The economy continued its recovery in 2022, expanding by 3.9 percent, largely fueled by public consumption and investment. However, private consumption growth remained muted. Labor force participation continues to lag the regional counterparts because the stagnating private sector is simply not creating enough new jobs. The economy is projected to grow 2.4 percent in 2023.
Inflation reached 9.6 percent by March 2023, reflecting both global trends and domestic policy decisions, including the introduction of higher excise taxes on select commodities. The Government's 2023 budget remains ambitious, despite predictions of a growing fiscal deficit, which reached a concerning 63.7 percent of GDP in 2022.
The halt in oil and gas production in 2023 highlights Timor-Leste's overreliance on hydrocarbon exports, spotlighting the urgency for economic diversification. The challenges in attracting substantial foreign direct investment compound the situation, prompting the Government to exceed its withdrawals from the Petroleum Fund, which, if current trends hold, may be depleted by 2034.
"Timor-Leste stands at the economic crossroads. The opportunities presented by political stability and careful planning are vast," said Bernard Harborne, Country Representative for the World Bank. "We strongly recommend an immediate focus on economic diversification. A concerted effort in agricultural investment could reshape the economic landscape, offering stability and sustainable growth."
The report includes a special chapter on the importance of investing in the agriculture sector to help Timor-Leste achieve inclusive economic development and foster broad-based employment creation. Currently, constituting the largest share of the economy outside the public sector, the agriculture sector faces steep challenges. Productivity levels are low, harvested areas have diminished significantly over two decades, and farmers' returns remain minimal.
Efforts to enhance agricultural productivity and create sustainable economic opportunities for farming households are vital. This includes boosting farmer incomes through increased small-scale agriculture productivity, focusing on high-value commodities, and encouraging productivity gains through improved seed varieties, affordable technologies, and superior storage methods. The development of food processing, particularly in Micro, Small, and Medium Enterprises, should also be supported.
The report encourages the new 9th Constitutional Government to tackle fiscal consolidation, emphasizing the importance of revenue mobilization and rationalized expenditure. With significant public spending increments yielding limited economic impact, the World Bank report suggests that growth could be sustained, possibly even bolstered, with a carefully calibrated budget, real fiscal reforms, savings, and new investments.
