IMF Executive Board Concludes 2019 Article IV Consultation with the Democratic Republic of Timor-Leste
May 7, 2019
OnMarch 27, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Democratic Republic of Timor-Leste.
Non-oil real GDP contracted sharply in 2017 by about 5 percent as public spending fell due to political and economic uncertainty. With a pick-up in public spending in Q4 2018, non-oil growth is expected to recover to around zero percent in 2018. Inflation remained low in 2017 at 0.8 percent (y/y), but rebounded to 2.1 percent (y/y) on the back of higher prices of rice and tobacco as well as an increase in education fees.
The overall fiscal deficit improved to 19 percent of GDP in 2017 from 35 percent in 2016, and is expected to further improve in 2018. As a result, excess withdrawals from the Petroleum Fund (PF) fell significantly. With petroleum revenue and investment returns exceeding total withdrawals, the PF balance increased in 2017 for the first time since 2014. However, tighter global financial market conditions at the end of 2018 caused the PF balance to fall to US$16 billion.
The external current account deficit was nearly halved to 10 percent of GDP in 2017 compared to the previous year, with reduced imports amid weaker public spending. A bad coffee harvest led to a decline in non-oil exports, but petroleum export receipts improved as oil prices rose. The current account deficit is expected to remain broadly unchanged in 2018. The real effective exchange rate depreciated in 2017, followed by an appreciation in 2018 on the back of higher domestic inflation.
Non-oil GDP growth is expected to rebound to 5 percent in 2019, as public spending recovers. Medium-term growth will broadly remain the same. Apart from a planned increase in petroleum production in 2019 – causing an increase in overall GDP growth in 2019—value added from the petroleum-sector will continue to decline until production ends in 2022, resulting in a sharp overall GDP contraction in 2023. Inflation is expected to rise, reaching 4 percent over the medium term. Excess PF withdrawals will continue to finance fiscal deficits, and the CA will largely be driven by fluctuations in investment income from the PF.
Medium- and long-term risks are tied to progress on implementing fiscal and structural reforms. The key challenge facing Timor-Leste will be achieving greater economic diversification. Insufficient progress in reducing reliance on the public sector and generating more private sector jobs would put added pressure on public finances, risk long-run fiscal sustainability, and further deteriorate labor market outcomes. Over the long-term, development of the Greater Sunrise fields constitutes a significant upside risk, conditional on technical and economic viability and that proper safeguards are taken to minimize funding risks.
Executive Board Assessment [2]
Executive Directors commended the authorities for the impressive progress since independence in 2002 and noted the projected pick‑up in near‑term economic growth. However, significant challenges remain, and Directors highlighted the need to ensure long‑run fiscal sustainability, strengthen institutional capacity, generate jobs for a young and rapidly‑growing population, and continue to develop the financial system.
Directors recognized that the main challenge facing Timor‑Leste is improving fiscal management. They underscored the need to adopt a credible fiscal strategy and protect the assets of the country’s Petroleum Fund. Directors stressed the need to improve expenditure control, raise spending efficiency, and improve revenue mobilization. Moreover, Directors welcomed the authorities ongoing efforts to develop a government‑led, donor‑partnered, Public Financial Management strategy and strengthen the country’s legal and institutional framework to combat corruption.
Directors emphasized the need to diversify the economy and enhance the business environment to facilitate private investment and business formation. While the development of the Greater Sunrise fields represents an important source of potential petroleum revenue, a more diverse economy is essential to create job opportunities for a rapidly‑growing working‑age population.
Directors stressed that investment in education and health will be essential to capture Timor‑Leste’s demographic dividend and ensure high, inclusive, and sustainable growth to help it achieve the Sustainable Development Goals. Improving both basic education and vocational education and training should help raise labor productivity and address existing and future skill shortages. Directors also emphasized the necessity to address both gender and rural‑urban inequalities.
Directors noted the soundness of the banking system and commended the authorities for improvements in the payment system. They underscored the importance of ensuring a strong and effective regulatory and supervisory framework as the financial sector develops. They also saw significant room to improve financial intermediation and were encouraged by their continued commitment to enhance financial inclusion. In this context, Directors welcomed the new Land Law and the development of a secured transaction framework for movable property.
Directors agreed that the use of the U.S. dollar as legal tender has served Timor‑Leste well and emphasized the importance of increasing international competitiveness by maintaining low inflation and boosting labor productivity.
Directors called for continued efforts to improve statistical capacity and encouraged the authorities to further leverage technical assistance from the Fund and other development partners.
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Timor-Leste: Selected Economic Indicators, 2015-24 |
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|
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
|
Est. |
Proj. |
|||||||||
|
(Annual percent change) |
||||||||||
|
Real sector |
||||||||||
|
Real total GDP |
20.9 |
0.8 |
-4.5 |
-8.0 |
6.6 |
1.3 |
-12.3 |
-19.2 |
-2.0 |
4.8 |
|
Real oil GDP |
46.5 |
-4.0 |
-4.4 |
-18.3 |
9.0 |
-3.7 |
-38.3 |
-81.3 |
-100.0 |
- |
|
Real non-oil GDP |
4.0 |
5.3 |
-4.6 |
0.8 |
5.0 |
4.8 |
4.8 |
4.8 |
4.8 |
4.8 |
|
CPI (annual average) |
0.6 |
-1.5 |
0.5 |
2.3 |
2.5 |
3.2 |
3.7 |
3.9 |
4.0 |
4.0 |
|
CPI (end-period) |
-0.6 |
0.0 |
0.6 |
2.1 |
2.8 |
3.5 |
3.8 |
4.0 |
4.0 |
4.0 |
|
(In percent of non-oil GDP, unless otherwise indicated) |
||||||||||
|
Central government operations |
||||||||||
|
Revenue |
64.1 |
54.2 |
49.3 |
49.7 |
40.9 |
34.6 |
30.3 |
26.3 |
23.2 |
21.9 |
|
Domestic revenue |
10.6 |
11.6 |
11.3 |
10.4 |
9.8 |
9.0 |
8.4 |
7.7 |
7.1 |
7.4 |
|
Estimated Sustainable Income (ESI) |
39.7 |
32.0 |
27.8 |
29.5 |
23.3 |
20.4 |
17.5 |
14.9 |
12.4 |
10.9 |
|
Grants |
13.8 |
10.7 |
10.2 |
9.8 |
7.8 |
5.1 |
4.4 |
3.7 |
3.7 |
3.7 |
|
Expenditure |
96.9 |
106.4 |
79.3 |
78.5 |
75.1 |
76.6 |
59.2 |
52.1 |
43.4 |
41.7 |
|
Recurrent |
64.0 |
60.4 |
53.9 |
47.3 |
50.6 |
47.0 |
43.5 |
39.5 |
36.2 |
34.5 |
|
Net acquisition of nonfinancial assets |
19.1 |
35.4 |
15.2 |
21.4 |
16.8 |
24.4 |
11.3 |
8.9 |
3.5 |
3.5 |
|
Donor project |
13.8 |
10.7 |
10.2 |
9.8 |
7.8 |
5.1 |
4.4 |
3.7 |
3.7 |
3.7 |
|
Net lending/borrowing |
-32.8 |
-52.2 |
-30.0 |
-28.7 |
-34.3 |
-42.0 |
-28.9 |
-25.8 |
-20.2 |
-19.8 |
|
(Annual percent change, unless otherwise indicated) |
||||||||||
|
Money and credit |
||||||||||
|
Deposits |
76.7 |
11.9 |
36.1 |
41.5 |
29.8 |
35.8 |
35.7 |
33.8 |
35.1 |
34.9 |
|
Credit to the private sector |
10.5 |
-1.8 |
24.8 |
-3.8 |
13.0 |
10.3 |
10.9 |
12.8 |
13.3 |
9.1 |
|
Lending interest rate (percent, end-period) |
13.5 |
14.0 |
13.3 |
13.5 |
… |
… |
… |
… |
… |
… |
|
(In millions of U.S. dollars, unless otherwise indicated) |
||||||||||
|
Balance of payments |
||||||||||
|
Current account balance 1/ |
204 |
-544 |
-284 |
-279 |
56 |
-62 |
15 |
-329 |
-171 |
-295 |
|
(In percent of GDP) |
6.6 |
-21.6 |
-10.2 |
-9.0 |
1.8 |
-1.8 |
0.5 |
-10.4 |
-4.9 |
-7.6 |
|
Trade balance |
-635 |
-546 |
-615 |
-626 |
-652 |
-714 |
-694 |
-734 |
-717 |
-760 |
|
Exports 2/ |
18 |
20 |
17 |
22 |
26 |
30 |
36 |
43 |
50 |
60 |
|
Imports |
653 |
567 |
631 |
648 |
678 |
744 |
730 |
777 |
768 |
820 |
|
Services (net) |
-583 |
-569 |
-344 |
-398 |
-291 |
-397 |
-311 |
-389 |
-299 |
-271 |
|
Petroleum revenue |
1,281 |
872 |
2,034 |
672 |
899 |
938 |
890 |
647 |
677 |
559 |
|
Overall balance |
220 |
-157 |
263 |
26 |
103 |
79 |
79 |
18 |
41 |
51 |
|
Public foreign assets (end-period) 3/ |
16,655 |
16,125 |
17,344 |
16,374 |
16,262 |
15,865 |
15,667 |
15,194 |
14,870 |
14,396 |
|
(In months of imports) |
153 |
160 |
195 |
172 |
182 |
151 |
159 |
138 |
144 |
130 |
|
Exchange rates |
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|
NEER (2010=100, period average) |
120.2 |
120.1 |
119.7 |
119.9 |
… |
… |
… |
… |
… |
… |
|
REER (2010=100, period average) |
150.3 |
146.2 |
143.6 |
146.3 |
… |
… |
… |
… |
… |
… |
|
Memorandum items (in millions of U.S. dollars): |
||||||||||
|
GDP at current prices: |
3,104 |
2,521 |
2,778 |
3,090 |
3,145 |
3,413 |
3,333 |
3,166 |
3,498 |
3,886 |
|
Non-oil GDP |
1,609 |
1,702 |
1,730 |
1,863 |
2,086 |
2,342 |
2,643 |
3,035 |
3,498 |
3,886 |
|
Oil GDP |
1,496 |
820 |
1,048 |
1,228 |
1,060 |
1,071 |
689 |
131 |
0 |
0 |
|
GDP per capita |
2,620 |
2,080 |
2,240 |
2,435 |
2,422 |
2,569 |
2,453 |
2,279 |
2,463 |
2,677 |
|
(Annual percent change) |
-25.0 |
-20.6 |
7.7 |
8.7 |
-0.5 |
6.1 |
-4.5 |
-7.1 |
8.1 |
8.7 |
|
Crude oil prices (U.S. dollars per barrel, WEO) 4/ |
51 |
43 |
53 |
68 |
54 |
55 |
56 |
57 |
57 |
58 |
|
Petroleum Fund balance (in millions of U.S. dollars) 5/ |
16,218 |
15,844 |
16,799 |
15,803 |
15,588 |
15,112 |
14,834 |
14,343 |
13,979 |
13,453 |
|
(In percent of non-oil GDP) |
1,008 |
931 |
971 |
848 |
747 |
645 |
561 |
473 |
400 |
346 |
|
Public debt (in millions of U.S. dollars) |
46 |
77 |
107 |
168 |
255 |
303 |
361 |
457 |
559 |
666 |
|
(In percent of GDP) |
2.9 |
4.5 |
6.2 |
9.0 |
12.2 |
12.9 |
13.6 |
15.1 |
16.0 |
17.1 |
|
Population growth (annual percent change) |
2.4 |
2.3 |
2.3 |
2.3 |
2.3 |
2.3 |
2.2 |
2.2 |
2.2 |
2.2 |
|
Sources: Timor-Leste authorities; and IMF staff estimates and projections. |
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1/ Excludes trade in goods and services of entities located in the Joint Petroleum Development Area, which are considered non-resident. |
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|
2/ Excludes petroleum exports, the income of which is recorded under the income account. |
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|
3/ Includes Petroleum Fund balance and the central bank's official reserves. |
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|
4/ Simple average of UK Brent, Dubai, and WTI crude oil prices based on July 2017 WEO assumptions. |
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|
5/ Closing balance. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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