IMF Concludes Staff Visit to Timor-Leste

IMF News, November 7, 2016

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IMF team led by Ms. Yu Ching Wong visited Timor-Leste during October 24–28 to assess recent economic developments and discuss government policies.
Meetings included Finance Minister Ms. Santina Cardoso; Central Bank of Timor-Leste Deputy Governors Ms. Nur-Aini Djafar Alkatiri and Ms. Sara Lobo Brites; senior officials; private sector and civil society representatives; and development partners.
End-of-Mission press release conveys preliminary IMF staff findings; the mission will not result in a Board discussion.

Real non-oil GDP in 2016 is expected to grow at 5 percent, supported by government spending.
Consumer prices are expected to decline by 0.6 percent year on year in 2016, due to lower global food and oil prices.
The external current balance is expected to turn to a deficit of 9.9 percent of GDP in 2016, largely due to a sharp increase in imports related to increased public investments.
The near-term outlook is described as generally favorable with a continuing non-oil growth recovery accompanied by low inflation.

The supplementary budget approved in July 2016 doubled capital spending.
Additional capital expenditures of 15.6 percent of GDP have been allocated to projects under the infrastructure fund that are expected to advance ahead of schedule in 2016.
The overall fiscal deficit in 2016 is widened to 13.9 percent of GDP.
The increase in capital spending is financed through excess withdrawals from the Petroleum Fund (PF).
While the impact of current low oil prices to the PF is characterized as limited, projected withdrawals from the PF are above the estimated sustainable income levels, and the PF balance is expected to decline over the medium-term.
The investment returns of the PF are exposed to the volatility of global financial markets.

The medium-term outlook depends critically on economic diversification as oil fields in operation are expected to be depleted by around 2020.
Medium-term risks include whether the front-loading of public investment would generate sufficient social and economic returns to achieve inclusive growth and translate into higher tax returns and fiscal sustainability.

IMF’s past advice on the need for bold fiscal consolidation measures to ensure long-term fiscal and debt sustainability remains valid.
Recurrent spending can be further rationalized by containing the increase in current transfers.
Given resource and capacity constraints, the front-loading of capital spending warrants moderation despite the need to close the infrastructure gap.
Public investment should be better prioritized, focusing on projects with higher returns determined by rigorous investment appraisal to ensure more "bang for the buck" in tapping into the PF.
Authorities should consider creating a mechanism to enable multi-year capital commitments.
Updates to the Strategic Development Plan should include indicative costing to enable prioritization and selection.
Through closer consultation with multilateral and bilateral development partners, authorities can better anticipate the level of available concessional financing.
Authorities should consider developing a set of clear criteria to help identify public investment projects that would benefit additionally from knowledge transfer from partnership with multilateral and bilateral creditors.

Progress in customs and tax reforms to mobilize domestic revenues is welcomed.
On the introduction of a value-added tax (VAT):
- Broad consultation on the draft VAT Law with domestic stakeholders is recommended.
- An early start in strengthening tax administration capacity would help pave the way for a smooth implementation of the VAT.
The IMF stands ready to provide technical assistance, in coordination with other development partners, in the design and implementation of the VAT and other fiscal reform initiatives.

The banking system remains sound.
Private sector credit growth has continued to lag behind rapid deposit growth, leading banks to place excess deposits abroad.
Financial soundness indicators have improved:
- The banks’ non-performing loan ratio declined to 15 percent in September 2016 from 23 percent at end-2015, due largely to the resolution of legacy bad loans.
The IMF team welcomes steady progress in implementing the Financial Sector Master Plan aimed at raising financial inclusion and safeguarding financial stability.

Source: IMF press release "IMF Concludes Staff Visit to Timor-Leste", November 7, 2016.