structural reform agenda includes creat- ing a more supportive environment for TIMOR-LESTE Key conditions and private-sector-led growth and building a more climate-resilient economy. challenges Table 1 2021 Economic growth driven by public spend- Population, million 1.3 ing has generated low returns in the past Recent developments GDP, current US$ billion 1.7 and is fiscally unsustainable going forward. GDP per capita, current US$ 1283.8 Between 2013 and 2020, GDP growth aver- After a relatively slow start, the vaccination a 22.0 International poverty rate ($1.9) aged 0.3 percent per year, well below the campaign has accelerated rapidly. As of a 65.9 EAP average of 6.0 percent. Public spending March, 21, 2022, 72.5 percent of eligible Lower middle-income poverty rate ($3.2) a 28.6 skyrocketed in 2007-2016 and remained one adults are fully vaccinated while more than Gini index School enrollment, primary (% gross) b 112.5 of the highest in the world (71.2 percent of 85 percent adults have received at least one Life expectancy at birth, years b 69.5 GDP in 2020). But high public spending did dose. The government has started vaccinat- Total GHG Emissions (mtCO2e) 6.5 not boost growth as expected and led to a ing children and adolescents aged between large fiscal deficit of 18.2 percent of GDP in 12 and 18 years old. Booster shots have been Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2014), 2011 PPPs. 2020. The fiscal deficit can be financed using made available since early this year. Timor- b/ Most recent WDI value (2019). the Petroleum Fund (about 19 times 2021 Leste is in the early phase of the third wave GDP) in the short to medium term. Howev- of transmission primarily driven by Omi- er, the Petroleum Fund will be depleted by cron. Also, of concern is the surge of Dengue The economy is showing signs of moder- 2032 under current spending trajectories. cases. There have been some 20 deaths and Timor-Leste has had eight different gov- more than 3 000 reported cases of dengue ate recovery from the dual COVID-19 ernments since independence twenty years fever since January 2022. and natural disaster shocks in 2021. The ago. Recent political instabilities, particu- The country had a challenging year in 2021 economy is projected to grow by 2.4 per- larly in 2018 and 2020, have caused con- as the economy was adversely impacted by cent in 2022 on the back of public spend- siderable delays in the approval, promul- the surge of COVID-19 cases and major ing and a strong COVID-19 vaccination gation, and execution of the state budgets. flooding caused by Tropical Cyclone Seroja. Public investment declined by 17.9 percent High spending to respond these shocks has campaign. Risks to the outlook include and 49.1 percent in 2019 and 2020, respec- led to a budget deficit of 44.2 percent of GDP the recurrence of COVID-19 outbreaks tively. A political consensus around key in 2021, but authorities were only able to ex- and political uncertainty due to the up- policy and regulatory reforms to support ecute 71 percent of the allocated budget. The coming Presidential election. Long-term economic recovery and overcome socio- 2022 budget was opportunely approved economic challenges is urgently needed. and promulgated on time in December 2021 growth prospects remain contingent on Timor-Leste is vulnerable to natural haz- and January 2022, respectively. the ability of the Government to promote ards and ranked 20th amongst countries The dual shocks in 2021 might also increase private sector growth and to build a more with the highest disaster risks. The April poverty. Measured by an international climate-resilient economy. 2021 natural disasters and related recov- poverty line of US$1.90 per day per capita ery costs have eroded fiscal space and (2011 PPP), poverty was estimated to have undermined macroeconomic stability. The increased from 24 to 27 percent between FIGURE 1 Timor-Leste / Real GDP growth and contributions FIGURE 2 Timor-Leste / Actual and projected poverty rates to real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 10 90 1600 80 1400 5 70 1200 60 0 1000 50 800 -5 40 600 30 -10 20 400 10 200 -15 0 0 2018 2019 2020 2021e 2022f 2023f 2024f 2007 2009 2011 2013 2015 2017 2019 2021 2023 Private consump. Public consump. Investment International poverty rate Lower middle-income pov. rate Net exports Growth Upper middle-income pov. rate Real GDP pc Sources: Ministry of Finance and World Bank staff estimates. Source: World Bank. Notes: see Table 2. MPO 1 Apr 22 2019 and 2021. It is difficult to capture the COVID-19 infection rates. On the demand should help narrow the current account impact of COVID-19 at the household level side, a gradual rebound in private con- deficit. The financial account surplus will due to very limited data as the latest Timor- sumption, supported by public sector expand, although mainly due to divest- Leste Survey of Living Standard was in wages and personal benefit transfer, and ments of the Petroleum Fund used to cover 2014. According to the nationally represen- higher execution of Government expen- both the fiscal and current account deficits. tative Socio-Economic Impact Assessment diture will drive economic growth. Yet, Consumer price inflation is projected to (SEIA) 2.0 survey conducted by the General it is concerning to note that the sustain- gradually pick up, reflecting the increase Directorate of Statistics, Ministry of Finance able sources of revenue for the 2022 bud- in higher Government spending and the and the UNDP in July-August 2021, around get are set considerably below what is re- global energy prices. 40 percent of the employed population lost quired to cover even the recurrent spend- The presidential vote is scheduled on their jobs since the COVID-19 pandemic ing. Without major revenue reforms, fis- March 19 with a potential runoff for the outbreak in March 2020. As of March 2021, cal deficit is projected to hover at around two top candidates on April 19. There 90 percent of them reported that they were 40 percent of GDP in the medium term. is also a possibility of an early Par- back in employment. But this is character- Net exports will continue to be a drag liamentary elections in case the elected ized by informal work arrangements with on growth due to structural external sec- President is from the opposition. As the unstable earnings and low productivity. tor imbalances (lack of diversified exports country moves into an electoral period, and high import demand). policymaking and reform processes can External pressures will persist in the short be stalled. term, owing in part to import-intensive in- Risks to the forecast are skewed to the Outlook frastructure projects. Border re-openings, downside. Worsening of the political en- if carefully managed, will gradually sup- vironment, new waves of COVID-19, and The economy is projected to expand by 2.4 port the tourism sector. High oil prices and impact of climate changes and natural dis- percent in 2022 with the decline of slightly higher oil and gas production aster events could slow the recovery. TABLE 2 Timor-Leste / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 2.1 -8.6 1.6 2.4 2.8 3.0 Private Consumption 3.7 -2.5 1.6 2.9 3.7 3.8 Government Consumption 3.2 4.9 3.1 4.9 1.5 1.5 Gross Fixed Capital Investment -17.4 -42.5 19.5 12.3 13.1 14.0 Exports, Goods and Services -17.2 -51.1 13.1 11.8 13.8 14.0 Imports, Goods and Services -6.5 -8.5 5.6 9.8 6.4 7.0 Real GDP growth, at constant factor prices 2.0 -8.3 1.6 2.4 2.8 3.2 Agriculture 2.5 5.1 2.9 2.9 2.9 -1.2 Industry 4.8 -28.5 2.4 2.4 2.4 16.7 Services 1.2 -7.1 1.1 2.2 2.9 2.0 Inflation (Consumer Price Index) 0.9 0.5 3.8 2.5 2.6 2.3 Current Account Balance (% of GDP) 7.8 -19.3 -33.5 -42.7 -49.1 -55.4 a Fiscal Balance (% of GDP) -29.9 -26.1 -44.2 -46.2 -47.6 -51.6 b,c International poverty rate ($1.9 in 2011 PPP) 23.6 27.0 27.2 27.0 26.6 26.2 b,c Lower middle-income poverty rate ($3.2 in 2011 PPP) 67.4 70.5 70.6 70.4 70.1 69.8 GHG emissions growth (mtCO2e) 1.5 -5.7 1.8 3.2 3.8 3.9 Energy related GHG emissions (% of total) 9.7 9.5 9.6 9.7 9.7 9.7 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ The ESI is part of total revenue, while excess withdrawals from the PF is a financing item. b/ Calculations based on EAPPOV harmonization, using 2007-TLSLS and 2014-TLSLS.Actual data: 2014. Nowcast: 2015-2021. Forecasts are from 2022 to 2024. c/ Projection using annualized elasticity (2007-2014) with pass-through = 1 based on GDP per capita in constant LCU. MPO 2 Apr 22