Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with the Democratic Republic of Timor-Leste
IMF News, July 20, 2005
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- Published: July 20, 2005
Background and context
- On June 15, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the 2005 Article IV consultation with Timor-Leste.
- Post-conflict transition status: security broadly restored; macroeconomic stability re-established through adoption of the U.S. dollar and cautious fiscal management.
- Key socioeconomic conditions:
- Unemployment: high (no aggregate rate given).
- 40 percent of the population lives below the poverty line.
- Human capital scarce, physical infrastructure inadequate, financing opportunities limited.
- Major upcoming challenge/opportunity: winding down of international financial and technical support while large oil and gas revenue is coming on stream.
Recent developments and macroeconomic outcomes (2004–2005)
- Non-oil economic activity:
- Modest recovery in non-oil GDP in 2004, reflecting post-drought rebound in agriculture and expansion in banking sector activity.
- Real non-oil GDP growth (percentage change): 2001: 16.6; 2002: -6.7; 2003: -6.2; 2004: 1.8; 2005 (Est., Proj.): 2.5.
- Inflation:
- CPI (Dili) leveled off at about 2 percent (year-over-year) since August 2004.
- Inflation (percentage change; end-period) series: 2000: 3.0; 2001: -0.3; 2002: 9.5; 2003: 4.2.
- External sector:
- External current account surplus (including international assistance) widened sharply to 35 percent of non-oil GDP in 2004, driven by large oil/gas tax and royalty income.
- Net foreign assets of the Banking and Payment Authority (BPA) at end-March 2005: US$284 million (more than 15 months of projected imports for 2005).
- Trade and prices:
- Measured against Indonesia and Australia, overall external price competitiveness deteriorated somewhat through March 2005 due to significant rupiah depreciation against the U.S. dollar.
Fiscal outcomes and management of oil/gas wealth
- FY 2004/05 fiscal outcome:
- Central government surplus (including grants) now expected at 68 percent of non-oil GDP, compared with the surplus of 33 percent of non-oil GDP expected in the revised FY04/05 budget.
- On a "combined sources" basis (total public sector including off-budget donor activities), the fiscal balance will move into a surplus of 29 percent of GDP in FY04/05.
- Fiscal policy framework and institutions:
- Norwegian-style petroleum fund on track to be operational by July 2005.
- Long-term fiscal savings policy adopted: annual budget "sustainable" spending = non-oil revenue + estimated permanent income from oil/gas wealth.
- Authorities committed to transparency and accountability principles in line with the Extractive Industries Transparency Initiative (EITI).
- Preliminary Sector Investment Programs (SIPs) set out a public investment strategy to be financed by domestic revenue and donor funds.
- Noted fiscal administration developments:
- Favorable developments in non-oil revenue.
- Recommendation: further strengthening of tax and customs administration and careful administration of tax incentives in new investment laws.
- Caution on creating a national oil company — Directors advised to weigh costs and benefits.
Financial sector and monetary framework
- Financial intermediation:
- Bank lending to the private sector increased rapidly during 2004; credit as share of non-oil GDP tripled to 21 percent at end 2004.
- Financial intermediation remains concentrated in Dili; rural access limited to a few cooperatives and microcredit institutions.
- Banking and Payments Authority (BPA):
- Net foreign assets rose sharply due to government deposits from oil/gas revenue.
- Capacity building progressed; central bank law, payment system and anti-money laundering legislation in final stages of preparation.
- Financial intelligence unit planned for the BPA by the end of the year.
- Directors encouraged vigilance over bank portfolios and early approval of legislation.
- Authorities encouraged to support expansion of financial institutions to rural areas.
- Monetary and exchange rate policy:
- Directors endorsed maintaining the current monetary and exchange rate regime (U.S. dollar legal tender) as a credible nominal anchor.
- View that stronger institutional capacity and a well-developed foreign exchange market are preconditions for introducing a national currency.
- Continued cautious fiscal and wage policies highlighted as key to preserving external competitiveness.
Structural reforms, private sector, and capacity building
- Progress and remaining gaps:
- Good progress in recent months: key land legislation, insurance law, and domestic and foreign investment laws approved or submitted to Parliament.
- Overall legal framework still incomplete; complex regulations, ineffective administration, and weak judiciary discourage private activity.
- Administrative skill levels improving slowly, but local capacity remains thin.
- Policy priorities urged by Directors:
- Accelerate efforts to establish an environment conducive to private investment and non-oil private sector activity.
- Maintain liberal trade and investment regime.
- Early enactment of pending economic legislation and issuance of regulations that are transparent and simple to administer.
- Finalize bankruptcy legislation, develop a strong and independent judiciary, and establish a comprehensive land-titling system.
- Prompt implementation of the new planning and capacity building program; close coordination with donor community and continued technical assistance.
- Strengthen macroeconomic data compilation capacity, particularly national accounts and balance of payments statistics.
Executive Board assessment — main conclusions and recommendations
- Directors welcomed progress toward a stable and healthy economy and commended prudent macroeconomic policies during transition.
- Key messages:
- Effective management of oil/gas wealth and creation of an environment for private investment in the non-oil economy are critical for pace and quality of development.
- The authorities' long-term strategy (fiscal sustainability policy, SIPs, petroleum fund) provides a solid basis to address challenges and progress toward the Millennium Development Goals.
- Fiscal stance and spending:
- Support for moving quickly toward sustainable spending level without creating inflationary pressures or non-priority expenditure.
- The proposed spending increase for fiscal year 2005/06 considered ambitious given limited administrative and absorptive capacity; Directors suggested considering spreading spending commitments over a somewhat longer period.
- Encouraged shift of spending toward human capital and basic infrastructure; welcomed intention to maintain restraint on the wage bill.
- Called for early additional steps to eliminate bottlenecks, particularly for capital spending; welcomed Fund technical assistance.
- Governance and transparency:
- Commended progress in legislative framework for petroleum fund; welcomed investment advisory board and consultative council and commitment to operate the fund consistent with EITI.
- Encouraged transparency and accountability and cautioned on national oil company creation.
- Data and capacity:
- Encouraged authorities to seek additional assistance to strengthen domestic capacity for macroeconomic data compilation.
Selected economic indicators (highlights from Timor-Leste: Selected Economic Indicators, 2000–2005)
- Non-oil GDP (levels): 2000: 316; 2001: 368; 2002: 343; 2003: 336; 2004: 339; 2005 (Est./Proj.): 349.
- Real non-oil GDP growth (percentage change): 2000: 15.4; 2001: 16.6; 2002: -6.7; 2003: -6.2; 2004: 1.8; 2005: 2.5.
- Central government revenues (percent of non-oil GDP): 2000: 17; 2001: 15; 2002: 24; 2003: 90; 2004: 57; 2005: (unstated in table but earlier text notes large oil/gas revenues).
- Central government overall balance (percent of non-oil GDP): FY04/05 expected central government surplus (including grants) of 68 percent of non-oil GDP.
- Combined sources fiscal operations (percent of GDP): FY04/05 combined sources surplus of 29 percent of GDP.
- Net foreign assets of the BPA (millions of U.S. dollars): end-March 2005: US$284 million.
- Credit to private sector (share of non-oil GDP): end 2004: 21 percent.
- External current account incl. international assistance (millions of U.S. dollars): selected series show wide surpluses; table entries include 2004 and 2005 figures discussed in text (external current account surplus widened to 35 percent of non-oil GDP in 2004).
- Notes on table methodology and data:
- Non-oil GDP and national accounts data for 2000–2003 based on estimates prepared by BIDE consultants in October 2004.
- Fiscal year basis is July–June.
- Combined sources include fiscal and quasi-fiscal donor and IFI activities outside central government budget.
- In 2005 merchandise imports include transfer of assets from UNMISET valued at approximately US$12 million.
Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with the Democratic Republic of Timor-Leste (July 20, 2005).