20240226-IMF-Democratic_Republic_of_Timor-Leste_2023_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_the_Democratic_Republic_of_Timor-Leste_88页_1mb

2023 Article IV Consultation with Timor-Leste Summary

Core Content

The IMF Country Report No. 24/56 outlines the results of the 2023 Article IV consultation with the Democratic Republic of Timor-Leste, highlighting economic performance, fiscal challenges, inflation trends, and policy recommendations.

Main Economic Indicators (2022–2025)

Key Economic Developments and Outlook

• Growth: Non-oil real GDP growth reached 4% in 2022, driven by post-pandemic re-opening and fiscal expansion. It slowed to 1.5% in 2023 due to fiscal drag from the May 2023 elections. Growth is expected to recover to 3.5% in 2024 and remain around 3% in the long term, though policy actions could accelerate it.
• Inflation: Inflation surged to 8.4% in 2023 due to food and transport costs, but eased to 4.3% in January 2024. It is projected to moderate further to 2.5% by year-end 2024.
• Fiscal Position: The fiscal deficit declined from 58% of non-oil GDP in 2022 to 41% in 2023, but is still expected to be high over the medium term. The Petroleum Fund (PF), which has been a key source of financing, is projected to be fully depleted by the end of the 2030s due to large withdrawals.

Main Viewpoints and Recommendations

A. Supporting Growth While Securing Fiscal Sustainability

• The 2024 budget prioritizes public capital expenditure, which is expected to boost growth.
• Recurrent spending continues to make up two-thirds of total expenditure, often poorly targeted.
• Fiscal sustainability is a key concern. The government needs to align the deficit with the PF’s sustainable income stream to avoid a fiscal cliff.
• Fiscal responsibility law and a medium-term fiscal framework are recommended to guide sustainable fiscal policy.
• Expenditure rationalization and targeted social safety nets are needed to improve the efficiency of public spending.

B. Reforms to Promote Financial Deepening and Inclusion

• The banking sector is stable in terms of capital and liquidity, but structural reforms are needed to improve financial services.
• Digital financial services and IFRS 9 and Basel III compliance are encouraged to promote financial inclusion and deepening.
• AML/CFT deficiencies should be addressed to strengthen the financial system.

C. Structural Reforms for Sustainable Growth and Diversification

• Economic diversification is essential to reduce reliance on oil and gas.
• Agriculture and tourism are key sectors for growth, and reforms to address bottlenecks in these areas are recommended.
• Digitalization and legal reforms are necessary to support private sector development and financial growth.
• Human capital development (education, vocational training) is crucial to harness the demographic dividend.
• Climate resilience and infrastructure investment are important to mitigate risks from climate change and natural disasters.

Risks and Challenges

• Downside risks to growth include a global recession, commodity price volatility, and extreme climate events.
• These risks could require fiscal responses, which might hinder expenditure restraint and adversely affect the PF.
• Upward risks include the development of the Greater Sunrise oil field, which could significantly boost fiscal sustainability.

Authorities' Views

• The authorities agree with the staff’s assessment of the economic outlook and risks.
• They emphasize the importance of fiscal and structural reforms to meet the 5% growth target.
• They also stress the need to diversify the economy and develop the private sector to reduce imbalances.

Key Documents and Context

• The Staff Report was completed on February 2, 2024, following discussions with officials in November 2023.
• The Executive Board concluded that the near-term outlook has improved, with growth recovering and inflation easing.
• Timor-Leste remains a fragile post-conflict state with pressing development needs.
• The Petroleum Fund is a major financial buffer, but its sustainable use is critical to long-term stability.

Conclusion

The IMF recommends a balanced approach to fiscal and structural reforms to ensure sustainable growth and fiscal sustainability. Timor-Leste needs to rationalize public expenditure, mobilize domestic revenues, and develop the private sector to reduce its economic fragility and external imbalances. The Country Engagement Strategy and capacity development projects will play a vital role in this process.