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June 2022 Timor-Leste Economic Report

Investing in the Next Generation

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Key Findings

• 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.
• Rising commodity prices spurred by the Ukraine-Russia war imposes an additional hurdle but Timor-Leste has the policy space to absorb the shocks through various social protection schemes. Despite the negligible direct impact, the Timor-Leste economy is greatly exposed to the indirect impacts of the war through commodity markets. Headline inflation rose to 6.6 percent year-on-year (YoY) in April 2022, driven by surging global food and energy prices.
• The President has recently promulgated a 2022 budget revision of US$1.24 billion (74.8 percent of non-GDP). Of the new measures proposed by the government nearly 90 percent will be allocated to the National Liberation Combatants¡¯ Fund (NLCF). The revised 2022 State Budget will amount to USD 2.4 billion (nearly double of non-oil GDP), the largest budget in the country¡¯s history and will accelerate the depletion of the Petroleum Fund to less than a decade.
• Uncertainties surrounding the baseline forecast remain large whilst risks are tilted to the downside. Macroeconomic risks include further increases in global food and energy prices and COVID-19-related mobility restrictions. Timor-Leste¡¯s exposure to extreme weather events and natural disasters also makes it vulnerable to upward pressure on food prices ?especially if there is another spell of heavy floods. Domestic political uncertainty and policy reform slippages can also lead to protracted macroeconomic imbalances.
• 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) ¨C 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.

December 2021 Timor-Leste Economic Report

Steadying the Ship

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Key Findings

• After dual COVID-19 and natural disaster shocks, available data points to some signs of economic recovery. Receipts from sales and excise taxes rebounded while household credit expanded as government executed a nominally higher budget in Q2 2021. 
• The COVID-19 situation has begun to improve. The pace of vaccine rollout continues to accelerate as nearly 71 percent of the eligible population has received one dose and about 46 percent are fully vaccinated. Nevertheless, there is considerable disparity of vaccine coverage. 
• The Government collected 11.3 percent less domestic revenue during the first half 2021 compared to 2020. Public spending grew by 20.3 percent, but capital spending remains relatively low. 
• Inflation increased to 3.6 percent in the second quarter of 2021, the highest reading in eight years, driven largely by rising food, beverage, alcohol, and tobacco prices. Private sector credit growth doubled to nearly 20 percent, driven by household credit. Outlook and Risks 
• Non-oil GDP contracted by 8.6 percent in 2020 but is projected to recover by 1.6 percent in 2021 on account of base effects and COVID-19 related fiscal expansion. 
• Uncertainty surrounding the growth outlook is high, given that COVID-19 is still evolving locally and globally. Rapidly expanding vaccination coverage is key to containing the pandemic and economic recovery. 
• Despite a reduced allocation and more coherent budgeting, allotment for recurrent spending in 2022 budget grows by 24 percent than the 2015-2019 average. In contrast, sustainable sources of revenue are set at nearly 40 percent lower than the recurrent spending. Fiscal deficit is projected to narrow in 2022, but still rather elevated at around 40 percent of GDP. 

May 2021 Timor-Leste Economic Report

Key findings:

• COVID-19 is spreading quickly throughout the country, despite early successes in containing the virus. Meanwhile, flooding and landslides have caused considerable human loss and economic damage. These compounding health and humanitarian emergencies are undermining the economic recovery in 2021.
• The economy contracted by about 7 percent in 2020, the largest decline since independence. Public health measures and lower consumer confidence weakened private consumption, while political uncertainty in early 2020 undermined public spending ¨C by delaying the approval of the 2020 budget. Moreover, international travel restrictions hampered exports of services.
• Public expenditure declined by 9 percent in 2020. Capital spending nearly halved, but public transfers increased to support households. Domestic revenues suffered from lower economic activity. 
• The fiscal deficit eased to 26 percent of GDP ¨C mostly due to lower spending ¨C but remains very large. The deficit was largely financed by withdrawals from the Petroleum Fund.
• Exports nearly halved, owing to limited travel services but also lower coffee earnings.
• GDP is forecast to grow by 1.8 percent in 2021, which is lower than the 3.1 projected in October 2020. The economy is expected to recover in the medium-term, but structural constraints will remain an impediment to faster growth. Reforms to boost productivity and competitiveness are critical.
• COVID-19 remains the key risk to the outlook, as it may require prolonged containment measures to avoid large human losses. A swift vaccination rollout is more critical than ever. 

October 2020 Timor-Leste Economic Report

Towards a Sustained Recovery

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Key findings:

• The COVID-19 pandemic and renewed political instability have taken a heavy toll on the economy. The lack of a 2020 budget constrained public spending, while public health measures and voluntary changes in behaviour have weakened private sector activity. However, an 
• The economic response package ¨C financed through a special fund ¨C provided some relief to households and businesses.
• Public expenditure declined by 7 percent in the first half of 2020. Spending on capital projects was particularly affected. Domestic revenues suffered from lower economic activity and temporary relief measures (e.g. electricity subsidy).
• Exports declined by 46 percent in the first half of the year, mainly due to lower travel services. Imports decreased by 20 percent, with services declining further than goods. 
• Gross domestic product (GDP) is expected to contract by 6.8 percent in 2020 due to the combined impacts of COVID-19 and political uncertainty (earlier in the year). 
• A second wave of COVID-19 infections is a key external risk to the outlook, while political instability remains the main internal risk. Strengthening health preparedness and building a durable political consensus are important preconditions for a robust and sustained economic recovery.

April 2020 Timor-Leste Economic Report

A Nation Under Pressure

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Key findings:

• Economic prospects for 2020 have been weighed down by the lack of a state budget for 2020, renewed political uncertainty, and the global COVID-19 outbreak
• GDP is currently forecast to contract by nearly 5 percent in 2020, although this projection remains highly uncertain.
• Public spending is likely to be constrained for most of the year, due to the duodecimal regime in place and execution delays owing to COVID-19.
• A $250 million withdrawal from the Petroleum Fund was approved, 60 percent of which allocated to prepare and respond to the COVID-19 pandemic.
• Timor-Leste has implemented several public health measures to help contain the spread of the virus, including: restrictions on international travel, school closures, rules on access to commercial premises, mandatory confinement of those infected or entering the country, ban on public gatherings, and minimum services for the public administration.
• An effective response to COVID-19 will require measures to contain the virus and strengthen the capacity of the health system, protect vulnerable households, support affected businesses, and ensure the continuity of public services

October 2019 Timor-Leste Economic Report

Unleashing the Private Sector

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Key findings:

• Despite the late approval of the 2019 budget, public expenditure in the first half of 2019 was 16 percent higher than in the same period in 2018
• Private investment is also expected to benefit from greater political and economic stability. 
• Gross domestic product (GDP) is expected to grow by 4.1 percent in 2019.
• GDP growth is expected to accelerate to 4.9 percent by 2021, driven by larger public spending and household consumption. 
• Medium-term growth prospects are hampered by a weak private sector. Developing productive capabilities will require continued political and macroeconomic stability, strong investments in high-return connective infrastructure and relevant skills, as well as policy and regulatory reforms that improve the business environment.

April 2019 Timor-Leste Economic Report

Moving Beyond Uncertainty

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• Key findings:
• GDP declined for a second consecutive year, owing to political and economic uncertainty.
• Public spending constrained until (late) approval of 2018 budget, with strong increase in the last 3months of the year
• Current account improved due to higher primary income. Trade deficit eased as imports declinded and exports increased.
• Positive outlook for 2019, with GDP forecast to grow by 3.9% and inflation to remain below 4%..

October 2018 Timor-Leste Economic Report   

Regaining Momentum?

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Key findings:

• GDP growth has fallen sharply in 2017 to -4.7 percent.
• GDP forecast to improve to 0.8 percent for 2018.
• Outlook remains uncertain, depending on budget execution.
• Offshore oil production continues to decline, however the Petroleum Fund recorded strong investment returns.

Lower Public Spending Leads to Slower Growth

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Key findings:

• GDP growth has fallen sharply in 2017 to a projected -1.8 percent.
• Reserve assets grow and the outlook for tourism and petroleum remains positive.
• Private consumption has been robust in 2017, but public and private investment has declined.
• Offshore oil production continues to decline, however strong Petroleum Fund investment returns has lifted GNI.
• Coffee exports dropped from US$23million in 2016 to US$14million in 2017. This reflects seasonal volatility and exports continue to trend upwards over the long term.