Dili, June 29, 2022 -Timor-Leste’s non-oil economy is projected to expand 3.0 percent in 2022, underpinned by a significant increase in government spending and investment, as well as rebounding private consumption supported by the gradual opening of borders. Increasing prices of food, fuel and electricity driven by the war in Ukraine could be long-lasting and may impact future growth prospects, according to the June 2022 edition of the World Bank’s Timor-Leste Economic Report.
Buffeted by the twin shocks of COVID-19 and Tropical Cyclone Seroja, the non-oil economy grew by 1.5 percent in 2021. A record-high budget with expenditure of nearly 90 percent of GDP bolstered government consumption. A series of fiscal stimulus measures supported employment and incomes, allowing households to maintain their spending. However, this growth follows recessions in 2017, 2018, and 2020 which have left Timor-Leste’s Gross Domestic Product (GDP) lower than it was in 2016.
“It is positive to see Timor-Leste return to economic growth following some very difficult years,” said World Bank Director for Indonesia and Timor-Leste Satu Kahkonen. “Although growth is projected to continue at a similar rate in 2023, increasing inflation is likely to have an impact on long-term recovery. Structural policy reforms will be critical to lay the foundation for more diversified and resilient growth in the future.”
According to the report, a strategy to address short- and medium-term challenges is urgently needed. Fiscal policy should aim to protect the vulnerable from rising food and fuel prices, preferably through targeted assistance. The government can promote policy actions conducive to reducing food prices through increasing agricultural productivity and increasing nutrition through diversifying domestic production.
Diversification of the economy through development of export sectors is essential for sustained growth. On the energy side, the efficiency of electricity generation and provision should be improved as doing so would positively impact the budget and reduce the carbon footprint of the country. Diversified energy sources, including renewables, should be explored.
The report also includes a special focus on Human Capital (HC) – which refers to the knowledge, skills and health that people accumulate over their lives, that allows each person to fully realize his or her potential. Measured by the Human Capital Index (HCI), a child born in Timor-Leste today will only be 45% as productive as an adult than she could be if she enjoyed complete education and full health.
The risk of the Petroleum Fund depletion over the next decade – having underpinned the oil-driven economy and allowed increased spending – means that the Timorese people themselves need to be the drivers of the country’s economic growth. With 37 percent of the population under the age of 15, designing cost-effective interventions to invest in people to accumulate and protect human capital is critical.
Even before the pandemic, there were urgent challenges; some 47% of children are stunted for example, and many students had poor learning outcomes due to low levels of education service delivery. These challenges were compounded by the COVID-19 pandemic which disrupted education services, leading to school closures and learning losses affecting 45% of school children.
A sharper focus on human capital investment is essential for Timor-Leste’s sustained long-term growth. Human capital investments not only contribute to economic growth, they also effectively contribute to reducing poverty. Increased human capital investments typically benefit the poor by improving related service deficiencies and gaps, and reducing inequalities.