IMF Executive Board Concludes 2021 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.

Timor-Leste has been severely affected by the pandemic and by recent floods. Despite early success in containing the propagation of COVID-19, the recent surge in cases combined with the floods in early April will result only in a modest economic recovery in 2021. Real non-oil GDP growth in 2021 is projected at 1.8 percent, driven by higher government spending, rebounding private consumption, and the vaccination rollout that began in April. The current account deficit will continue to increase as oil revenues decline. Inflation is projected to pick up, reflecting the increase in government spending and in energy prices. Real non-oil GDP growth is projected to stabilize at around 3 percent in the medium term, as structural constraints weigh on growth potential.

In the near term, the focus should be on accelerating the ongoing rollout of vaccines and on providing relief to the most vulnerable. Once the pandemic is well contained, regaining a more solid fiscal footing should be a priority in order to preserve fiscal and external sustainability. Expenditure rationalization and revenue mobilization should underpin fiscal reforms. Structural reforms to improve the business environment, strengthen governance, raise labor productivity, and increase financial deepening, including through harnessing digitalization, would help promote private sector development, create jobs, and diversify the economy. Strengthening disaster risk management and preparedness is also crucial, given the country's vulnerability to climate shocks.

Executive Board Assessment[2]

Executive Directors welcomed the authorities' response to mitigate the impact of the shocks from the COVID-19 pandemic and floods. Directors noted that while a modest recovery is expected, significant challenges prevail, including the uncertainty from the pandemic. They emphasized that the immediate focus should be on accelerating the ongoing vaccine rollout and supporting the most vulnerable. In the medium and long term, policies are needed to support fiscal sustainability, develop the non-oil private sector economy, and generate jobs.

Directors welcomed the strong fiscal package to mitigate the adverse impact of the pandemic and floods and emphasized the need to report government spending in a transparent manner. They noted that once the pandemic abates, priority should be given to putting the fiscal position on a more solid footing. Given the drying up of active oil fields, fiscal consolidation should be underpinned by revenue mobilization and expenditure rationalization. This should help reduce excess withdrawals from the Petroleum Fund and secure fiscal sustainability. Directors encouraged that a medium-term fiscal reform strategy should be laid out in the 2022 budget.

Directors emphasized that ongoing reforms to strengthen public financial management are necessary to improve the quality of spending and enhance the fiscal framework. They recommended that public investment projects focus on high-return projects by making them subject to thorough cost-benefit analysis, including the Greater Sunrise project, and that the basic public financial management law is aligned with international best practices.

Directors underscored that structural reforms are needed to promote economic diversification, develop the private sector, and create jobs. In this context, they called for measures to improve the business environment, strengthen governance, raise labor productivity, increase financial deepening, including through harnessing digitalization. They also noted that strengthening disaster risk management is crucial to mitigate the impact of climate shocks and that improving data quality is vital to support policy making. Directors agreed that continued technical assistance by the Fund will be helpful.