IMF Executive Board Concludes 2024 Article IV Consultation with Timor-Leste

IMF News, December 17, 2024

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IMF Executive Board Concludes 2024 Article IV Consultation with Timor-Leste

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Bibliographic details

• Published: December 17, 2024

Executive Board conclusion and context

• The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Timor-Leste on December 10, 2024 and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
• Press Release No. 24/479; announcement dated December 17, 2024.

Recent macroeconomic developments

• Non-oil GDP growth slowed to 2.4 percent in 2023 (from 4 percent in 2022) due to a drag from fiscal policy as budget execution fell in the election year.
• Headline inflation averaged 8.4 percent in 2023 and declined to 0.6 percent (y/y) in September 2024, driven by lower global food prices and the rollback of tax hikes introduced in 2023.
• Growth is estimated to increase to 3.4 percent in 2024, supported by fiscal expansion and strong credit growth.

Executive Board assessment and medium-term outlook

• Fiscal expansion and strong credit growth are expected to support economic growth in 2024.
• Following the 2023 slowdown, growth is estimated to rise to 3.5 percent in 2024.
• A large fiscal expansion in 2025—mainly driven by transfers with low multiplier—would deliver growth of 3.4 percent in 2025.
• Long-run non-oil GDP growth is expected to remain modest at around 3 percent, which corresponds to about 1.5 percent in per-capita terms.
• Inflation is expected to average 2.2 percent in 2024 and 1.5 percent in 2025 as global commodity prices moderate.
• The external sector position in 2023 was substantially weaker than implied by fundamentals and desirable policy settings.
• Risks to the outlook are balanced.

Key risks

• Near- to medium-term risks include:
  • A sudden global recession that could reduce PF returns.
  • Severe climate events affecting food security.
  • An onset of political instability limiting foreign direct investment.
• A potential upside: reaching an agreement to develop the Greater Sunrise oil field could boost long-term exports.

Fiscal position and sustainability

• The sizable savings in the Petroleum Fund (PF) should be used productively and prudently to deliver higher living standards.
• In the past decade, a high share of public spending relative to the economy has delivered only modest growth and development.
• Timor-Leste remains at moderate risk of overall and external debt distress, but large fiscal imbalances over the medium term would fully deplete the PF by the end of the 2030s.
• Fiscal and structural reforms are needed to secure fiscal sustainability and strengthen the external sector position.

Policy recommendations

• Public spending:
  • Reduce public spending gradually and further improve spending quality.
  • Gradually unwind the surge in recurrent spending since 2020 while accommodating higher spending on human and physical capital (including in climate-resilient infrastructure) and on social safety nets to protect the vulnerable.
• Revenue mobilization:
  • Start domestic revenue mobilization promptly.
  • A key reform priority is the introduction of the VAT in 2026, which requires immediate progress with legislation and strengthening tax administration.
• Fiscal frameworks and public financial management:
  • Advance PFM reforms and formulate a medium-term fiscal framework to underpin fiscal efforts.
• Financial sector and private sector development:
  • Address structural bottlenecks to lending through financial sector reforms.
  • The authorities’ ambitious agenda of legal reforms of the financial sector is welcome.
  • Accelerate the issuance of land titles to provide essential collateral for lending.
• Structural and governance reforms:
  • Combine financial sector reforms with other structural reforms to support economic diversification.
  • Continue steps towards deeper integration in the global and regional economies.
  • Strengthen governance reforms, notably in the domain of rule of law.
  • Address deficiencies in the AML/CFT framework in line with the findings and recommendations in the Mutual Evaluation Report recently adopted by the Asia Pacific Group.
  • Improve performance under dollarization by reducing fiscal imbalances and advancing reforms that address structural bottlenecks undermining competitiveness.

Selected economic and financial indicators (highlights from Table 1)

• Non-oil GDP at current prices (2023): US$1.802 billion
• Population (2023): 1.377 million
• Non-oil GDP per capita (2023): US$1,309
• Quota: SDR 25.6 million

• Real sector (annual percent change)
  • Real Non-oil GDP: 2023: 2.4; 2024: 3.5; 2025: 3.4; 2026: 3.2
  • Real Non-oil GDP per capita: 2023: 1.3; 2024: 2.1; 2025: 1.9
  • CPI (annual average): 2023: 8.4; 2024: 2.2; 2025: 1.5; 2026: 2.0
  • CPI (end-period): 2023: 8.7; 2024: 0.5; 2025: 1.8

• Central government operations (percent of Non-oil GDP)
  • Revenue: 2023: 51.4; 2024: 49.2; 2025: 46.1; 2026: 42.7
  • Domestic revenue: 2023: 13.8; 2024: 11.4; 2025: 11.5
  • Estimated Sustainable Income (ESI): 2023: 27.2; 2024: 28.3; 2025: 26.2; 2026: 23.6
  • Grants: 2023: 10.5; 2024: 9.4; 2025: 8.5; 2026: 7.6
  • Expenditure: 2023: 93.9; 2024: 92.5; 2025: 95.3; 2026: 91.5
  • Recurrent: 2023: 70.6; 2024: 69.8; 2025: 73.6; 2026: 70.5
  • Net acquisition of nonfinancial assets: 2023: 12.8; 2024: 13.3; 2025: 13.2; 2026: 13.4
  • Net lending/borrowing: 2023: -42.5; 2024: -43.3; 2025: -49.2; 2026: -48.8

• Money and credit (annual percent change)
  • Deposits: 2023: 2.5; 2024: 6.9; 2025: 6.8
  • Credit to the private sector: 2023: 20.6; 2024: 20.5; 2025: 15.7; 2026: 8.1
  • Lending interest rate (percent, end of period): 2023: 11.3

• Balance of payments (in millions of U.S. dollars)
  • Current account balance: 2023: -17; 2024: -195; 2025: -515; 2026: -575
  • (In percent of Non-oil GDP): 2023: -1; 2024: -10.1; 2025: -24.9; 2026: -26.0
  • Trade of Goods: 2023: -149; 2024: -611; 2025: -814; 2026: -836
  • Exports of goods: 2023: 632; 2024: 233; 2025: 142; 2026: 152
  • Imports of goods: 2023: 781; 2024: 845; 2025: 956; 2026: 988
  • Trade of Services: 2023: -353; 2024: -310; 2025: -309; 2026: -318
  • Primary Income: 2023: 397; 2024: 540; 2025: 427; 2026: 406
  • Secondary Income: 2023: 88; 2024: 186; 2025: 180; 2026: 173
  • Overall balance: 2023: -49; 2024: 19; 2025: 77; 2026: 33

• Public foreign assets (end-period) 1/: 2023: 19,072; 2024: 18,881; 2025: 18,282; 2026: 17,554
  • (In months of imports): 2023: 190; 2024: 184; 2025: 162; 2026: 150

• Memorandum items
  • Nominal Non-oil GDP (in millions of U.S. dollars): 2023: 1,802; 2024: 1,939; 2025: 2,073; 2026: 2,215
  • Nominal Non-oil GDP per capita (in U.S. dollars): 2023: 1,309; 2024: 1,393; 2025: 1,471; 2026: 1,551
  • Crude oil prices (U.S. dollars per barrel, WEO) 2/: 2023: 81; 2024: 73; 2025: 70
  • Petroleum Fund balance (in millions of U.S. dollars) 3/: 2023: 18,288; 2024: 18,078; 2025: 17,402; 2026: 16,641
  • Public debt (in millions of U.S. dollars): 2023: 1,015; 2024: 932; 2025: 839; 2026: 751
  • Population growth (annual percent change): 2023: 1.1

1/ Includes Petroleum Fund balance and the central bank's official reserves. 2/ Simple average of UK Brent, Dubai, and WTI crude oil prices based on October 2024 WEO assumptions. 3/ Closing balance.

IMF Executive Board press release dated December 17, 2024.

References

• Democratic Republic of Timor-Leste and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home