IMF Concludes 2025 Article IV Consultation

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for Timor-Leste. [1]

Growth is estimated to have risen to 4.1 percent in 2024, supported by fiscal expansion and strong credit growth. Inflation declined from 8.4 percent in 2023 to 2.1 percent in 2024, driven by moderating global food prices and the rollback of tax hikes, and fell further to -0.2 percent y/y in May 2025.

Growth is projected to remain robust at 3.9 percent in 2025, supported by a strong fiscal impulse and continued rapid credit growth. In 2026, growth is expected to moderate to 3.3 percent, as ASEAN accession begins to support growth through stronger FDI inflows and non-oil exports, but being more than offset by the expected drag from fiscal policy. Inflation is expected to rise modestly in the second half of the year—averaging 0.9 percent in 2025 and 1.8 percent in 2026—as global food prices rise. Risks to the outlook are balanced.

Executive Board Assessment [2]

Executive Directors noted that growth is expected to remain robust in 2025 and inflation to remain contained, with balanced risks to the medium-term outlook. However, considering the cessation of oil production in 2025, and the substantial fiscal and external imbalances, Directors underscored the importance of gradual fiscal consolidation and growth-enhancing structural reforms to avoid depletion of the Petroleum Fund, secure fiscal and external sustainability, and promote needed economic diversification. They welcomed Timor-Leste's WTO accession and forthcoming accession to ASEAN, which are expected to boost trade and attract more foreign investment.

Directors concurred that improving the composition and quality of public spending, and gradually enhancing revenue mobilization, are needed to support fiscal consolidation efforts. They welcomed recent initiatives to restrain recurrent spending and encouraged further efforts to reduce untargeted transfers and contain the public wage bill, while prioritizing investments in human capital and high-quality capital projects. They welcomed plans for the implementation of VAT by 2027, and encouraged efforts to strengthen tax administration and compliance. While noting prospects offered by the Greater Sunrise gas field, Directors called for carefully managing the risks associated with its development. They encouraged the full implementation of ongoing reforms to public financial management and procurement to improve budget discipline and spending efficiency.

Directors noted that the financial system remains shallow, despite strong credit growth in recent years. They welcomed ongoing legal reforms in the financial sector, and called for accelerating the issuance of land titles and developing a national digital ID to address structural impediments to lending and support growth. While systemic risks remain limited, Directors called for close monitoring and supervision of the financial sector given the rapid credit growth. Addressing AML/CFT framework deficiencies is also important.

Directors emphasized that advancing structural reforms is crucial to boost private sector development, enhance financial inclusion, and support sustainable growth. They encouraged the authorities to continue ongoing efforts to strengthen governance and the rule of law. They noted that human capital development, including by strengthening vocational training, would help Timor-Leste to unlock its large demographic dividend.

Directors welcomed ongoing capacity development projects and noted that continued engagement with the Fund would help support Timor-Leste's reform agenda.

[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] At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .