## 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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## Bibliographic details
- Published: July 20, 2005

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### 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).*

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## References

- [Democratic Republic of Timor-Leste and the IMF](http://www.imf.org/external/country/TLS/index.htm)
- [Public Information Notices](https://www.imf.org/en/news/searchnews)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0592_