Public Information Notice: IMF Executive Board Concludes 2010 Article IV Consultation with the Democratic Republic of Timor-Leste
IMF News, March 8, 2011
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- Published: March 8, 2011
Background
- Timorese economy grew fast over the past three years in an environment of improved security following the 2006 civil unrest.
- Non-oil growth averaged 11 percent during 2007–09, driven by higher oil-financed public spending and a rebound in agriculture from the 2007 drought.
- World Bank estimate: poverty incidence declined from 50 percent in 2007 to 41 percent in 2009.
- Domestic price pressures have recently been rising and are particularly high in some segments of the economy, such as housing and construction.
- Fiscal developments:
- Non-oil fiscal deficit declined by 17 percentage points to 92 percent of non-oil GDP in 2009.
- Spending growth moderated to 8 percent in 2009 after a 130 percent increase in 2008.
- Supplemental 2010 budget raised the spending envelop by more than 30 percent to US$838 million, to be financed by withdrawals of US$811 million from the Petroleum Fund (PF).
- Due to procurement delays actual public spending is expected to be around US$729 million, and the non-oil fiscal deficit is projected at about 100 percent of non-oil GDP.
- Oil dependency and external position:
- In 2009, petroleum income accounted for about 95 percent of total government revenue and almost 80 percent of gross national income (GNI).
- PF assets reached US$6.8 billion or about ten times non-oil GDP in October 2010.
- Current account surplus driven by large oil income.
- Financial sector:
- Remains at an embryonic stage: three foreign bank branches dominate, plus a small state-owned microfinance institution; first insurance company established.
- High bank deposit growth but private sector credit stagnant due to large share of non-performing loans, weak contract enforcement, and unclear property rights.
- Near-term outlook and risks:
- Preliminary data from authorities indicate GDP growth in 2010 likely higher than the staff report estimate of 6 percent and closer to the government’s estimate of 9½ percent.
- Inflation projected to increase from 4½ percent to 6 percent in 2011, higher than the average of neighboring countries.
- Large uncertainties: path of oil prices and production, magnitude and quality of public spending, and progress in business-enabling structural reforms.
Executive Board Assessment (findings and policy recommendations)
- Findings:
- Directors welcomed Timor-Leste’s economic performance over the last three years and progress on poverty reduction and other social indicators.
- Medium-term outlook for growth is positive following a slowdown caused by adverse weather.
- Timor-Leste is highly oil-dependent; key challenge is using petroleum wealth wisely to build a strong non-oil economy and raise living standards.
- Fiscal and spending guidance:
- Carefully selected infrastructure investment could have sufficiently high returns to justify temporary withdrawals from the PF in excess of the estimated sustainable income (ESI).
- Upward revision in the ESI has created room for additional capital expenditure.
- Most Directors observed that spending at a slower-than-planned pace, consistent with absorptive capacity, would better realize high-quality projects and crowd in private investment.
- Public financial management and institutional arrangements:
- Praise for government emphasis on improving planning, evaluation, and implementation of spending programs to avoid overwhelming administrative capacity.
- Support for plans to create a new agency, reporting directly to the Prime Minister, to be in charge of major project evaluation and approval.
- Further improvements in public financial management and budget execution considered important.
- Structural and financial sector reforms:
- Welcomed efforts to make the regulatory environment more business-friendly; introduction of a one-stop-shop for start-ups noted as a step forward.
- Accelerated reforms to enhance property rights (such as the pending land law) would ease credit extension by the financial sector.
- Macroeconomic policy stance:
- Official dollarization has helped keep inflation under control and should be maintained, supported by a fiscal policy mindful of external stability.
- Productivity-enhancing structural reforms and efforts to build labor skills would improve competitiveness in non-oil industries and services.
- A slower-than-envisaged pace of public spending growth would help contain inflation pressures as supply-side limitations are approached.
- Engagement with the IMF:
- Directors called for intensified engagement between Fund staff and the authorities.
- Noting differences between official and the more conservative staff’s growth projections, Directors encouraged closer policy dialog and greater use of technical assistance, including to strengthen Timor-Leste’s economic statistics.
- A number of Directors saw merit in reopening the resident representative office.
Selected Economic Indicators (highlights from table, 2005–11)
- GNI at current prices (US$ million): 695 (2005); 972 (2006); 1,689 (2007); 2,851 (2008); 2,401 (2009); 2,704 (2010 Prel.); 3,019 (2011 Proj.).
- Non-oil GDP at current prices (US$ million): 332 (2005); 327 (2006); 358 (2007); 444 (2008); 556 (2009); 627 (2010 Prel.); 708 (2011 Proj.).
- Real non-oil GDP growth (percentage change): 6.2 (2005); -5.8 (2006); 9.1 (2007); 11.0 (2008); 12.9 (2009); 6.1 (2010 Prel.); 7.3 (2011 Proj.).
- Including United Nations 1/: 2.3 (2005); -3.4 (2006); 18.2 (2007); 10.6 (2008); 5.0 (2009); (2010 Prel. blank in table).
- Inflation (CPI, percentage change, end-period): 1.0 (2005); 6.7 (2006); 7.6 (2007); 1.1 (2008); 6.5 (2009); 6.0 (2010 Prel.); (2011 Proj. blank in table).
- Inflation (CPI, percentage change, period average): 1.8 (2005); 4.1 (2006); 8.9 (2007); 0.1 (2008); 4.5 (2009); (2010–11 entries blank in table).
- Investment-saving balance (In percent of non-oil GDP) — Gross investment 2/: 21 (2005); 23 (2006); 29 (2007); 63 (2008); 55 (2009); 48 (2010 Prel.); 70 (2011 Proj.).
- Gross national savings (percent of non-oil GDP): 99 (2005); 188 (2006); 518 (2007); 301 (2008); 276 (2009); 267 (2010 Prel.); (2011 Proj. blank).
- External savings (percent of non-oil GDP): -79 (2005); -166 (2006); -329 (2007); -456 (2008); -245 (2009); -227 (2010 Prel.); -197 (2011 Proj.).
- Central government finances (percent of non-oil GDP):
- Revenues: 128 (2005); 205 (2006); 382 (2007); 551 (2008); 342 (2009); 338 (2010 Prel.); 334 (2011 Proj.).
- Domestic revenues: 11 (2005); 10 (2006); 12 (2007) (other years blank).
- Petroleum revenue: 107 (2005); 195 (2006); 367 (2007); 540 (2008); 328 (2009); 323 (2010 Prel.); (2011 Proj. blank).
- Expenditure (cash basis): 26 (2005); 32 (2006); 66 (2007); 120 (2008); 103 (2009); 100 (2010 Prel.); 123 (2011 Proj.).
- Recurrent expenditure: 19 (2005); 27 (2006); 51 (2007); 81 (2008); 65 (2009); 72 (2010 Prel.); 73 (2011 Proj.).
- Capital expenditure: 7 (2005); 5 (2006); 15 (2007); 39 (2008); 38 (2009); 28 (2010 Prel.); 50 (2011 Proj.).
- Overall balance: 102 (2005); 174 (2006); 316 (2007); 431 (2008); 239 (2009); 210 (2010 Prel.); (2011 Proj. blank).
- Non-oil fiscal balance: -5 (2005); -21 (2006); -51 (2007); -110 (2008); -92 (2009); -89 (2010 Prel.); -113 (2011 Proj.).
- Combined sources fiscal operations 3/ (percent of non-oil GDP) — selected entries: Domestic revenue and budget grants 24 (2005); 13 (2006); 17 (2007). Expenditure 67 (2005); 98 (2006); 163 (2007); 144 (2008); 133 (2009); 154 (2010 Prel.); 47 (2011 Proj.) (table contains more detailed rows).
- Money and credit: Broad money (end-period) 4/: 31 (2005); 40 (2006); 43 (2007); … (2008 onward blank in table). Net domestic assets (end-period): -24 (2005); -3 (2006); -48 (2007); -42 (2008); -30 (2009).
- External sector (In millions of U.S. dollars): Current account: 261 (2005); 541 (2006); 1,177 (2007); 2,023 (2008); 1,363 (2009); 1,425 (2010 Prel.); 1,395 (2011 Proj.).
- Merchandise exports 2/: 8 (2005); 9 (2006); 14 (2007) (other years blank).
- Merchandise imports: 112 (2005); 101 (2006); 176 (2007); 311 (2008); 385 (2009); 575 (2010 Prel.); 802 (2011 Proj.).
- Memorandum item:
- Petroleum Fund balance (percent of non-oil GDP) 5/: 310 (2005); 583 (2006); 945 (2007); 968 (2008); 1,076 (2009); 1,169 (2010 Prel.). (Figure for 2004 in source refers to Timor-Sea account.)
Public Information Notice (PIN) No. 11/31, March 8, 2011.