrawal (Total 2017–21): 3,824 - Borrowing (Total 2017–21): 1,066 - Adjustment Scenario (Total 2017–21 funding gap): 2,730 - Excess PF Withdrawal (Total 2017–21): 1,865 - Borrowing (Total 2017–21): 865 - Staff recommendation: maintain fiscal consolidation and prioritize high-return investment projects to preserve PF assets. ### Financial sector, inclusion, and stability - Banking sector structure and conditions - Four banks total; three are branches of foreign banks (incorporated in Australia, Indonesia, and Portugal) and one is locally incorporated, wholly government-owned BNCTL. - BNCTL: transformed from micro-finance institution in 2011 with an initial capital of $2 million; BNCTL reported a capital adequacy ratio of 45 percent as of September 2015, bolstered by a $10 million capital injection by the government in 2014. - Banking system is highly liquid and well capitalized; excess liquidity and banks’ overseas placements of deposits have remained high. - Non-performing loan (NPL) ratio declined to 23 percent as of end-December 2015 from 27 percent at end-December 2014, with full loan-loss provisions. - About two-thirds of NPLs are legacy bad loans accumulated by one commercial bank during the mid-2000s. - Financial inclusion and policy - Two in five Timorese have a bank account; credit to private sector was 15 percent of GDP in 2015. - BCTL’s Financial Sector Master Plan (August 2014) roadmap to 2025; objective to increase proportion of adult population with bank accounts to 90 percent by 2025. - Adoption of bank-based mobile banking model; all four banks introducing branchless banking facilities. - BCTL strengthening banking supervision capacity with TA from development partners and aims to enhance role as lender of last resort with clear protocols and legal framework. - Need for a strategy to resolve legacy NPLs; financial sector entities in Oecusse ZEESM should remain under central bank supervision. - AML/CFT: national risk assessment completed; final report expected in 2016; BCTL issuing revised instructions on enhanced due diligence for high-risk customers in line with FATF. - Monetary and exchange rate regime - Use of the U.S. dollar as legal tender remains appropriate given institutional capacity constraints and limited financial development; central bank to review exchange rate regime as set out in SDP. ### Structural reforms and private sector diversification - Medium-term growth depends critically on economic diversification; near depletion of oil production in existing fields increases urgency. - Key impediments: low human capital, poor infrastructure and connectivity, small domestic market, limited financial sector development, high business cost structure. - Priority areas: - Business climate: strengthen enforcement of contracts, resolve insolvency, register property, improve ease of getting credit; accelerate land law reform to clarify ownership and improve collateral availability. - Wage competitiveness: public sector wages should grow in line with productivity gains. - Labor market and human capital: emphasis on quality of spending and outcomes in health and education, including vocational and technical education. - ADB finding: need to build agricultural markets and develop tourism through improving crop quality, productivity, supply consistency, price incentives, and land tenure arrangements. - Authorities reviewing investment law and land and property law to attract FDI and promote commercial use of land as collateral. ### Statistics, technical assistance, and capacity development - Timeliness and quality of data remain challenging; staff supports ongoing improvements in statistical capacity. - National Accounts: improvements with TA; need to improve timeliness and methodology; close divergence between expenditure and production estimates; start compilation of producer prices. - Staff welcomed plan to publish quarterly GDP data and urged institutional support to General Directorate of Statistics for timely quarterly estimates. - Poverty data: last official poverty indicators based on 2007 data; living standards measure survey underway with World Bank support. - IMF TA delivered in 2015: on-site examination of commercial banks, government finance statistics, external sector statistics; regional workshop to strengthen fiscal framework and planning capacity. - Capacity development pipeline: TA on debt management, assessment of public infrastructure investment, continuation of TA on strengthening financial institution oversight. ### Risk assessment (selected entries from Risk Matrix) - 1. Sharper-than-expected global growth slowdown - Domestic implication: Expenditures plans need to be scalable and efforts to raise non-oil revenues need to be intensified. - 2. Tighter or more volatile global financial sector conditions - Policy recommendation: Enhance BCTL’s regulatory and supervisory framework and crisis management toolkit with TA. - 3. Persistently low energy prices - Impact: Delays investment in new oil fields and reduces scope for government spending. - 4. Higher inflation - Policy recommendation: Fiscal policy needs to be adaptable to maintain macro-stability and protect the poor. - 5. Over investment in projects with low returns - Policy recommendation: Projects should be subject to transparent and realistic cost benefit assessments and risk analysis. - 6. Failure to secure inclusive growth - Policy recommendation: Reinforce sound policy frameworks and governance, including more transparency and accountability. *Source: DEMOCRATIC REPUBLIC OF TIMOR-LESTE — STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (IMF).* ### 5.5 percent, supported by increasing public spending and foreign direct investment. This hinges ### _cr16183 - 5.5 percent, supported by increasing public spending and foreign direct investment. This hinges ### Executive Board assessment and overall judgment - Directors commended progress in nation building and economic and social development, but noted difficult policy challenges from the fall in oil revenue and large development needs. - Emphasis on achieving fiscal sustainability and economic diversification. - Directors recommended continued fiscal consolidation: strengthen non-oil revenue, rationalize current spending, and adhere to a medium-term adjustment plan. - Priority to capital spending on high-return infrastructure projects through rigorous investment appraisal, aligned with implementation capacity and debt sustainability. - Support for preserving the assets of the Petroleum Fund and greater use of concessional financing for large infrastructure projects to reduce reliance on Petroleum Fund withdrawals. - Welcomed plans to introduce a value-added tax to help raise non-oil revenues. - Supported efforts to improve financial inclusion while safeguarding financial stability; called for strengthening regulatory and supervisory capacity, improving central bank functions, and a strategy to resolve legacy non-performing loans. - Directors concurred that the use of the U.S. dollar as legal tender has served Timor-Leste well and supported further financial sector and institutional development as a precondition to any potential change in the monetary and exchange rate regime. - Directors stressed that medium-term growth critically depends on economic diversification; priorities include boosting the private sector by building infrastructure, improving the business climate, enhancing competitiveness, improving social conditions, and investing in human capital. - Called for continued improvement in statistical capacity and data quality and timeliness; encouraged leveraging IMF technical assistance and other development partners. ### Medium-term outlook, risks, and scenario dependence - Growth projection highlighted: non-oil real GDP growth of "5.5 percent" is supported by increasing public spending and foreign direct investment, conditional on prioritization of government expenditures and structural reforms that catalyze non-oil private sector growth. - Main medium- to long-term risks: - Higher fiscal spending. - Public investments not yielding adequate returns and enhanced growth. - Inadequate mobilization of domestic revenues. - Debt sustainability assessment: deterioration with a moderate risk of debt distress reflecting government plans to tap concessional borrowing to finance front-loaded public investments. - Petroleum Fund (PF) trajectory: PF provides a short-run buffer, but fiscal trends under existing capital expenditure plans are unsustainable and the PF will be depleted in the long term at the current rate of withdrawals. ### Key policy recommendations (condensed) - Fiscal policy - Scale back plans to front-load public investment. - Rationalize recurrent spending. - Mobilize non-oil revenues (including introduction of a value-added tax). - Adhere to a medium-term fiscal consolidation plan. - Debt management - Support the authorities’ plan to tap concessional borrowing for frontloaded capital expenditures to help preserve PF assets as an endowment fund, while strengthening debt management capacity. - Implement bold fiscal consolidation measures to safeguard long-term fiscal and debt sustainability. - Financial policy - Promote financial inclusion while safeguarding financial stability. - Strengthen regulatory and supervisory capacity and central bank functions. - Develop and implement a strategy to fully resolve legacy non-performing loans. - Structural reforms - Develop human capital, boost competitiveness, and improve the business environment to enable private sector diversification and growth. - Statistics and technical assistance - Improve statistical capacity and the quality and timeliness of data. - Leverage IMF and development partner technical assistance. ### Selected quantitative findings and indicators (preserved exactly as reported) - Growth and inflation - Real total GDP: 5.3 (2012), -13.9 (2013), -15.8 (2014), -0.6 (2015), -8.8 (2016), -12.9 (2017), -3.9 (2018), -9.4 (2019), -9.2 (2020), -8.8 (2021). - Real non-oil GDP: 6.4 (2012), 2.8 (2013), 5.5 (2014), 4.3 (2015), 5.0 (2016), 5.5 (2017), 6.0 (2018), 6.5 (2019), 5.5 (2020), 5.5 (2021). - CPI (annual average): 10.9 (2012), 9.6 (2013), 0.8 (2014), 0.6 (2015), 1.5 (2016), 3.8 (2017), 4.0 (2018), 4.0 (2019), 4.0 (2020), 4.0 (2021). - Central government operations (in percent of GDP) - Revenue: 61.1 (2012), 66.1 (2013), 63.2 (2014), 61.5 (2015), 63.1 (2016), 52.6 (2017), 49.0 (2018), 46.0 (2019), 42.7 (2020), 40.0 (2021). - Domestic revenue: 2.0 (2012), 2.7 (2013), 3.9 (2014), 6.5 (2015), 8.0 (2016), 7.6 (2017), 7.3 (2018), 7.2 (2019), 7.1 (2020), 7.3 (2021). - Petroleum revenue (incl. PF interest): 55.5 (2012), 58.7 (2013), 53.2 (2014), 48.9 (2015), 48.3 (2016), 41.1 (2017), 37.7 (2018), 34.8 (2019), 31.5 (2020), 28.7 (2021). - Grants: 3.7 (2012), 4.7 (2013), 6.2 (2014), 6.1 (2015), 6.8 (2016), 4.0 (2017), 4.0 (2018), 4.0 (2019), 4.0 (2020), 4.0 (2021). - Expenditure: 22.0 (2012), 24.0 (2013), 37.4 (2014), 57.3 (2015), 73.5 (2016), 73.1 (2017), 69.1 (2018), 67.2 (2019), 65.0 (2020), 58.5 (2021). - Recurrent expenditure: 10.4 (2012), 13.1 (2013), 20.9 (2014), 39.1 (2015), 49.3 (2016), 45.8 (2017), 43.8 (2018), 43.1 (2019), 42.2 (2020), 40.9 (2021). - Capital expenditure: 7.9 (2012), 6.3 (2013), 10.2 (2014), 11.7 (2015), 17.4 (2016), 23.3 (2017), 21.3 (2018), 20.1 (2019), 18.8 (2020), 13.6 (2021). - Donor project: 3.7 (2012), 4.7 (2013), 6.2 (2014), 6.1 (2015), 6.8 (2016), 4.0 (2017), 4.0 (2018), 4.0 (2019), 4.0 (2020), 4.0 (2021). - Overall balance: 39.1 (2012), 42.1 (2013), 25.9 (2014), 4.2 (2015), -10.4 (2016), -20.5 (2017), -20.1 (2018), -21.2 (2019), -22.4 (2020), -18.5 (2021). - Non-oil overall balance (in percent of non-oil GDP): -86.0 (2012), -70.5 (2013), -86.9 (2014), -82.8 (2015), -83.3 (2016), -81.8 (2017), -73.5 (2018), -66.1 (2019), -59.7 (2020), -49.5 (2021). - Money and credit - Deposits (annual percent change): 26.5 (2012), 22.4 (2013), 19.6 (2014), 22.8 (2015), 21.6 (2016), 21.3 (2017), 21.9 (2018), 21.6 (2019), 21.6 (2020), 21.7 (2021). - Credit to the private sector (annual percent change): 20.5 (2012), 13.6 (2013), 5.5 (2014), 10.5 (2015), 13.3 (2016), 13.7 (2017), 12.5 (2018), 13.2 (2019), 13.1 (2020), 12.9 (2021). - Lending interest rate (percent, end-period): 12.2 (2012), 12.4 (2013), 12.9 (2014), 13.5 (2015). - Balance of payments and external - Current account balance (in millions of U.S. dollars): 2,736 (2012), 2,391 (2013), 1,096 (2014), 431 (2015), 41 (2016), -281 (2017), -315 (2018), -334 (2019), -359 (2020), -241 (2021). - Current account balance (in percent of GDP): 40.2 (2012), 42.7 (2013), 25.1 (2014), 16.5 (2015), 2.0 (2016), -11.9 (2017), -12.2 (2018), -12.2 (2019), -12.2 (2020), -7.8 (2021). - Trade balance (in millions of U.S. dollars): -638 (2012), -679 (2013), -749 (2014), -684 (2015), -710 (2016), -844 (2017), -892 (2018), -901 (2019), -917 (2020), -892 (2021). - Exports (in millions of U.S. dollars): 33 (2012), 18 (2013), 15 (2014), 9 (2015), 17 (2016), 20 (2017), 21 (2018), 24 (2019), 26 (2020), 28 (2021). - Imports (in millions of U.S. dollars): 672 (2012), 696 (2013), 764 (2014), 692 (2015), 728 (2016), 864 (2017), 914 (2018), 925 (2019), 943 (2020), 920 (2021). - Services (net, in millions of U.S. dollars): -920 (2012), -437 (2013), -388 (2014), -414 (2015), -486 (2016), -648 (2017), -647 (2018), -646 (2019), -637 (2020), -524 (2021). - Petroleum revenue (in millions of U.S. dollars): 3,775 (2012), 3,286 (2013), 2,319 (2014), 1,281 (2015), 1,014 (2016), 972 (2017), 976 (2018), 955 (2019), 925 (2020), 889 (2021). - Overall balance (in millions of U.S. dollars): 422 (2012), -197 (2013), -376 (2014), 127 (2015), 8 (2016), 6 (2017), 3 (2018), 1 (2019), 1 (2020), 1 (2021). - Public foreign assets (end-period, in millions of U.S. dollars): 12,659 (2012), 15,639 (2013), 16,849 (2014), 16,655 (2015), 16,552 (2016), 16,247 (2017), 15,944 (2018), 15,600 (2019), 15,226 (2020), 14,816 (2021). - Public foreign assets (in months of imports): 91 (2012), 156 (2013), 165 (2014), 169 (2015), 153 (2016), 122 (2017), 115 (2018), 110 (2019), 106 (2020), 110 (2021). - Memorandum items (levels) - GDP at current prices (in millions of U.S. dollars): 6,807 (2012), 5,595 (2013), 4,361 (2014), 2,620 (2015), 2,100 (2016), 2,368 (2017), 2,589 (2018), 2,746 (2019), 2,933 (2020), 3,094 (2021). - Non-oil GDP (in millions of U.S. dollars): 1,295 (2012), 1,319 (2013), 1,371 (2014), 1,412 (2015), 1,480 (2016), 1,782 (2017), 2,037 (2018), 2,323 (2019), 2,647 (2020), 2,948 (2021). - Oil GDP (in millions of U.S. dollars): 5,512 (2012), 4,276 (2013), 2,990 (2014), 1,207 (2015), 620 (2016), 587 (2017), 552 (2018), 423 (2019), 286 (2020), 147 (2021). - GDP per capita: 5,673 (2012), 4,974 (2013), 3,807 (2014), 2,244 (2015), 1,769 (2016), 1,959 (2017), 2,104 (2018), 2,192 (2019), 2,300 (2020), 2,384 (2021). - Crude oil prices (U.S. dollars per barrel, WEO): 105 (2012), 104 (2013), 96 (2014), 51 (2015), 35 (2016), 41 (2017), 45 (2018), 48 (2019), 49 (2020), 51 (2021). - Petroleum Fund balance (in millions of U.S. dollars, closing balance): 11,775 (2012), 14,952 (2013), 16,539 (2014), 16,218 (2015), 16,106 (2016), 15,795 (2017), 15,489 (2018), 15,144 (2019), 14,769 (2020), 14,359 (2021). - Petroleum Fund balance (in percent of non-oil GDP): 909 (2012), 1,134 (2013), 1,206 (2014), 1,148 (2015), 1,088 (2016), 887 (2017), 760 (2018), 652 (2019), 558 (2020), 487 (2021). - Public debt (in millions of U.S. dollars): 0 (2012), 6 (2013), 22 (2014), 46 (2015), 153 (2016), 326 (2017), 541 (2018), 777 (2019), 1,059 (2020), 1,219 (2021). ### Contextual background and near-term developments - Political: Smooth political transition with the sixth constitutional government formed in February 2015; presidential and parliamentary elections due in early 2017. - Oil sector: Industry estimates indicate that unless new oil reserves are developed, oil production is expected to decline further and cease by 2023. - 2015 developments: - Non-oil real GDP growth estimated at "4¼ percent" in 2015 (down from "5½ percent" in 2014). - Total real GDP estimated to have contracted by "0.6 percent" in 2015. - Petroleum revenue fell by "40 percent" in 2015; revenue at "$1.45 billion (excluding grants)" with expenditure at "$1.34 billion", staff estimates an overall surplus of "4.2 percent of GDP" in 2015. - Excess withdrawal from the PF in 2015 was more than six times the level in the previous year; PF balance declined to "$16.2 billion" as of end-2015. - 2016 budget: Approved expenditure of "$1,562.2 million (excluding donor projects)"—if fully executed this would represent an expenditure increase of "17 percent (11 percent of 2016 GDP)" compared to the estimated outturn for 2015; capital expenditure about "49 percent higher" than the 2015 estimated outturn. *Source: DEMOCRATIC REPUBLIC OF TIMOR-LESTE — STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (IMF).* ### 6. The external current account position has also deteriorated sharply. The current account ### _cr16183 - 6. The external current account position has also deteriorated sharply. The current account ### External current account and trade - Current account surplus: - Halved to 25 percent of GDP in 2014. - Estimated to have shrunk further to 17 percent of GDP in 2015. - Drivers of deterioration: - Lower income from declining oil and gas receipts. - Weak investment returns on the PF portfolio against weak global equity market performance in 2015. - Trade and non-oil sector: - Imports estimated to have declined by 9 percent in 2015 (against significant appreciation of the effective exchange rate and lower commodity prices). - Non-oil exports such as coffee and tourism remain insignificant. - Growth in coffee exports slowed due to drought and low coffee prices. ### Financial sector and credit - Money and credit: - Money supply M2 growth slowed to 7.1 percent (y/y) in December 2015, due largely to an increase in central government deposits. - Growth of private sector credit picked up to 10.5 percent (y/y) in December 2015 from 5.5 percent (y/y) in the previous year. - Composition of private credit (as of end-2015): - Credit to individuals: 43 percent of total private sector credit. - Construction sector: 28 percent of total private sector credit. - Banking system conditions: - Bank lending survey in mid-2015 indicated banks are cautious in lending to business enterprises due to credit risks. - Excess liquidity and banks’ overseas placements of deposits have remained high. - Non-performing loan (NPL) ratio declined to 23 percent as of end-December 2015 from 27 percent at end-December 2014, with full loan-loss provisions. - About two-thirds of NPLs are legacy bad loans accumulated by one commercial bank during the mid-2000s. ### Outlook and risks (medium term) - Growth outlook and diversification: - Medium-term growth outlook depends critically on economic diversification. - Under the baseline scenario, average non-oil real GDP growth in the medium term is projected to moderate to 5.5 percent, supported by increasing public spending and foreign direct investment. - FDI projects in the pipeline include a beer and beverage factory, a cement plant, the development of the Tibar Bay Port and a high-end resort hotel. - Constraints and vulnerabilities: - Persistently low oil prices have limited short-run impact on fiscal spending due to PF buffer, but could delay investment in new oil fields and hurt petroleum sector prospects. - Full dollarization and absence of independent monetary policy require fiscal policy to absorb shocks, but fiscal space is constrained by limited domestic revenue mobilization and depleting PF balance in the medium to long term. - Key risks: - Higher fiscal spending and inadequate mobilization of domestic revenues are main sources of risk over the medium-long term. - Failure to ensure efficient public investment (feasibility studies, adequate returns) could amplify fiscal sustainability risks. - Steady depletion of the PF due to excess withdrawals to fund existing expenditure plans implies heightened risk of fiscal distress unless new non-oil revenues are generated or expenditures revised downwards. - Increased share of global equities in the PF portfolio exposes investment returns to global financial market volatility. - Authorities’ view: - Authorities broadly agree with the staff’s outlook and risk assessment. - They stressed that frontloaded infrastructure spending is expected to diversify the economy, boost potential growth, and alleviate capacity constraints. - They view the current low inflationary environment as providing more space for increasing government spending with little risk of overheating. ### Fiscal policy: Budgetary plans and implications - 2016 Budget and multi-year plan: - Significant scaling up of public investment in 2017-19, front-loaded infrastructure (roads, bridges, ports, airports). - Tasi Mane project requires government investment of $0.8 billion, close to a quarter of total capital spending in 2017–20. - Total capital budget amounts to US$3.4 billion (130 percent of GDP). - Proposed capital spending of $0.8-1.3 billion per annum risks stretching administrative capacities and creating bottlenecks and imbalances. - Under the budget scenario, financing mainly met through excess withdrawals from the PF, amounting to US$4.6 billion during 2017-20, or 28 percent of the balance of the PF at end-2015. This is in addition to ESI withdrawals amounting to about $2 billion. - Overall fiscal deficit averaging 30 percent of GDP. - Historical execution and staff baseline: - On average, execution rate of capital projects in 2008–14 was 73 percent of planned expenditures (about US$375 million per annum). - Staff baseline assumes lower infrastructure spending due to weak implementation capacity: - Key capital expenditures—about two-thirds of planned capital expenditure for 2017–20—assumed spread over five years (vs. budget assumption of three years). - Baseline expects smoother non-oil GDP growth and inflation trajectory and healthier current account balance than budget scenario. - Lower excess withdrawal from the PF reduced to about $3.0 billion (one-third lower than planned for 2017-20). - PF balance projected to decline to about two-thirds of its current value by 2030. - A lower PF balance reduces the level of ESI, resulting in higher excess withdrawal to close a given financing gap. - Adjustment scenario and recommended consolidation: - Staff advise bold fiscal consolidation under an adjustment scenario: - Total spending (excluding grants) should be capped at around US$1.4 billion per annum between 2017 and 2026 (representing a total expenditure reduction from 65 percent of GDP in 2017 to 29 percent in 2026), and remain broadly constant at 26 percent of GDP thereafter. - Proposed lower capital expenditure would amount to one-half of the budgeted amount and focus on high-priority, high-return infrastructure projects. - PF drawdown should be minimized by greater use of concessional borrowing while maintaining debt sustainability. - Government should cease making PF withdrawals in excess of the ESI at the latest by 2026. - Recognizes limited immediate financing for essential capital spending assumed at $325 million per year or 10 percent of GDP. - Reflects authorities’ reform target to increase domestic tax mobilization through introduction of a VAT over the medium term. - Tax revenue target and mobilization: - Staff projects a tax revenue increase equivalent to about 5 percentage point of non-oil GDP is needed for tax revenue to reach 13 percent in 2021. - The increase should be achieved largely through revenue mobilization by the VAT. - Long-term spending should depend on strength of domestic tax mobilization; preliminary analysis suggests adjustment scenario can lead to upper-middle income status while maintaining macro stability and fiscal sustainability. ### Scenarios (Box 1): Budget, Baseline, Adjustment — principal features and impacts - 2016 Budget Framework: - Assumptions: - Full implementation of 2017–20 frontloaded infrastructure spending. - No limit on PF withdrawal in the medium term. - Long-run convergence to baseline scenario (including PF withdrawal limit). - Use concessional financing. - Impacts: - Spikes in non-oil growth and inflation early in the budget horizon; considerably weaker current account balance in the medium term. - Faster decline in the PF balance and per capita net public assets relative to the baseline. - Baseline: - Assumptions: - 2017–20 capital outlay reduced by a third and spread over 5 years. - PF withdrawal capped at US$1.3 billion per annum. - Use concessional financing. - Impacts: - Relatively smooth non-oil growth and inflation trajectory; broadly healthy current account balance relative to the Budget scenario. - Gradual decline in the PF balance and per capita net public assets. - Adjustment Scenario: - Assumptions: - 2017–20 capital outlay reduced by half and spread over 5 years. - Total spending (excl. grants) kept at under US$1.4 billion after 2021; spending kept constant as percent of non-oil GDP after 2027. - PF withdrawal capped at US$1.3 billion up to 2025, and limited to ESI thereafter. - Fiscal reforms to mobilize domestic revenues (including VAT), reducing need for concessional financing. - Impacts: - Smoother non-oil growth and inflation trajectory; healthier current account balance relative to the baseline. - Slow decline in per capita net public assets relative to the baseline. - PF balance stabilizes in the medium term and increases in the long term. ### Improving spending efficiency and revenue mobilization - Spending efficiency: - Overall allocation to health and education increased up to 2015, but health expenditure appears low relative to peers and returns on higher education spending need improvement. - More detailed sector-level analysis of social spending and outcomes recommended to improve resource allocation. - Government should exercise strong wage restraint to avoid losing cost competitiveness. - Extension of fiscal autonomy to Oecusse ZEESM needs careful management to minimize off-budget expenditures and contingent liabilities. - Domestic non-oil revenue mobilization (urgent): - Fiscal Reform Commission working to introduce a VAT and review income tax and other taxes to raise domestic non-oil revenues from an average of 11 percent of non-oil GDP in 2011–15 to 15 percent of non-oil GDP by 2020. - Near-term focus: broaden tax base and enhance tax compliance. - Staff recommendations: - VAT: Implement a single-rate VAT with exemptions restricted to a minimum and a sufficiently high registration threshold at the start to exclude most small businesses; tax rate choice driven by revenue mobilization needs and should go beyond replacing current service tax, sales tax, and customs duties. - Other taxes: Raise excise duties on tobacco and petroleum products and raise the income tax rate from 10 to 15 percent could yield additional tax revenue of close to 2 percent of GDP. - Review and streamline existing tax holidays on investment. ### Petroleum Fund (PF) policy and financing options - PF preservation and fiscal rules: - PF has been a source of confidence and should be preserved as an endowment fund. - ESI functions as a fiscal rule intended to act as an annual withdrawal limit so PF assets could be preserved in real terms to generate permanent investment income. - Some drawdown for infrastructure is justified, but assets need preservation to provide investment income for future generations. - Experience of other resource funds suggests strong fiscal discipline and binding fiscal rules are needed. - Adoption of adjustment scenario policies would facilitate return to strict compliance with the ESI within a feasible timeframe. - Consider revising aspects of the PF legal framework to strengthen the withdrawal rule and reduce discretion. - Use of concessional loans: - Greater use of concessional borrowing to finance large infrastructure projects welcomed to preserve the PF. - External loans could meet financing gap if borrowing cost is lower than opportunity cost of tapping the PF (measured by PF’s expected investment return) and guided by the Debt Sustainability Analysis (DSA). - Discipline of debt sustainability monitoring by creditors could transfer knowledge from multilateral/bilateral institutions. - To date, government has been very conservative in borrowing. *Source: IMF staff report excerpt contained in the supplied content unit.* ### 18. The debt sustainability assessment has deteriorated, and the risk of external debt ### 18. The debt sustainability assessment has deteriorated, and the risk of external debt ### Debt sustainability and borrowing - Risk of external debt distress has increased to moderate. - Baseline fiscal scenario does not entail breaches of any DSA threshold, but stress tests resulted in breaches for all but one indicator. - Deterioration reflects authorities’ plan to increase concessional borrowing to finance higher frontloaded capital expenditures compared to plans in the 2014 DSA. - Higher concessional borrowing would help preserve the assets of the PF by reducing the need for excess withdrawals. - Maintaining a sustainable fiscal framework (as outlined under staff’s adjustment scenario) is crucial to long-term debt sustainability. - Staff recommendation: maintain fiscal consolidation and prioritize high-return investment projects to preserve PF assets. ### Public financial management (PFM) and public investment efficiency - Further strengthening of PFM capacity is needed to cement progress. - Efficiency of public investment critically determines economic and social impact. - IMF analytical work shows economic dividends from closing the efficiency gap can be substantial. - Improvements in public investment management (planning, allocation, implementation) could increase efficiency and productivity of capital spending. - The IMF Public Investment Management Assessment (PIMA) tool would help identify reform priorities and develop capacity building strategies. - The recently adopted PPP policy for the Tibar Port could provide a template for future PPPs. - Staff urged rigorous investment appraisal and prioritization, focusing on high-return infrastructure projects. ### Authorities’ views on expenditure, debt, and reforms - Authorities consider total annual expenditure of US$1.4 billion in the medium term to be insufficient given infrastructure needs. - Government remains committed to medium-term infrastructure spending plans as outlined in the SDP to support diversification and raise potential growth. - Authorities emphasize infrastructure improvements to attract FDI. - Authorities concur on need to ensure quality of investment spending via robust feasibility assessments and appraisals. - Authorities seek IMF support to determine desirable level of infrastructure investment. - Authorities recognize risk of advancing the Tasi Mane project and broadly share staff recommendation to remain flexible in timing and scope of implementation. - Authorities share staff view on need to mobilize domestic revenue; fiscal reform in pipeline includes introduction of the VAT. - Authorities consider the risk of debt distress to be contained despite higher borrowing and plan to utilize more concessional financing for large infrastructure projects. - Projected external borrowing for infrastructure is considerable but viewed as close to upper limit of financing needed; actual borrowing will be determined by pace of project implementation. - Accumulated savings in the PF provide buffer against debt distress; higher growth from infrastructure is expected to help debt sustainability. - Authorities expressed interest in Fund TA to strengthen debt management capacity. ### Financial policy — structure, inclusion, and stability - Banking sector: four banks total; three are branches of foreign banks (incorporated in Australia, Indonesia, and Portugal) and one is locally incorporated, wholly government-owned BNCTL. - BNCTL: smallest bank, predominantly Timorese customer base; transformed from micro-finance institution in 2011 with an initial capital of $2 million. - Banking system is highly liquid and well capitalized; BNCTL reported a capital adequacy ratio of 45 percent as of September 2015, bolstered by a $10 million capital injection by the government in 2014. - System issues: large portion of economy is cash-based; strong deposit growth and continued decline in loans-to-deposits ratio indicate weak financial intermediation; limited bank credit to SMEs and rural businesses; constrained access to long-term affordable credit. - Financial inclusion progress: - BCTL’s Financial Sector Master Plan launched in August 2014 sets roadmap to 2025. - Installation of Automatic Payment System and passage of Law on National Payments System are major milestones. - Timor-Leste adopted bank-based mobile banking model; all four banks are introducing branchless banking facilities. - Central bank published a Financial System Review. - Supervisory and stability priorities: - BCTL strengthening banking supervision capacity with TA from development partners. - Need for a strategy to resolve legacy NPLs (concentrated in one commercial bank). - BCTL aims to enhance role as lender of last resort with clear protocols and legal framework. - Conceptualization of a development bank is at an early stage; risk of contingent fiscal liabilities warrants vigilance; clear mandate and strong governance recommended. - Financial sector entities in Oecusse ZEESM should remain under central bank supervision. - AML/CFT: national risk assessment completed; final report expected in 2016; BCTL issuing revised instructions on enhanced due diligence for high-risk customers in line with FATF. - Exchange rate regime: use of the U.S. dollar as legal tender remains appropriate given institutional capacity constraints and limited financial development; central bank to review exchange rate regime this year as set out in SDP. ### Structural reforms and private sector diversification - Medium-term growth depends critically on economic diversification. - Key impediments: low human capital, poor infrastructure and connectivity, small domestic market, limited financial sector development, high business cost structure. - Near depletion of oil production in existing fields increases urgency for diversification and reduces fiscal resources. - Continued efforts to improve health, education, and quality of life (including SDGs) would help lift potential growth. - Staff view: limited, well-targeted government involvement in industrial development is warranted where markets are missing/incomplete but should be under appropriate risk-sharing to minimize contingent liabilities. - Staff urged flexibility in timing and speed of state-initiated petroleum-related development projects in light of uncertain private-sector commitments. - Priority areas to catalyze private sector: - Business climate: strengthen enforcement of contracts, resolve insolvency, register property, improve ease of getting credit; accelerate land law reform to clarify ownership and improve collateral availability. - Wage competitiveness: public sector wages should grow in line with productivity gains to avoid discouraging FDI in labor-intensive sectors. - Labor market and human capital: emphasis on quality of spending and outcomes in health and education, including vocational and technical education. - ADB finding noted: need to build agricultural markets and develop tourism through improving crop quality, productivity, supply consistency, price incentives, and land tenure arrangements. - Authorities are reviewing investment law and land and property law to attract FDI and promote commercial use of land as collateral. ### Statistics, technical assistance, and capacity development - Timeliness and quality of data remain challenging; staff supports ongoing improvements in statistical capacity. - National Accounts: improvements with TA; need to improve timeliness and methodology; close divergence between expenditure and production estimates; start compilation of producer prices for measuring real national product. - Staff welcomed plan to publish quarterly GDP data and urged institutional support to General Directorate of Statistics for timely quarterly estimates. - Poverty data: last official poverty indicators based on 2007 data; a living standards measure survey underway with World Bank support to update poverty data. - IMF TA delivered in 2015: on-site examination of commercial banks, government finance statistics, external sector statistics; regional workshop to strengthen fiscal framework and planning capacity. - Capacity development pipeline: TA on debt management, support for assessment of public infrastructure investment, continuation of TA on strengthening financial institution oversight. - Large need for TA and training to support government reform and human capital improvements. ### Staff appraisal — summary of policy advice - Timor-Leste faces difficult challenges from sharp fall in oil revenue and large developmental needs; growth moderated and inflation subdued. - Low oil revenue and frontloaded public investment plans have led to significant deterioration in fiscal and external positions; at current withdrawal rates PF will be depleted in the long term. - Fiscal consolidation is needed to safeguard long-term fiscal sustainability: - Scale back large front-loaded public investment in line with implementation capacity. - Rationalize recurrent spending. - Strengthen non-oil revenues. - Adhere to a medium-term fiscal consolidation plan. - Prioritize public investment toward high-return projects through rigorous appraisal. - Preserve assets of the PF to provide investment income for future generations. - Increase utilization of concessional financing for large infrastructure projects to reduce reliance on excess PF withdrawals. - Introduction of the VAT will be instrumental in achieving target of raising non-oil revenues to 15 percent of non-oil GDP by 2020. - Medium-term growth relies on economic diversification and private sector development requiring an enabling business environment, improved social conditions, and human capital investment. - Private sector should leverage comparative advantage in labor-intensive sectors such as agriculture and tourism via branding, product innovation, and niche market exploration. *Source: IMF staff report chapter as provided.* ### 39. Financial inclusion will help enhance economic growth but needs to strike an ### 39. Financial inclusion will help enhance economic growth but needs to strike an appropriate balance with safeguarding financial stability. ### Financial inclusion and financial stability - The progress in promoting financial inclusion is promising. - The financial sector is developing and is sound but continued effort in strengthening regulatory and supervisory capacity and improving central bank functions is key. - A strategy to fully resolve legacy NPLs should be put place as soon as practical. ### Monetary and exchange rate regime - The use of the U.S. dollar as legal tender has served Timor-Leste well. - Going forward, financial sector and institutional developments would be needed to pave the way for any potential change in the monetary and exchange rate regime. ### Statistical capacity and data quality - Continued efforts are required to improve statistical capacity, as limitations in this area continue to pose challenges to surveillance. - Further work is needed to increase the quality and timeliness of data, which are crucial to policy formulation. - The authorities should further leverage TA from the Fund and other development partners to this end. *Source: IMF staff report excerpt.* ### 42. It is expected that the next Article IV consultation with Timor-Leste will be held on the ### _cr16183 - 42. It is expected that the next Article IV consultation with Timor-Leste will be held on the ### Real sector developments - Economy remains dominated by the oil sector despite declining oil production. - Non-oil real GDP growth: - Recent subdued growth; headline series: "Real non-oil GDP 6.4 2.8 5.5 4.3 5.0 5.5 6.0 6.5 5.5 5.5" (as presented across tables/figures). - Real non-oil GDP growth (percentage change): "6.4 2.8 5.5 4.3 5.0 5.5 6.0 6.5 5.5 5.5". - Drivers of non-oil GDP: primarily net exports and government spending. - Inflation: - CPI (annual average) series: "10.9 9.6 0.8 0.6 1.5 3.8 4.0 4.0 4.0 4.0". - CPI (end-period) series: "10.9 4.0 0.3 -0.6 3.6 4.0 4.0 4.0 4.0 4.0". - Headline and food components shown: contributions from non-food, food ex rice, rice. ### Petroleum Fund and oil sector developments - Oil wealth per capita described as relatively modest; "Oil Reserves Per Capita (In thousand barrels, 2014)" places Timor-Leste among countries with modest reserves per capita. - Years of production remaining projected to cease by 2023; chart notes "production projected to cease by 2023." - Estimated production of barrels of oil equivalent presented for budgets: "2015 Budget" and "2016 Budget" production paths shown. - Oil price context: - Brent historical and forecast series shown in US$ per barrel (2015 dollar price). - Petroleum Fund flows and dynamics: - Net Petroleum Fund inflows turned negative in 2015 due to excess withdrawals and falling petroleum revenues. - PF Dynamics (2016 Budget Scenario, flow) components include Revenues, Investment return, ESI, Excess withdrawal, External financing, Net inflows (values plotted in millions of US dollars). - Petroleum Fund balances (closing balances): - Table values: "Petroleum Fund balance (in millions of U.S. dollars) 11,775 14,952 16,539 16,218 16,106 15,795 15,489 15,144 14,769 14,359". - Petroleum Fund balance (in percent of non-oil GDP): "909 1,134 1,206 1,148 1,088 887 760 652 558 487" (as presented). - Estimated Sustainable Income (ESI) noted; role undermined by excess withdrawals. ### Fiscal developments and composition - Overall fiscal balance: - Estimated to become a smaller surplus in 2015; table/figure series indicate overall balance values and trend toward deficits in projection years. - Overall balance (Table 1 & 2): examples include "Overall balance 39.1 42.1 25.9 4.2 -10.4 -20.5 -20.1 -21.2 -22.4 -18.5" (2012–21 series). - Non-oil balance deteriorated further in 2015. - Non-oil overall balance (in percent of non-oil GDP) series: "-86.0 -70.5 -86.9 -82.8 -83.3 -81.8 -73.5 -66.1 -59.7 -49.5". - Expenditure composition: - Recurrent expenditure rising at the expense of capital expenditure. - Recurrent spending components (in million US$): wages and salaries, goods and services, current transfers plotted (series across years, e.g., recurrent spending levels up to 2015). - Capital expenditure shown declining in share: "Capital expenditure 7.9 6.3 10.2 11.7 17.4 23.3 21.3 20.1 18.8 13.6" (Table 1). - Current transfers and subsidies: - Current transfers have increased significantly relative to GDP. - Transfers and subsidies (percent of non-oil GDP) series indicated; subsidies include rice and electricity. - Budget execution: - Budgeted expenditure continues to be under-executed due to capacity constraints. - Expenditure Execution Rates: Total Budget (In percent) series shown; 2015 estimate included. ### Central government operations (selected figures) - Revenue composition (Table 2, levels in millions of US$ for 2013–21 presented): - Revenue (examples): "Revenue 3,697.8 2,555.1 1,818.8 1,611.8 1,908.3 1,325.7 1,246.6 1,269.1 1,263.9 1,251.2 1,238.8". - Petroleum revenue (incl. PF interest): "3,286.4 2,116.8 1,394.1 1,280.8 1,593.5 1,014.1 972.2 976.5 954.8 925.0 889.3". - Investment returns: "244.6 299.8 532.2 301.9 874.8 869.1 904.9 913.7 897.6 877.6 857.4". - Taxes and grants breakdowns provided with numeric series. - Expenditure (levels in millions of US$ and percent of GDP series provided): - Expenditure: "1,341.7 1,629.4 1,824.3 1,501.2 1,705.6 1,543.8 1,731.0 1,789.7 1,845.7 1,907.7 1,809.9". - Current expenditure and capital expenditure time series provided. - Petroleum Fund interactions: - Net transfer to the Petroleum Fund and Petroleum Fund withdrawals series (millions US$) provided, e.g., "Petroleum Fund withdrawals 730.0 732.0 1,327.5 1,278.5 1,283.8 1,125.2 1,283.2 1,282.4 1,300.0 1,300.0 1,300.0". - ESI series: "730.0 632.3 638.5 638.5 544.8 544.8 505.2 567.0 537.4 522.8 509.1". - Withdrawals above ESI series listed (including large excess withdrawals in several years). - Financing and non-oil overall balance: - Non-oil overall balance levels and percent series highlighted, e.g., non-oil overall balance (in percent of non-oil GDP) "-70.5 -86.8 -99.1 -82.8 -94.0 -83.3 -81.6 -73.4 -66.0 -59.6 -49.5". - Memorandum: Funding gap presented (in millions of US$): "-200.3 -558.8 -761.1 -531.6 -846.0 -687.4 -951.3 -930.0 -999.2 -1058.7 -951.2". ### Financial sector developments - Banking system remains small relative to the economy. - Private credit and deposits: - Credit to the private sector (levels and growth): series includes "Credit to the private sector 20.5 13.6 5.5 10.5 13.3 13.7 12.5 13.2 13.1 12.9" (Table 3). - Private credit growth lagged deposit growth; M2 and deposit growth series shown. - Liquidity and asset composition: - Liquidity in the banking system remains high; overseas placements and liquidity ratios shown. - Growth in private sector credit recovered in 2015, driven by lending to construction. - Interest rates and spreads: - Lending and deposit rates (end-period): lending rate series includes "12.2 12.4 12.9 13.5 ..." (Table 3); deposit rate around "1.1 1.1 1.1 1.0 ...". - High interest rate spreads indicate inefficiencies despite rising competition. - Non-performing loans: - Amounts of non-performing loans (in millions of US$) e.g., "48.0 49.5 47.4 43.7 ..." and NPL ratios "30.8 28.0 26.8 22.9 ...". ### Business environment and governance - Petroleum Fund governance described as strong by international standards. - Governance indicators: improvements in government effectiveness, regulatory quality, and political stability noted (Worldwide Governance Index metrics). - Ease of doing business: improvements limited; rankings and percentile comparisons shown (Developing Asia Doing Business Ranking, percentile). - Competitiveness pillars: scores across "Institutions, Infrastructure, Macro environment, Health & primary education, Higher education & training, Goods mkt efficiency, Labor mkt efficiency, Financial mkt development, Technological readiness, Market size, Business sophistication, Innovation" with TLS vs Developing Asia averages. - Employment composition: - Agriculture and services generate most employment despite small GDP shares; Employment and GDP share chart presented. ### Social and human development - Human Development Index: - Ranking falls in 2014 due to decline in GNI. - HDI components show lag in years of schooling and need for improvement in life expectancy and literacy. - Selected indicators: - Under-5 mortality rate (Per 1,000; 2015) plotted and compared with peers. - Female labor force participation rate (percent of female population ages 15+, 2013) listed; modeled ILO estimate. - Life expectancy and literacy rates compared across selected Asian economies, with Timor-Leste typically below many peers. - Example numeric: "Literacy Rate: 58.3" (presented on figure). ### Balance of payments and external position - Current account and trade: - Current account balance (millions US$): "2,736 2,391 1,096 431 41 -281 -315 -334 -359 -241" (2012–21 series). - Trade balance (millions US$): "-638 -679 -749 -684 -710 -844 -892 -901 -917 -892". - Exports and imports series provided; exports excluding petroleum noted. - Income and transfers: - Income (net) series: "3,862 3,327 2,149 1,304 1,001 964 967 944 913 879" (2012–21). - Current transfers (net) series: "432 180 842 252 362 462 572 682 822 296". - Public foreign assets and reserves: - Public foreign assets (end-period) series: "12,659 15,639 16,849 16,655 16,552 16,247 15,944 15,600 15,226 14,816". - Central bank reserves (component) series: "884 687 311 438 446 452 455 456 457 458". ### Medium-term scenario and projections (selected) - GDP at current prices (millions US$) series: "6,807 5,596 4,361 2,620 2,100 2,368 2,589 2,746 2,933 3,094". - Non-oil GDP (millions US$) series: "1,295 1,319 1,371 1,412 1,480 1,782 2,037 2,323 2,647 2,948". - Oil GDP (millions US$) series: "5,512 4,276 2,990 1,207 620 587 552 423 286 147". - Crude oil prices (U.S. dollars per barrel, WEO assumptions): "105.0 104.1 96.2 50.8 34.8 41.0 44.5 47.6 49.4 50.5" (presented as WEO assumptions). - Public external debt (millions US$) projections: "0 6 22 46 153 326 541 777 1,059 1,219"; percent of GDP series: "0.0 0.1 0.5 1.8 7.3 13.8 20.9 28.3 36.1 39.4". - Petroleum Fund balance (percent of GDP and percent of non-oil GDP) projections included, e.g., "Petroleum Fund balance (in percent of non-oil GDP) 909.3 1,133.6 1,206.2 1,148.2 1,088.3 886.6 760.4 651.9 557.9 487.1". ### Monetary developments (selected) - Broad money and narrow money levels (millions US$): Broad money "407 500 600 642 693 794" (2012–17); Narrow money "206 279 343 398 429 492". - Net foreign assets and reserves (banking system): "Net foreign assets 1,179 1,072 757 1,016 1,007 1,012"; gross reserves "884 687 311 438 446 452". - Reserve and broad money growth rates: - Broad money growth: "26.2 22.9 19.9 7.1 7.9 14.6". - Reserve money growth: "189.7 -14.4 71.4 45.5 6.5 2.5". - Credit to private sector growth and credit ratios: - Credit to private sector growth: "20.5 13.6 5.5 10.5 13.3 13.7". - Credit/non-oil GDP: "12.4 13.8 14.0 15.0 16.2 15.3". ### Risk assessment (framework present) - Risk Assessment Matrix structure provided with columns: - Source of Risks, Overall Level of Concern, Policy Recommendations, Likelihood (high, medium or low), Expected Impact if Realized (high, medium or low). - Specific entries not reproduced in text extract; framework indicates assessment across macroeconomic, fiscal, external, and governance risks and corresponding policy recommendations. *Source: DEMOCRATIC REPUBLIC OF TIMOR-LESTE — INTERNATIONAL MONETARY FUND (extracted figures, tables, and notes from the supplied content).* ### 1. Sharper-than- ### 1. Sharper-than-expected global growth slowdown ### Key risk drivers and transmission channels - Low/Medium likelihood: This could be due to (i) significant China slowdown in 2016-17; and/or - Medium likelihood: (ii) turning of the credit cycle generating disorderly deleveraging in large emerging economies and potential spillbacks to advanced economies. - Medium/Low likelihood: These could lead to lower global trade and weak demand for oil, adversely impacting revenues. The impact is limited by the insulating role of the Petroleum Fund (PF) and low levels of non-oil trade and capital account integration. ### Domestic implications and policy guidance - Expenditures plans need to be scalable and efforts to raise non-oil revenues need to be intensified. --- ### 2. Tighter or more volatile global financial sector conditions ### Key risk drivers and transmission channels - Medium likelihood: Sharp asset price adjustment as investors reassess underlying risk and response to unanticipated change in growth and financial intermediation; Fed policy rate path, and increase in U.S. term premium, with poor market liquidity amplifying volatility. - High likelihood: A further surge in the U.S. dollar boosting non-U.S. trade but creating balance sheet strains for dollar debtors. - Medium/Low likelihood: PF would gain from higher global interest rates but could incur capital losses on its bond portfolio. - Renewal of global shocks that affect international banking operations could impact local liquidity conditions. - No crisis management or contingency planning frameworks are yet in place. - Prolonged weakness in credit supply would limit private sector growth and diversification efforts. ### Policy recommendations - The BCTL’s regulatory and supervisory framework and crisis management toolkit need to be enhanced, with support from TA donors. --- ### 3. Persistently low energy prices ### Key risk drivers and transmission channels - Medium likelihood: Low oil and gas prices triggered by global supply factors reversing only gradually and due to continuing weak global demand. - Medium impact: Low energy prices delay investment decisions in new oil fields and investment may become not profitable. The scope for government spending is reduced, lowering GDP growth. - As for risk 1 above. --- ### 4. Higher inflation ### Key risk drivers and transmission channels - Medium likelihood: Inability to moderate public expenditures raises inflation as the absorptive capacity of the economy is limited. - Medium/High impact: High inflation adversely affects the poor and vulnerable. Higher transfers to compensate and higher public sector wages add to spending pressures. ### Policy recommendations - Fiscal policy needs to be adaptable to maintain macro-stability, preserve competitiveness and better protect the poor. --- ### 5. Over investment in projects with low returns ### Key risk drivers and transmission channels - Medium likelihood: This could arise due to the implementation of capital-intensive projects with ambitious cost-benefit analysis. - High impact: Capital-intensive projects that have limited linkages mean that job creation and poverty reduction is limited while depleting PF and risk fiscal sustainability. ### Policy recommendations - Projects should be subject to transparent and realistic cost benefit assessments and risk analysis, and only go ahead if the social returns are higher than the opportunity costs. --- ### 6. Failure to secure inclusive growth ### Key risk drivers and transmission channels - Low/Medium likelihood: Discontent could be triggered by public perception that oil wealth is not trickling down and not reducing poverty. - High impact: Higher rent seeking behavior and more pressures to raise expenditures that may lower the quality of public investments. Foreign investment, vital for private sector growth, may be discouraged. ### Policy recommendations - Sound policy frameworks and governance structures to be reinforced, especially through more transparency and accountability. --- ### Appendix I. Timor-Leste Petroleum Fund: Cornerstone of Fiscal Sustainability ### Role and policy framework - The oil and gas sector accounted for about 70 percent of GDP and almost 90 percent of total government revenue during 2010–15. - Recent production from Bayu Undan and Kitan; under the baseline scenario, all production is expected to cease by 2023 as reserves become depleted. - Prospects for Greater Sunrise fields remain uncertain; the Greater Sunrise project has not been factored into PF wealth, the estimated sustainable income (ESI), or any macro projections. ### Petroleum Fund design and rules - The PF was set up under the Petroleum Fund Law in 2005. The PF Law requires that all petroleum revenues are transferred to the PF and invested abroad in financial assets. The PF’s only outgoings are transfers back to the central government budget based on parliamentary approval. - The PF law defines the Estimated Sustainable Income (ESI) as 3 percent of the total petroleum wealth, which includes the current PF balance plus the net present value of expected future petroleum revenue. - The ESI could be seen as a form of fiscal rule but without a rigid fiscal ceiling. Actual withdrawal may exceed the ESI as long as the government provides detailed explanation to the parliament why doing so is in the interest of the country. ### Projections and recent trends - The PF is expected to peak in nominal terms in 2016 and declines thereafter if annual PF withdrawal remains at about US$1.3 billion for the next 10 years against an average projected ESI of US$537 for 2015–20. - Oil prices for estimating ESI are projected under prudent assumption required under the PF Law based on the U.S. Energy Information Administration’s (EIA) long-term forecasts of the Brent crude oil prices using an average of the EIA low and reference cases. - In recent years, falling oil prices have limited the build-up of the PF to its original targeted balance. However, the risk posed by low oil prices is becoming less significant as around 80–90 percent of the PF are already in the form of financial assets. - The PF was initially invested only in bonds; an amendment to the PF Law in 2011 allowed up to 50 percent allocation in equities. As at end-2015, 40 percent of the PF’s investment was invested in equities. PF wealth declined for the first time in 2015 on account of valuation losses. --- ### Appendix II. Key Policy Recommendations from Previous Article IV Consultation ### Fiscal policy recommendations and implementation notes - Greater focus on fiscal sustainability with a front-loading strategy in line with the SDP objectives should see expenditure stabilized at $1.3 billion. - Broadly accepted by the authorities in the Yellow Road Process. Expenditure outturns (excluding grants) in 2014 and 2015 were $1.36 billion and $1.34 billion, respectively, lower than the budgeted amount of $1.50-1.57 billion. - Improve the composition of government expenditure, including rigorous cost-benefit analysis for large scale projects, scaling back planned infrastructure for cases ahead of demand, higher recurrent budget for maintenance cost for infrastructure development, curtail rapid increase in transfer and subsidies. - On-going progress but challenges remain. The authorities recognized public investment plans should be subject to robust appraisal but need to build capacity. - Raise non-oil domestic revenues. - Fiscal Reform Commission is working on the introduction of value-added tax in the medium term. The authorities are also reviewing tax incentives for corporates. ### Financial sector recommendations and implementation notes - Implement the Financial Sector Master Plan to strengthen financial system oversight and development. - BCTL is making progress in building up supervisory capacity with the support of IMF TA. - Faster progress in reform of the land law to improve the availability of collateral to expand lending and borrowing. - Early attention to be given to enable moveable property to be used as collateral; followed by the use of immoveable property such as land and building as collateral when land titles have been clarified. - Establishing appropriate AML/CFT framework. - Good progress is being made. - The financial system in Oecusse special economic zone continues to be within the mandate of the BCTL. Accepted by the BCTL authorities. - Dollarization remains appropriate given current conditions. The authorities agreed with the staff's views given competing development goals and while the financial markets remains underdeveloped. A review of the exchange rate regime is required by the SDP. ### Growth and development recommendations and implementation notes - Non-oil GDP growth of 5-7 percent over the medium term led by the private sector is more inclusive and sustainable. - The 2016 Budget assumed non-oil GDP will grow between 4-7.5 percent in the medium term and placed heavy emphasis on economic diversification and private sector led growth. - Measures to alleviate impediments to private sector development. - Ongoing progress but challenges remain. --- ### Appendix III. Advancing Financial Inclusion and Safeguarding Stability ### Context and findings - Financial inclusion increases economic growth at initial stage of financial development. IMF (2015) found the initial levels of various types of financial inclusion indicators have a positive impact on 10-year growth, but causation remains a challenge. The study also points to evidence that financial stability risks increase when access to credit is expanded without proper supervision. - Timor-Leste financial market is relatively shallow: four commercial banks with 31 branches, translating to about 5.6 bank branches per 100,000 adults. - Only two in five Timorese have a bank account. Timor-Leste’s credit to private sector was 15 percent of GDP in 2015, compared with Pacific island small states weighted average 68 percent of GDP in 2014 and East Asia and Pacific developing countries 131 percent of GDP in 2014. ### Policy objectives and recommendations - The BCTL’s Master Plan for Financial Sector Development aims to increase the proportion of adult population with bank accounts to 90 percent by 2025, including through promoting mobile banking. - Sustainable financial inclusion requires balancing opportunity and innovation with safeguards to prevent excesses in both the supply of and demand for credit. - The BCTL is making progress in enhancing supervisory capacity for on-site and off-site examination of banks with TA. BCTL is expected to resume oversight of the non-bank financial sector including credit unions and microfinance with TA support from PFTAC. --- ### Appendix IV. Transition to Sustainable Development Goals (SDGs) ### Strategic alignment and priorities - The SDGs replace the MDGs and aim to achieve high and sustainable growth economically, socially and environmentally. A working group led by the Prime Minister’s office is reviewing the Strategic Development Plan (SDP) for alignment with the SDGs. - Timor-Leste played a key role in adopting SDG 16 (peace, justice, and strong institution) by its efforts and engagement at the global level through coordinating with g+7 countries. ### Progress and challenges - Some progress in achieving the MDGs. Timor-Leste is on-track in promoting gender equality, reducing child mortality, and combating malaria and other diseases. - Infant and child mortality rates declined sharply by 50 percent during 2001-09. - Challenges remain in improving other social indicators. Raising the level and efficiency of health and education spending is essential. The government has initiatives to promote inclusive growth through various social programs. ### IMF support priorities for SDGs - Key priority areas include domestic revenue mobilization, financial sector supervision and data enhancement. - Domestic revenues mobilization would create fiscal space to increase social and pro-growth spending. - Financial inclusion supported by legal, regulatory, and institutional frameworks would help narrow income and gender inequality. - Continued data enhancements are crucial to monitor and assess progress. *Source: IMF staff report, Democratic Republic of Timor-Leste (selected sections).* ### Appendix V. Remittances and Labor Flow Dynamics ### Appendix V. Remittances and Labor Flow Dynamics ### Remittance outflows and foreign workers - Remittance outflows from Timor-Leste have increased since 2006, reflecting the reliance on foreign workers for high-skill managerial jobs. - The 2014 Enterprise and Skills Survey shows the number of foreign workers is relatively high in managerial and professional positions, especially in the oil and gas sector. - The end of UN peacekeeping operation in 2012 contributed to some extent the decline in outflows (staff’s crude estimates for remittances in 2013 and 2014 use transaction data from money transfer operators). ### Skill gaps and workforce education - The 2013 Labor Force Survey reports: - vocational/polytechnic diploma: 5.3 percent of the labor force - university degree: 8.9 percent of the labor force - Human resource constraints: 40 percent of the population over 15 years old has not had any education. - Type of training received by those employed (Labor Force Survey, 2010, in percent): - Formal schooling, 6.8 - Vocational training program, 13.6 - Training program provided by NGO, 3.4 - On the job training, 8.0 - Learning from parent, relative, friend, 21.6 - Self-taught, 47.7 - Only 13.6 percent of the population had gone through a vocational training program as of 2010. - Observation: vocational training has been underutilized given that most of the population have been self-taught or trained by relatives or friends. ### Remittance inflows, labor migration, and private sector development - Remittance inflows have increasingly become an important income source for households, albeit from a low base. - Outward labor flows provide employment opportunity while the private sector in Timor-Leste is developing. - According to UN statistics, migrants from Timor-Leste are currently estimated at around 33,000 (3 percent of the population). ### Data and statistics on remittances and balance of payments - Reliable data on remittance flows is key to monitoring external balance, labor market dynamics, and their impact on households’ standard of living. - Further improvement in recording compensation of employees and personal transfers from Timorese residents and nationals working abroad in the balance of payments statistics is currently being reviewed by the BCTL with the support of Fund TA. - The October 2015 TA mission on ESS found important improvements on the integrated IIP (classification of components; treatment of changes in prices and exchange rates; treatment of positions of the Petroleum Fund and IMF-related accounts). Compilers should: - improve the coverage of the FDI survey to include transactions and positions of JPDA companies’ equity valued at Own Funds at Book Value; - review current estimates, updating the information for compensation of employees; and - assess the information on personal transfers that financial institutions (banks and money transfer operators) are reporting regularly to the Bank Supervision Division (BSD). - Currently, there is limited information on remittances from Timorese working abroad and improvement in the estimation and compilation procedures of such remittances should be pursued. ### Key statistics and survey findings (preserved exactly as reported) - Vocational/polytechnic diploma: 5.3 percent - University degree: 8.9 percent - Population over 15 years old with no education: 40 percent - Participation in vocational training program (2010): 13.6 percent - Migrants from Timor-Leste (UN statistics): around 33,000 (3 percent of the population) - Type of Training Received by Those Employed (Labor Force Survey, 2010, in percent): - Formal schooling, 6.8 - Vocational training program, 13.6 - Training program provided by NGO, 3.4 - On the job training, 8.0 - Learning from parent, relative, friend, 21.6 - Self-taught, 47.7 ### Policy recommendations and priorities (as stated in the source) - Close the skill gap by developing more targeted training and education of the workforce. - Develop well designed, targeted skill improvement programs in coordination with the private sector to enhance educational quality and vocational training. - Encourage Timorese working abroad to bring back experiences and business know-how (e.g., tourism, and services) when they return home. - Increase skilled job opportunities and incentives so returning migrants can choose suitable jobs. - Improve recording and compilation of compensation of employees and personal transfers in balance of payments statistics using available information from financial institutions; this effort is under review by the BCTL with Fund TA support. *Source: Appendix V. Remittances and Labor Flow Dynamics (Staff Report for the 2016 Article IV Consultation).* ### 1. This DSA is based on the macroeconomic framework outlined in the IMF’s staff report ### _cr16183 - 1. This DSA is based on the macroeconomic framework outlined in the IMF’s staff report ### Macroeconomic framework and outlook - Staff projects total nominal GDP to contract through 2016, as oil production declines. - Real non-oil GDP growth is projected to be in the range of 5–6½ percent in the medium term and to stabilize at around 5.5 percent for 2021–35. - Inflation is expected to remain low in the medium term due to lower global commodity prices and continued strength of the U.S. dollar; inflation is expected to increase steadily to about 4 percent over the medium term and maintained at that level in the long run. - The external current account balance is expected to deteriorate relative to the 2014 DSA due to a greater decline in oil and gas prices and diminishing oil exports; the current account balance is expected to remain in surplus up to 2016, after which it moves into deficit. - Oil production is estimated to run out by 2023. ### Scenarios considered to illustrate debt sustainability - 2016 Budget scenario - Assumes full implementation of frontloaded capital spending in 2017–20. - Total capital spending in 2017–20 will reach US$3.4 billion for front-loaded infrastructure (roads, bridges, ports, airport). - On average, 70 percent of the larger financing gap in 2017–20 will be met by withdrawals from the Petroleum Fund (PF), the bulk consisting of withdrawals above the Estimated Sustainable Income (ESI), complemented by concessional borrowing. - Baseline fiscal scenario - Assumes frontloading of capital spending at two-third of the 2017–20 amount outlined in the 2016 Budget, reflecting implementation capacity constraints. - Investment plans comprise mid-sized key infrastructure projects (subset of the infrastructure plans). - Assumes a cap on total withdrawal of the PF of US$1.3 billion. - Expected borrowing during 2017–20 is comparable to the 2016 Budget scenario given lower excess PF withdrawal. - Staff’s proposed adjustment scenario - Increase in capital spending projected by the 2016 Budget over 2017–20 is reduced by one-half. - Total spending is kept at under $1.4 billion (excluding donor projects) during 2022–26 and as a constant share of GDP after 2027. - Assumes domestic revenue mobilization measures including the introduction of a value-added tax (VAT) in the medium term to achieve the government’s tax revenue goal of 15 percent of non-oil GDP in 2020. - Concessional borrowing need is lower over the long term; reliance on excess PF withdrawals is lower and ceases beyond 2025. ### Key macroeconomic assumptions (Box 1) - Real GDP growth: projected to fall in the medium term due to declining oil production; non-oil GDP growth projected in the range of 5–6½ percent over the medium term; stabilizes at around 5.5 percent for 2021–35. - Inflation: expected to increase steadily to about 4 percent over the medium term and maintained at that level in the long run. - Current account: surplus up to 2016, then deficit reflecting lower oil and gas receipts and higher imports generated by infrastructure projects; assumptions substantially weaker relative to the 2014 DSA because of lower global oil prices. - Grant element of loans: assumed to decline over the medium term and stabilize at about 40 percent in the long run after the infrastructure spending peak; average interest rate on concessional loans for 2021–35 projected at 1.8 percent. - External borrowing: under the baseline scenario borrowing projected to decline rapidly from $171 million per annum in the medium term to $37 million per annum in the long term. ### Quantified medium-term and long-term assumptions (selected figures from table) - Real GDP Growth (in percent) - 2015-2021 (Medium Term): 5.5 - 2022-2035 (Long Term): 5.5 - Previous DSA 2014-2020 (Medium Term): 7.0 - Previous DSA 2021-2034 (Long Term): 7.0 - Inflation (in percent) - Current DSA Medium Term: 3.3 - Current DSA Long Term: 4.0 - Previous DSA Medium Term: 3.5 - Previous DSA Long Term: 4.0 - Overall fiscal balance (in percent of GDP) - Current DSA Medium Term: -15.5 - Current DSA Long Term: -10.5 - Previous DSA Medium Term: 19.5 - Previous DSA Long Term: -9.0 - Current account (in percent of GDP) - Current DSA Medium Term: -5.4 - Current DSA Long Term: -15.8 - Previous DSA Medium Term: 20.7 - Previous DSA Long Term: -5.7 - Revenue (in percent of GDP) - Current DSA Medium Term: 50.7 - Current DSA Long Term: 20.7 - Previous DSA Medium Term: 56.9 - Previous DSA Long Term: 26.5 - Borrowing (in millions of USD, period average) - Current DSA Medium Term: 171 - Current DSA Long Term: 379 - Previous DSA Medium Term: 150 ### Petroleum Fund (PF) dynamics and fiscal funding gaps - PF balance at end-2015: US$16.2 billion or 169 months of imports of goods and services. - External loans signed as of end-2015: $240 million (9 percent of GDP), including a semi-concessional loan of $50 million from China EXIM Bank. - Projected medium-term fiscal funding gaps (2017–21) and financing sources (In millions of US dollars) - 2016 Budget Framework (Total 2017–21 funding gap): 6,547 - Excess PF Withdrawal (Total 2017–21): 5,621 - Borrowing (Total 2017–21): 6 - Yearly breakdown (2017–2021 funding gaps): 1,258; 1,784; 1,423; 1,072; 1,012 - Yearly breakdown (2017–2021 excess PF withdrawal): 909; 1,417; 1,262; 1,033; 1,000 - Yearly breakdown (2017–2021 borrowing): 348; 366; 161; 391; 292 - Baseline Scenario (Total 2017–21 funding gap): 4,890 - Excess PF Withdrawal (Total 2017–21): 3,824 - Borrowing (Total 2017–21): 1,066 - Yearly funding gaps: 951; 930; 999; 1,059; 951 - Yearly excess PF withdrawal: 778; 715; 763; 777; 791 - Yearly borrowing: 173; 215; 237; 281; 160 - Adjustment Scenario (Total 2017–21 funding gap): 2,730 - Excess PF Withdrawal (Total 2017–21): 1,865 - Borrowing (Total 2017–21): 865 - Yearly funding gaps: 675; 583; 533; 491; 449 - Yearly excess PF withdrawal: 426; 336; 409; 345; 349 - Yearly borrowing: 248; 246; 124; 147; 100 ### Assessment of debt risk and dynamics - Risk of debt distress has deteriorated from low to moderate since the 2014 DSA. - Under the baseline scenario: - Fiscal projections do not lead to breaches of indicative thresholds, but stress tests (export shock scenarios) resulted in breaches for all but one indicator. - Net debt remains negative throughout the forecast period but deteriorates progressively due to PF asset reduction and increased external debt. - Increased excess PF withdrawals heighten loss in investment income and accelerate PF depletion. - Under the adjustment scenario: - Fiscal consolidation and reforms could ensure long-term fiscal sustainability. - Debt ratios projected to remain well below indicative thresholds. - Excess PF withdrawals could be gradually reduced to zero in the long term with fiscal reforms, allowing PF assets to grow. ### Policy recommendations and fiscal management priorities - Fiscal policy and debt management - Adopt bold policy actions to ensure long-term fiscal sustainability (as in the adjustment scenario). - Prioritize domestic revenue mobilization, including introduction of VAT to reach 15 percent of non-oil GDP by 2020. - Keep total spending under $1.4 billion (excluding donor projects) during 2022–26 and constant share of GDP thereafter (adjustment path). - Debt composition and borrowing practices - Prefer concessional financing; non-concessional debt should be avoided. - Debt financing contracted by the central government for infrastructure projects should be on a concessional basis. - Contingent liabilities and public-private engagement - Public-private partnerships (PPPs) need realistic and transparent project assessments to reduce contingent liabilities. - Off-budget activities and off-balance sheet activities should be avoided; state-owned enterprises such as Timor GAP should avoid equity positions in joint ventures or issuing liabilities in overseas markets. - Exercise caution in extending high fiscal autonomy to ZEESM and the Oecusse SAR to limit off-budget expenditures and contingent liabilities. - Petroleum Fund governance and strategy - Preserve PF assets in real terms and generate a permanent level of investment income to support government expenditures. - Carefully consider risk-return trade-offs if shifting strategic asset allocation toward equities; note the provision allowing PF to guarantee government debts (up to 10 percent of PF assets) is potentially risky and should be avoided. - Institutional capacity - Strengthen debt management and asset-liability framework to manage increased complexity from concessional financing and contingent liabilities. - Transparency and full scrutiny for major capital-intensive projects and financing structures. - Authorities expressed interest in Fund TA to strengthen debt management capacity. ### Authorities' views - Authorities consider the risk of debt distress to be contained despite higher borrowing; view baseline projections as close to the upper limit of expected financing needs. - Expect actual borrowing to be determined by the pace of project implementation, which may be slower than baseline projections. - Emphasize the PF savings buffer and the importance of infrastructure for achieving the Strategic Development Plan target of transitioning to upper middle income status by 2030. - Remain committed to long-term fiscal sustainability; fiscal reform plans including VAT are expected to boost domestic revenue. ### Conclusion - Timor-Leste’s debt is at moderate risk of debt distress driven by higher external borrowing associated with frontloaded infrastructure spending. - Some drawdown of PF assets is justified for infrastructure to diversify the economy and boost growth potential, but PF assets should be preserved at a level sufficient to provide adequate investment income for future generations. - Meeting the financing gap through external loans is warranted if borrowing cost is lower than the opportunity cost of tapping the PF as measured by the PF’s expected investment return and guided by the DSA. - Debt sustainability monitoring by creditors could bring added benefits including knowledge transfer from multilateral and bilateral institutions. *Source: IMF staff estimates* ### 15. Bold fiscal consolidation measures are needed to safeguard long-term fiscal and debt ### 15. Bold fiscal consolidation measures are needed to safeguard long-term fiscal and debt sustainability ### Fiscal sustainability needs and policy priorities - Achieving fiscal sustainability requires: - "scaling back large front-loaded public investment plans in line with implementation capacity" - "rationalizing recurrent spending" - "strengthening non-oil revenues" - "adhering to a medium-term fiscal consolidation plan" - Better prioritization of public investment plans is important: - "focusing on high-return infrastructure projects through rigorous investment appraisal" - "Optimizing the composition and quality of spending to help close Timor-Leste’s infrastructure gap is key to long-term fiscal and debt sustainability" ### Indicators and projections of public and publicly guaranteed external debt (high-level findings) - Debt indicators are presented under alternative scenarios for 2015-2035, including: - Baseline, Historical scenario, Most extreme shock, Adjustment Scenario, and 2016 Budget. - Under the historical scenario: - "debt-to-GDP ratio is negative after 2017, due to large current account surpluses." - Net debt-creating dynamics are assumed to depend on "the historical average of non-interest current account balances." - Note: "However, these do not reflect declining oil production in future." - Stress tests: - "The most extreme stress test is the test that yields the highest ratio on or before 2025." - In figure captions: most extreme shocks correspond to "a non-debt flows shock" or "a terms shock" depending on the indicator. ### Key numeric projections and indicators (selected exact figures from tables) - External debt (nominal), percent of GDP: - 2012: 0.0 - 2013: 0.1 - 2014: 0.5 - 2015: 1.9 - 2016: 7.7 - 2017: 14.5 - 2018: 21.9 - 2019: 29.6 - 2020: 37.6 - 2015-20 Average: 31.4 - 2025 Average: 9.9 - Identified net debt-creating flows (selected entries): - Non-interest current account deficit (various years): -40.2, -42.7, -25.1, -34.9, 10.9, -16.4, -2.0, 11.7, 11.9, 11.7, 11.7, 12.7, 20.5, 14.8 - Deficit in balance of goods and services (selected): -32.6, -38.9, -22.5, -8.0, 8.7, 21.9, 21.8, 21.6, 21.4, 20.6, 23.9 - Exports (selected): 5, 7.0, 60.4, 50.6, 53.2, 53.1, 45.8, 42.7, 40.3, 37.5, 24.7, 13.9 - Imports (selected): 2, 4.4, 21.5, 28.1, 45.2, 61.8, 67.8, 64.4, 61.8, 58.9, 45.3, 37.8 - Net current transfers (negative = inflow) (selected): -6.3, -3.2, -1.9, -8.2, 3.7, -8.6, -11.2, -10.4, -9.9, -9.8, -9.6, -8.1, -5.4, -7.3 - PV of external debt (selected): - 2015: 0.0 - 2016: 0.7 - 2017: 4.1 - 2018: 8.6 - 2019: 13.6 - 2020: 18.9 - 2015-20 Average: 24.5 - 2025 Average: 21.7 - 2035 Average: 6.7 - PV of PPG external debt expressed in percent of exports (selected): - 2015: 0.0 - 2016: 1.3 - 2017: 7.7 - 2018: 18.8 - 2019: 31.8 - 2020: 46.8 - 2015-20 Average: 65.3 - 2025 Average: 88.0 - 2035 Average: 48.4 - PPG debt service-to-revenue ratio (in percent) (selected): - 2015: 0.0 - 2016: 0.0 - 2017: 0.0 - 2018: 0.0 - 2019: 0.3 - 2020: 0.7 - 2025: 1.3 - 2035: 12.6 - Total gross financing need (Billions of U.S. dollars) (selected): - 2012: -2.8 - 2013: -2.5 - 2014: -1.1 - 2015: -0.5 - 2016: -0.2 - 2017: 0.1 - 2018: 0.1 - 2019: 0.2 - 2020: 0.2 - 2015-20 Average: 0.3 - 2025: 1.6 - Non-interest current account deficit that stabilizes debt ratio (selected): - 2012: -40.2 - 2013: -42.8 - 2014: -25.5 - 2015: -17.8 - 2016: -7.7 - 2017: 4.9 - 2018: 4.5 - 2019: 4.0 - 2020: 3.6 - 2025: 15.3 - 2035: 21.7 ### Key macroeconomic assumptions (exact entries) - Real GDP growth (in percent) (selected): - 2012: 5.3 - 2013: -13.9 - 2014: -15.8 - 2015: 9.8 - 2016: 24.8 - 2017: -0.6 - 2018: -8.8 - 2019: -12.9 - 2020: -3.9 - 2015-20 Average: -9.4 - 2025: -9.2 - 2035: -7.4 - Long-run entries also include 4.9, 5.6, 4.0 in other rows - GDP deflator in US dollar terms (change in percent) (selected): - 2012: 11.7 - 2013: -4.6 - 2014: -7.5 - 2015: 8.0 - 2016: 18.1 - 2017: -39.6 - 2018: -12.1 - 2019: 29.5 - 2020: 13.7 - 2015-20 Average: 17.1 - 2025: 17.6 - 2035: 4.4 - Effective interest rate (percent) (selected): - 2015: 0.0 - 2016: 0.0 - 2017: 0.0 - 2018: -3.8 - 2019: 0.8 - 2020: 2.0 - 2025 onward: 2.1, 2.1, 2.1, 0.9, 1.8, 1.8, 1.8 (as listed) - Growth of exports of G&S (US dollar terms, in percent) (selected): - 2012: 8.7 - 2013: -12.8 - 2014: -34.8 - 2015: 37.8 - 2016: 53.3 - 2017: -36.9 - 2018: -20.0 - 2019: -2.7 - 2020: 1.8 - 2015-20 Average: 0.1 - 2025: -0.6 - 2035 entries include -9.7, 1.2, 5.5, 2.2 in other rows - Grant element of new public sector borrowing (in percent) (selected): - Entries include 38.8, 38.3, 35.8, 35.0, 34.6, 34.1, 36.1, 40.4, 39.1, 40.6 (as listed) - Government revenues (excluding grants, in percent of GDP) (selected): - 2012: 8.0 - 2013: 11.1 - 2014: 12.2 - 2015: 24.7 - 2016: 27.1 - 2017: 24.9 - 2018: 25.2 - 2019: 22.8 - 2020: 20.9 - 2015-20 Average: 13.8 - 2025: 6.9 - 2035: 11.7 ### Debt sustainability and sensitivity analysis (selected findings) - Tables present sensitivity analysis for key indicators of public and publicly guaranteed external debt (2015-2035) and public sector debt (2012-2035) under: - Alternative scenarios (A1, A2) and Bound Tests (B1–B6). - Examples of stress scenario outcomes (selected numbers preserved exactly as presented): - PV of debt-to-exports ratio under certain scenarios shows very large negative and positive swings (e.g., entries include -209, -1503, 3020, 993) reflecting sensitivity to shocks. - PV of debt-to-revenue and PV of debt-to-GDP ratios show wide ranges across scenarios (entries include -284, -375, 157, 97). - Debt service-to-revenue and debt service-to-exports ratios also vary across scenarios with entries including 13, 18, 37, 48, 77 in various table cells. - Memorandum items and stress assumptions: - "Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 34 34 34 34 34 34 34 34 34 34 34 34" - Footnotes clarify scenario constructions, including assumptions on interest rates, export shocks, net non-debt creating flows, depreciation definitions, and grant-equivalent financing. ### Policy dialogue excerpts (authorities' statement, selected points) - Authorities thank the mission and "highly appreciate the candid discussions with staff and all the support received from the Fund." - Authorities concur that "the country’s medium-term outlook will depend critically on economic diversification amid potentially declining hydrocarbon resources." - Policy priorities stated by authorities: - "improving infrastructure and human capital, providing better education and health services to the population, and developing private sector entrepreneurship." - They emphasize "political stability, credible institutions, and good governance in the management of public resources." - On capital spending: - Authorities "stress the need to accelerate capital spending" and note this "may require drawing down on resources from the Petroleum Fund above the pace advised by staff." - Recent economic developments: - "The recent fall in global oil prices has weakened overall macroeconomic prospects of oil exporters." - "Timor-Leste, however, has been cushioned by the prudent saving of its oil wealth in the Petroleum Fund." - "Proven oil and gas reserves are low and may be exhausted in a few years." - Non-oil GDP growth: - "After expanding on average above 10 percent annually from 2007 to 2012, non-oil GDP growth decelerated to an estimated 4.3 percent in 2015 and is projected to be close to 5 percent this year." - "Over the medium-term, both staff and the authorities expect non-oil GDP to grow in the range of 5 to 7 percent." *Source: IMF staff report extract (Timor-Leste), figures and tables as provided in the supplied content.* ### 6. The deceleration in non-oil economic activity has been followed by a sharp ### 6. The deceleration in non-oil economic activity has been followed by a sharp ### Economic activity and inflation - Deceleration in non-oil economic activity has been followed by a sharp decline in inflation. - Inflation came down from two-digit figures in mid-2013 to close to zero in recent quarters. - Drivers of disinflation: a strong monetary anchor (the dollarization regime), lower commodity prices, and dollar appreciation vis-à-vis other trading partner currencies. ### External sector - The current account surplus is estimated at 16.5 percent of GDP in 2015. - The Timorese government expects a negative external balance over the medium-term due to, among other factors, lower petroleum revenues and increased imports of capital goods. - Public foreign assets will continue to represent a strong external buffer. - Public foreign assets are equivalent to more than fourteen years of imports of goods and services, or nearly 640 percent of 2015 GDP. ### Fiscal policy and debt sustainability - Despite the sharp fall in petroleum revenues, the fiscal balance remained positive in 2015 at 4.2 percent of GDP. - Current expenditure was 11 percent lower than projected in the rectification budget presented to parliament in April last year. - Capital spending was almost 30 percent below the budget. - Authorities have a strong track-record of responsible use of the oil wealth and remain committed to a prudent fiscal stance to preserve the resources of the Petroleum Fund and ensure public debt sustainability. - Agreement with staff on the need to mobilize domestic non-oil revenues. - The Fiscal Reform Commission, a technical body under the Ministry of Finance, is charged with broadening the tax base and increasing the efficiency of tax collection. - A value-added tax (VAT) is expected to be introduced once ongoing consultations with the private sector, civil society and other stakeholders are concluded. - Authorities note some room to revise down the 2016 envelope to around $1.4 billion. - Authorities consider that Timor-Leste cannot afford to strictly adhere to the Estimated Sustainable Income (ESI) of the Petroleum Fund; ESI is viewed as indispensable for fiscal planning but should not hold back investment in infrastructure projects. - Government considers tapping concessional borrowing to finance capital spending may be appropriate to help preserve the Petroleum Fund; borrowing would only be justified if the costs are lower than the expected investment return of the Fund. - Staff revised Timor-Leste’s debt sustainability analysis and underlines a risk of moderate external debt distress; authorities view this as somewhat exaggerated given the low level of gross external debt under staff’s alternative scenarios and the very comfortable public foreign assets position of the country. - Staff recommendation that “bold (emphasis added) fiscal consolidation measures are needed to safeguard long-term fiscal and debt sustainability” is considered to be overstated by the authorities. ### Monetary policy and financial sector - Timor-Leste is a dollarized economy; the monetary regime is considered by the government to have served the country well by anchoring inflation and neutralizing overvaluation pressures in times of very high current account surpluses. - Since 2014, inflation has been close to zero and is forecasted to remain low in the medium to long term. - The Central Bank of Timor-Leste (BCTL) has a mandate, under the 2011-2030 Strategic Development Plan, to assess the merits of adopting its own currency. - Authorities concur with staff that any decision on “de-dollarization” should be preceded by further financial and institutional development and by strengthening the BCTL’s operational capacity. - The BCTL has been making efforts to strengthen its capacity in banking regulation and supervision. - The banking system has only four institutions, is well capitalized and highly liquid. - Three banks are branches of foreign banks; the fourth is a state-owned institution that provides important banking services to the poor and small businesses, including in rural areas. - De-risking by global banks has not affected Timor-Leste so far, possibly because the bulk of the banking system is foreign-owned and remittance inflows are of limited importance. - Timor-Leste has made significant advances in financial inclusion; all banks are adapting services to branchless and mobile platforms. - Authorities are engaging in fostering financial literacy. - New payments system legislation has been introduced, aiming to reduce the costs of doing business, reduce reliance on cash transactions, and promote economic growth outside urban areas. ### Structural reforms - Authorities remain committed to advancing structural reforms, recognizing they might take some years to bear fruit. - Efforts focus on attracting foreign investment and fostering private-sector job creation. - Authorities believe discussions with staff have helped strike the right balance between infrastructure projects and preserving the Petroleum Fund—a critical trade-off given investors’ emphasis on improving basic infrastructure. - Public investment in infrastructure continues to be the priority. - Priority projects: improving basic transport infrastructure including roads, the Dili airport, and the new port at Tibar Bay (to be financed, built and operated under a Public Private Partnership). - Infrastructure improvements are fundamental to promote economic integration across the territory and strengthen links with the rest of the world. - Government is committed to integrate and develop the Oecusse district through the creation of a Special Zone for Social Market Economy, among other initiatives. - The Tasi Mane project is envisaged as a driver of progress along the south coast, facilitating development of the hydrocarbons industry as well as manufacturing and tourism. - Developing the tourism sector sustainably is a priority under the Strategic Development Plan; the sector is traditionally labor-intensive and may increase formal employment and boost government revenues. - Efforts to promote the country in tourist centers in the Asia-Pacific are underway. ### Social and development progress - As documented by staff (Appendix IV), Timor-Leste has made substantial progress in achieving the Millennium Development Goals (MDG). - MDG achievements: the goal to “Promote Gender Equality and Empower Women” has been fully achieved. - Substantial progress in reducing child mortality and malnutrition, combating malaria and tuberculosis, increasing primary school enrolment and enhancing access of the population to clean water sources. ### Conclusion and capacity needs - Authorities’ commitment to sustainable and inclusive growth and careful management of petroleum wealth is leading Timor-Leste to gradually improve living standards, develop human capital and overcome lack of basic infrastructure. - Authorities agree with staff that there is still a large need for technical assistance and training to support their bold reform and development agenda. - Authorities reiterate their appreciation to the Fund and other development partners for their role in nation-building and capacity development. *Source: IMF country authorities’ text (content unit _cr16183).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16183.pdf_