The Executive Board of the International Monetary Fund (IMF) concluded its 2024 Article IV consultation with Timor-Leste on December 10, 2024. The board endorsed the staff appraisal without a meeting, using a lapse-of-time basis.
In 2023, non-oil GDP growth in Timor-Leste slowed to 2.4 percent from the previous year's 4 percent, primarily due to fiscal policy constraints during an election year. However, inflation dropped significantly from an average of 8.4 percent in 2023 to just 0.6 percent by September this year, attributed to lower global food prices and the reversal of tax hikes introduced last year.
Looking ahead, economic growth is projected to rise to 3.4 percent in 2024 due to fiscal expansion and robust credit growth. A similar growth rate is expected for 2025 with continued fiscal expansion. Inflation is anticipated to ease further, averaging at 2.2 percent in 2024 and decreasing to 1.5 percent in the following year as global commodity prices moderate.
According to the IMF's assessment, "Fiscal expansion and strong credit growth are expected to support economic growth in 2024." The report anticipates that after a slowdown in the previous year, growth will increase to approximately 3.5 percent this year and sustain at about 3.4 percent next year due mainly to transfers with low multiplier effects.
Risks facing Timor-Leste's economy include potential global recessions affecting Petroleum Fund returns, climate events impacting food security, and political instability hindering foreign direct investment. Conversely, developing the Greater Sunrise oil field could enhance long-term exports.
The IMF advises that substantial savings within the Petroleum Fund should be utilized wisely for improving living standards since public spending relative to the economy has yielded modest development over recent years. They highlight that "Timor-Leste remains at moderate risk of overall and external debt distress," stressing that without addressing large fiscal imbalances, there is a risk of depleting the fund by the end of the next decade.
The IMF also suggests that public spending be reduced gradually while improving its quality and initiating domestic revenue mobilization promptly—particularly through introducing VAT by 2026—and recommends advancing Public Financial Management reforms alongside formulating a medium-term fiscal framework.
Moreover, financial sector reforms aimed at addressing structural lending bottlenecks are deemed crucial for private sector development. Legal reforms combined with issuing land titles are highlighted as urgent steps needed for realizing these changes' potential fully.
Finally, structural reforms should accompany ongoing efforts towards deeper integration into regional economies along with governance improvements focusing on rule of law vulnerabilities and enhancing anti-money laundering measures per recommendations from recent evaluations by Asia Pacific Group.