Press Release No. 06/225

Press Release: Statement by IMF Staff at the Conclusion of the 2006 Article IV Consultation Discussions with the Democratic Republic of Timor-Leste

October 20, 2006

The following statement was issued today by an International Monetary Fund (IMF) staff mission in Dili at the conclusion of the 2006 Article IV consultation discussions with Timor-Leste:

"An IMF mission led by Ms. Susan Creane, Deputy Division Chief in the Asia-Pacific Department, visited Dili during October 9-20, 2006, to conclude the Article IV consultation discussions with the Timor-Leste authorities. The team met with a wide range of people from the government, private sector, and civil society, to exchange views on recent economic developments and the medium-term economic outlook.

"Prior to the mid-2006 civil unrest and political turmoil, Timor-Leste had made good progress in establishing the basis for a stable and healthy economy. Its oil and gas wealth, if effectively used, offers the potential of a significantly more prosperous future. Unfortunately, the crisis has dealt a setback to the growth momentum. The mission finds that following the crisis, economic growth in 2006 is now likely to be somewhat negative, despite the expected end-year higher public spending and international aid. Crisis-related supply disruptions pushed inflation above the low rates previously achieved, with a resulting deterioration in international competitiveness. The crisis also contributed to a further worsening in the repayment of bank loans.

"The discussions considered the policies needed to resume the momentum toward lifting growth to a higher sustainable path to reduce poverty, strengthen human development, and avoid the oil curse. The mission recognizes the short-term need to alleviate losses related to the crisis. At the same time, it also notes the need to resume as quickly as possible the authorities' medium-term development strategy by focusing on the following core policies: a) adherence to the long-term petroleum revenue saving policy supported by the Petroleum Fund; b) an increase in prioritized development spending under the sector investment programs; c) the maintenance of a monetary and exchange rate regime that preserves macroeconomic stability; and d) the rapid establishment of the environment needed to promote private sector investment and activity. Important progress had been made prior to the crisis, and the mission welcomes the authorities' intention to implement fully this sound strategy.

"The mission estimates that annual economic growth rates of 7 percent or more are needed to significantly reduce poverty. We are encouraged by the government's recognition that achieving this will be a challenging task, and we note the wide range of initiatives being taken to bolster strong sustainable growth. The mission is also encouraged by recent measures to ease budget execution constraints to step up well-targeted public investment in infrastructure and human capital and to strengthen administrative capacity. At the same time, it is important that current spending is well-targeted to the neediest segments of the population and that steps are taken to guard against excessive demand pressures that could entrench inflation, with implications for competitiveness of the non-oil economy.

"Over the longer-term, however, growth and job creation must come from the non-oil private sector. To that end, concerted action is needed to create a business-friendly environment, including the necessary legal structure and a reduction in red-tape.

"The IMF mission wishes the government and the people of Timor-Leste every success and stands ready to assist in their efforts to recover from the crisis and to build a strong economy in support of poverty reduction and rapid human development."