World Bank: Improve Quality of Public Spending to Accelerate Development in Timor-Leste

Dili, December 02, 2022 – Timor-Leste’s economy is slowly recovering from its recent economic slump caused by COVID-19 and devastating impacts of Cyclone Seroja. After a rebound of 2.9 percent in 2021, the economy is on track to further grow by 3.0 percent in 2022 and 3.0 percent in 2023, supported mainly by government spending according to the latest World Bank’s Timor-Leste Economic Report, which also has a special chapter on improving the performance of Timor-Leste’s Social Protection System.

Following three years of negative growth, non-oil GDP per capita has not yet returned to pre-pandemic levels. Consumer price inflation reached 7.9 percent in August, one of the highest rates in the East Asia Pacific Region. Food inflation rose by 8.3 percent, partly due to increased global food prices driven by higher costs of transport and fertilizer. Despite the receding impact of the pandemic, the level of government spending has not returned to the pre-pandemic levels. Combined with the low level of domestic revenue, fiscal sustainability continues to be a major concern, as the current flow of petroleum revenue is projected to cease in 2022. Without inflows from a new production field or a change in the government’s fiscal policy, the balance is expected to be depleted by 2034.

“Fiscal consolidation and improving the quality of public spending are critical to accelerate and sustain economic development as Timor-Leste returns to growth,” said Bernard Harborne, World Bank Country Representative for Timor-Leste. “The Government needs to improve the performance of the Social Protection System to reduce poverty and reach the people most in need of assistance; it is more about spending better than spending more.”

With a national social protection system that provides a wide range of benefits and services, Timor-Leste has one of the highest rates of social protection spending in the developing world. In 2019, the total social protection expenditure was seven percent of non-oil GDP, with nearly 70 percent allocated for the Veterans’ Pension program and very low coverage and adequacy of benefits aimed at children and mothers, including the poor and vulnerable. Excluding the veterans’ pension, social protection spending corresponds to the ASEAN regional average of approximately three percent of GDP.

The anticipated fiscal crisis due to the declining oil revenue provides very little room to increase social protection spending but there is ample opportunity to improve its overall efficiency and ensure better allocation of resources to the most vulnerable people. Based on a political consensus, reforms to the Veteran’s Pension program could include reducing or terminating inter-generational benefits or changing from annuities to lump-sum payments. There is also an opportunity to consider the design of the Veterans Fund to assure that it is inclusive, such as including victims, as well as ensuring it focuses on productive activities.

There is also a need to look at reducing fragmentation of the social protection system and consolidating management, identification, and delivery systems, as well as increasing the use of electronic payments. The planned implementation of the Unique ID number system can be a key opportunity to foster integration and interoperability between the different social protection programs. All this should be with an effort to close gaps in reaching the poorest households, with a strong focus on children and mothers as well as human capital development.

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