An International Monetary Fund (IMF) team led by Ms. Yu Ching Wong visited Timor-Leste during October 24–28 to assess recent economic developments and
discuss government policies. The team met with Finance Minister Ms. Santina Cardoso, Central Bank of Timor-Leste Deputy Governors Ms. Nur-Aini Djafar
Alkatiri and Ms. Sara Lobo Brites, and other senior officials, and held discussions with private sector and civil society representatives as well as
development partners.
At the conclusion of the mission, Ms. Wong made the following statement:
“Economic activity is expanding at a satisfactory pace and is likely to maintain the momentum into next year. Real non-oil GDP in 2016 is expected to grow
at 5 percent, supported by government spending. Consumer prices are expected to decline by 0.6 percent year on year in 2016, due to lower global food and
oil prices. The external current balance is expected to turn to a deficit of 9.9 percent of GDP in 2016 due in large part to a sharp increase in imports
related to the increase in public investments. The supplementary budget approved in July 2016 doubled capital spending. Additional capital expenditures of
15.6 percent of GDP has been allocated to projects under the infrastructure fund that are expected to advance ahead of schedule in 2016. As a result, the
overall fiscal deficit in 2016 is widened to 13.9 percent of GDP. The increase in capital spending is financed through excess withdrawals from the
Petroleum Fund (PF).
“The near-term outlook remains generally favorable with a continuing non-oil growth recovery accompanied by low inflation. The medium-term outlook however
depends critically on economic diversification as oil fields in operation are expected to be depleted by around 2020. While the impact of current low oil
prices to the PF is limited, as projected withdrawals from the PF are above the estimated sustainable income levels, the PF balance is expected to decline
over the medium-term. Moreover, the investment returns of the PF are exposed to the volatility of global financial markets. Also, medium-term
risks lie in whether the front-loading of public investment would generate sufficient social and economic returns, which would help achieve inclusive
growth. Moreover, that would in turn translate into higher tax returns and fiscal sustainability.
“The Fund’s past advice on the need for bold fiscal consolidation measures to ensure long-term fiscal and debt sustainability remains valid. Recurrent
spending can be further rationalized by containing the increase in current transfers. While recognizing the need to close the infrastructure gap, the
front-loading of capital spending warrants moderation given resource and capacity constraints.
“Public investment should be better prioritized, focusing on projects with higher returns determined by rigorous investment appraisal. This would help to
ensure more “bang for the buck” in tapping into the PF. To further streamline plans for capital spending, the authorities should consider creating a
mechanism to enable multi-year capital commitments and ensure that updates to the Strategic Development Plan include indicative costing to enable
prioritization and selection.
“Through closer consultation with multilateral and bilateral development partners, the authorities can better anticipate the level of available
concessional financing. The authorities should also consider developing a set of clear criteria to help identify public investment projects that would
benefit additionally from knowledge transfer from partnership with multilateral and bilateral creditors.
“We welcome the progress in customs and tax reforms to mobilize domestic revenues. On the introduction of a value-added tax (VAT), in addition to the broad
consultation on the draft VAT Law with domestic stakeholders, an early start in strengthening the tax administration capacity would help pave the way for a
smooth implementation of the VAT. The IMF stands ready to provide technical assistance, in coordination with other development partners, in the design and
implementation of the VAT and other fiscal reform initiatives.
“The banking system remains sound. As private sector credit growth has continued to lag behind rapid deposit growth, excess deposits placed abroad by banks
have increased. Financial soundness indicators have improved; notably, the banks’ non-performing loan ratio declined to 15 percent in September 2016 from
23 percent at end-2015 due largely to the resolution of legacy bad loans. The IMF team welcomes the steady progress in implementing the Financial Sector
Master Plan aimed at raising financial inclusion and safeguarding financial stability.
“We would like to thank the authorities and our counterparts for their warm hospitality and for the candid discussions.”
