IMF Executive Board Concludes 2022 Article IV Consultation with Timor-Leste


IMF Executive Board Concludes 2022 Article IV Consultation with Timor-Leste







September 22, 2022















Washington, DC
:
The Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation

[1]

with Timor-Leste on August 24, 2022 and endorsed the staff appraisal
without a meeting on a lapse-of-time basis.

[2]

Timor-Leste is slowly emerging from several waves of COVID-19 outbreaks and
from severe floods following cyclone Seroja in April 2021. Steady progress
with vaccination has allowed the authorities to lift strict containment and
travel restrictions. After a sharp contraction in growth in 2020, there was
a moderate rebound in 2021. Inflation has been rising steadily since early
2021 driven by higher food and oil prices while non-tradable inflation
remains muted.

Real non-oil GDP growth in 2022 is projected at 3.3 percent, underpinned by
strong government support, a rebound in private consumption, and the
reopening of borders. Inflation is projected to pick up, reflecting the
increase in food and energy prices. A gradual recovery of private
consumption and investment will underpin GDP growth at around 3 percent in
the medium term.

Executive Board Assessment

In concluding the 2022 Article IV consultation with Timor-Leste, Executive
Directors endorsed the staff’s appraisal, as follows:


Timor-Leste’s strong progress with vaccination has allowed for the
lifting of strict containment restrictions, and the economy is expected
to continue its recovery.

Non-oil real GDP is projected to grow at 3.3 percent in 2022, after an
estimated growth of 1.5 percent in 2021, supported by public spending and
rebounding private consumption.

Large downside risks remain.
An important near-term downside risk is a re-intensification of a health
crisis. Ongoing geopolitical tensions pose additional risks through more
prolonged and/or heightened high oil and food prices. Domestic political
instability could stall reforms, and natural disasters could further slow
the recovery.


Fiscal consolidation and structural reforms are needed to secure fiscal
sustainability, strengthen the external sector position, and support a
smoother transition to a private sector-led economy.

The external sector position in 2021 was substantially weaker than implied
by fundamentals and desirable policy settings. Active oil fields are drying
up, with oil revenues expected to cease in 2023. The 2022 budget envisages
large fiscal imbalances in the medium term that would deplete the Petroleum
Fund in the long term, leading to a fiscal cliff. Domestic revenue
mobilization and government expenditure rationalization are needed in
future budgets to underpin fiscal consolidation. Government spending should
prioritize investment projects to enhance the productive capacity of the
economy and programs to protect the poor.


Addressing public financial management (PFM) weaknesses is essential
for strengthening fiscal management and improving the quality of
government spending.

High priority areas of PFM reforms include budget credibility, public
investment management, procurement performance and monitoring, and
fragmentation caused by the proliferation of autonomous agencies. The
authorities have adopted some PFM reforms and are committed to continuing
their reform efforts with technical support from the Fund and other
development partners. The introduction of a Fiscal Responsibility Law (FRL)
can also help improve fiscal discipline by requiring the government to
commit to a monitorable fiscal policy objective and to lay out a strategy
to achieve that objective.


A significant number of structural barriers need to be lifted to
facilitate diversification and generate inclusive and resilient growth.

These include transforming the predominantly subsistence-oriented
agricultural sector into a commercially viable sector, raising
productivity, and enhancing food security. Improving the business
environment and strengthening AML/CFT and anti-corruption effectiveness
will foster private investment. So far, progress in private sector
development and job creation has been tepid, as reforms have been slow and
limited. Investing in climate-resilient infrastructure is key to building
resilience to natural disasters, however, adaptation plans have not been
integrated into the budgetary planning, and coordination amongst various
public stakeholders and capacity constraints to access external
grant-financing remain key challenges.




[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

The Executive Board takes decisions under its lapse-of-time
procedure when the Board agrees that a proposal can be considered
without convening formal discussions.


Table 1. Timor-Leste: Selected Economic and Financial
Indicators, 2018–23

Non-oil GDP at current prices (2020): US$1.595 billion

Population (2020): 1.318 million

Non-oil GDP per capita (2020): US$1,210

Quota: SDR 25.6 million

2018

2019

2020

2021

2022

2023

Est.

Proj.

Proj.

(Annual percent change)

Real sector

Real Non-oil GDP

-0.7

2.1

-8.6

1.5

3.3

4.2

CPI (annual average)

2.3

0.9

0.5

3.8

7.0

4.0

CPI (end-period)

2.1

0.3

1.2

5.3

7.0

4.0

(In percent of Non-oil GDP, unless otherwise indicated)

Central government operations

Revenue

57.6

51.6

57.0

54.1

51.9

46.9

Domestic revenue

12.0

11.0

11.4

9.6

9.6

9.6

Estimated Sustainable Income (ESI)

34.8

31.0

34.1

33.0

30.8

25.8

Grants

10.8

9.5

11.5

11.5

11.5

11.5

Expenditure

84.0

81.9

82.6

97.2

106.8

114.4

Recurrent

51.8

54.0

61.1

77.5

79.0

62.4

Net acquisition of nonfinancial assets

21.4

18.4

10.0

8.3

16.3

40.6

Donor project

10.8

9.5

11.5

11.5

11.5

11.5

Net lending/borrowing

-26.4

-30.3

-25.6

-43.2

-54.9

-67.6

(Annual percent change, unless otherwise indicated)

Money and credit

Deposits

2.8

-7.5

10.1

29.3

10.5

9.9

Credit to the private sector

-3.8

5.5

10.1

4.6

8.9

5.8

Lending interest rate (percent, end of period)

14.5

16.3

11.3

11.3

11.3

11.3

(In millions of U.S. dollars, unless otherwise indicated)

Balance of payments

Current account balance

-191

133

-308

43

-284

-821

(In percent of Non-oil GDP)

-12

8

-19

3

-15

-40

Trade of Goods

-589

-566

-510

-569

-647

-726

Exports of goods

25

26

17

32

35

39

Imports of goods

613

592

527

601

682

765

Trade of Services

-349

-357

-275

-244

-279

-316

Primary Income

843

1,126

620

925

718

305

of which: other primary income (oil/gas) 1/

510

756

324

720

634

46

Secondary Income

-96

-70

-143

-70

-77

-84

Overall balance

129

-18

0.2

278

62

153

Public foreign assets (end-period) 2/

16,477

18,348

18,946

19,884

18,442

17,654

(In months of imports)

187

212

270

275

218

181

Exchange rates

NEER (2010=100, period average)

130.9

134.1

135.8

131.9

REER (2010=100, period average)

142.0

143.8

143.8

137.8

Memorandum items

Nominal Non-oil GDP (in millions of U.S. dollars)

1,584

1,704

1,595

1,681

1,858

2,043

Nominal Non-oil GDP per capita (in U.S. dollars)

1,249

1,318

1,210

1,251

1,357

1,464

(Annual percent change)

-3.9

5.5

-8.2

3.4

8.5

7.9

Crude oil prices (U.S. dollars per barrel, WEO) 3/

68

61

41

69

106

95

Petroleum Fund balance (in millions of U.S. dollars) 4/

15,803

17,692

18,289

18,949

17,446

16,504

(In percent of Non-oil GDP)

998

1,038

1,146

1,127

939

808

Public debt (in millions of U.S. dollars)

145

193

218

237

274

321

(In percent of Non-oil GDP)

9.1

11.3

13.7

14.1

14.7

15.7

Population growth (annual percent change)

2.0

2.0

2.0

1.9

1.9

1.9

Sources: Timor-Leste authorities; and IMF staff estimates
and projections.

1/ Oil sector activities are considered non-resident
activities in balance of payments statistics.

2/ Includes Petroleum Fund balance and the central bank’s
official reserves.

3/ Simple average of UK Brent, Dubai, and WTI crude oil
prices based on April 2022 WEO assumptions.

4/ Closing balance.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Pemba Sherpa

Phone: +1 202 623-7100Email: [email protected]

@IMFSpokesperson





https://www.imf.org/en/News/Articles/2022/09/22/pr22317-imf-executive-board-concludes-2022-article-iv-consultation-with-timor-leste

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