Democratic Republic of Timor-Leste: 2013 Article IV Consultation

KEY ISSUESContext. The economy is very dependent on natural resources. Government spending,funded by oil exports, has driven rapid non-oil GDP growth but with high inflation, a lossof competitiveness, and weak employment generation. The political situation is relativelystable with elections in 2012 and the long-term UN presence has ended but fragilitiespersist as poverty remains high. The Strategic Development Plan guides policies, aimingfor upper middle-income status and significant poverty reduction by 2030.Outlook and Risks. Non-oil GDP growth should average around 8 percent assumingstructural reforms to catalyze the private sector and a sustainable fiscal stance. Key risksare: (i) fiscal slippages risk sustainability and inflation remains high, hamperingdiversification and poverty reduction; (ii) no agreement on the development of a majornew oil field leads to the end of oil production by 2024; and (iii) lack of inclusiveness andpoverty reduction results in social discontent and pressures for expansionary policies.Policy assessment. Policy discussions focused on shifting to a higher quality andpoverty reducing growth path with stability and sustainability. Policy challenges include:? Ensuring a sustainable level of public spending that is well targeted on projects withhigh socio-economic returns and calibrated to reduce inflationary pressures andimprove competitiveness.? Developing an asset-liability management framework linking debt accumulation withthe Petroleum Fund; avoiding off-balance sheet and non-concessional liabilities.? Enacting structural reforms to create an enabling environment, promote access tofinance, provide basic infrastructure, and investment in human capital.? Strengthening the Banco Central de Timor-Leste's prudential and supervisoryregime, preparing a crisis management framework, and developing a strategy for thefinancial system to support inclusive growth. Full dollarization remains appropriatefor now given limited capacity for independent monetary and exchange rate policies.