IMF reveals Timor-Leste's fiscal sustainability at high risk - TATOLI Agência Noticiosa de Timor-Leste

DILI, 23 september 2022 (TATOLI)– A report from the International Monetary Fund reveals that Timor-Leste’s fiscal sustainability remains a key challenge amidst depleting oil revenues.

Timor-Leste is a country that depends on its petroleum revenues to finance its development, however, the main funding source for public spending is expected to cease in 2023.

Every year the Government of Timor-Leste has drawn the petroleum fund, for public spending, but the development of the important sectors continued to concern: “Significant gaps exist in health and education, and the lack of formal jobs and high youth unemployment are serious concerns,”

“The non-oil private sector economy remains underdeveloped, with informal and low-productivity employment. Moreover, Timor-Leste’s high vulnerability to natural disasters poses a fiscal risk. Amid Parliamentary elections in 2023, reaching
political consensus on how to respond to these challenges is very important,” The report said.

The report also suggested that the level of government spending should be reduced to protect the development of the country and the new generation.

“The level of government spending should be reduced while protecting the most vulnerable, sustaining vaccination efforts, and safeguarding investment crucial to development,”

For this step of the solution, the report explained that the expenditure ceiling is $2.1 billion, 75 percent higher than average
actual spending in 2017–2019 and three times larger than the estimated sustainable sources of revenue of $705 million.
Moreover, the decision to create a Fund worth $1 billion for the Veterans from the Petroleum Fund reduces the sources of
financing of the government.

Although COVID-19-spending is much lower than in 2020–21 as the pandemic situation has improved, the budget includes a remarkable increase in government transfers that are not targeted to the most vulnerable and do not increase the productive capacity of the economy. Vaccination efforts should
be sustained to mitigate the impact of potential COVID-19 outbreaks.

The other recommendations are Expenditure rationalization and revenue mobilization should underpin fiscal reforms, improving the quality of spending to improve the productive capacity of the economy and strengthening social safety nets for the most vulnerable is crucial, and Structural reform priorities to support private sector development include improving agricultural productivity, enhancing the business environment, strengthening
governance, tackling youth unemployment, facilitating financial deepening, and investing in climate-resilient infrastructure,” the report said.

The same concern was also revealed in the 2022 edition of the World Bank’s Timor-Leste Economic Report, saying therefore that Timor-Leste has to use and spend its petroleum fund rightly by investing in the next generation and the productive sectors to diversify the economy.

World Bank recommended two important steps to be taken by the government of Timor-Leste to properly utilize the petroleum fund.

“The first step is that the government needs to make better savings. For instance, if I got US$100 how should I use it
for people in the past or the future generation. The second thing is to increase revenues. It means that Timor-Leste needs to increase taxes to increase revenues. As you know that there’s a new Value-Added Tax (VAT) bill that will be passed this year or next year and that will increase the revenue and at the same time support the diversification of the economy to support the productive sectors of agriculture, and tourism,” Harborne said.

While in Last year, in his survey article entitled “Timor-Leste economic survey: The end of petroleum income”, Charles Scheiner states that as Timor-Leste nears the end of its petroleum-exporting era, the transition to a sustainable economy has become even more challenging due to partisan political competition, disastrous flooding, and the pandemic.

After a brief discussion of the political situation and the impacts of COVID-19, the survey explored expenditure and income trends in recent state budgets, with a particular focus on dependency on oil and gas revenues and their investments, which pay for 80% of state spending and may run out within a decade.

The article also assessed in detail revenue prospects from current and future oil and gas activities, including Greater Sunrise and the planned Tasi Mane petroleum infrastructure project. The analysis shows that it is highly likely that resource revenue will continue to decline. Diversification is not an option; it is the only way forward.

Journalist: Camilo de Sousa

Editor: Nelia B.

Journalist: Camilo de Sousa

Editor: Nelia B.