IMF Concludes 2022 Article IV Consultation with Timor-Leste

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.

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