20220921-IMF-Democratic_Republic_of_Timor-Leste_2022_Article_IV_Consultation-Press_Release_and_Staff_Report_81页_2mb

Summary of 2022 Article IV Consultation with Timor-Leste

Core Content

The 2022 Article IV Consultation with Timor-Leste, conducted by the IMF, assessed the country's economic recovery post-COVID-19 and post-cyclone Seroja, as well as its long-term fiscal and structural challenges. The consultation highlighted the need for fiscal consolidation, structural reforms, and improved public financial management to ensure sustainability and resilience.

Main Views and Key Information

Economic Recovery and Outlook

• Post-pandemic Recovery: Timor-Leste is slowly emerging from multiple waves of the pandemic and severe floods from cyclone Seroja in 2021. Vaccination efforts have enabled the easing of restrictions, supporting a rebound in private consumption and border reopening.
• Growth Projections: Real non-oil GDP growth is projected at 3.3% in 2022, with a moderate rebound to around 3% in the medium term. The recovery is expected to be supported by public spending and private sector activity.
• Inflation Trends: Inflation has been rising since early 2021, driven by higher food and oil prices. It is projected to reach 7% in 2022, with a slight decline to 3% in 2023.
• Oil Revenue Decline: Active oil fields are drying up, and oil revenues are expected to cease in 2023. The development of the Greater Sunrise fields is not included in baseline projections due to lack of approved plans.

Fiscal Sustainability

• Fiscal Deficit: The 2022 fiscal deficit is projected at 43% of non-oil GDP, increasing further in 2023–2024 due to front-loaded spending. The Petroleum Fund, a key source of financing, is at risk of depletion by 2038, potentially leading to a fiscal cliff.
• Need for Fiscal Consolidation: The government must reduce spending and improve revenue mobilization to achieve a sustainable fiscal position. Expenditure rationalization and targeted transfers are essential to protect the vulnerable while enhancing productivity.
• Budget Deficit: The 2022 budget includes a significant increase in government transfers, which are not focused on the most vulnerable or productive sectors. This raises concerns about fiscal sustainability.

Structural Reforms

• Economic Diversification: A major structural challenge is the lack of diversification. The non-oil private sector remains underdeveloped, with informal and low-productivity employment.
• Agricultural Sector: The predominantly subsistence-based agricultural sector needs transformation to become commercially viable and increase productivity.
• Private Sector Development: Improving the business environment, enhancing governance, tackling youth unemployment, and investing in climate-resilient infrastructure are key priorities for private sector-led growth.
• Public Financial Management (PFM): PFM reforms are critical to improve fiscal management and the quality of government spending. Key areas include budget credibility, public investment management, and reducing fragmentation from autonomous agencies.

Risks

• Downside Risks: The main risks include a re-intensification of the health crisis, geopolitical tensions leading to prolonged high oil and food prices, domestic political instability, and natural disasters.
• Fiscal Risks: The long-term depletion of the Petroleum Fund threatens fiscal sustainability and may necessitate abrupt fiscal adjustments, risking basic public services.
• External Risks: The current account is expected to shift to a deficit in 2022 and remain so in the medium term due to lower oil revenues and higher imports. A dollarized economy faces competitiveness issues from USD appreciation.

Policy Recommendations

• Fiscal Consolidation: Reduce government spending, improve revenue collection, and prioritize investment in productive sectors.
• Structural Reforms: Enhance the business environment, strengthen anti-corruption measures, and implement a Fiscal Responsibility Law (FRL) to ensure fiscal discipline.
• PFM Reforms: Focus on budget credibility, procurement performance, and reducing the number of autonomous agencies.
• Social Safety Nets: Strengthen social safety nets to protect the most vulnerable during the transition to a more private-sector-driven economy.

Key Indicators

Conclusion

The IMF concluded that while Timor-Leste is showing signs of recovery, long-term fiscal sustainability and structural reforms are essential. The government must address fiscal imbalances, improve public financial management, and diversify the economy to ensure resilience against future shocks.