DILI, 23 March 2026 (TATOLI) — Timor-Leste’s economy is expected to grow 5% in 2026, supported by improved budget execution, stronger private sector activity and ongoing structural reforms, accoridng to the country’s central bank Economic Performance Report released Monday.
Growth is expected to be driven by more effective fiscal spending, higher economic absorption capacity and reforms aimed at shifting toward private sector-led development. Stronger household consumption and rising private investment are also set to support the outlook.
For 2025, the economy was estimated to grow 4.6%, underpinned by expansionary fiscal policy, robust government spending and elevated public investment, particularly in infrastructure.
Despite the positive outlook, the Banco Central de Timor-Leste (BCTL) warned the economy remains heavily reliant on public spending, with limited contributions from private investment and export-oriented sectors.
“Non-oil exports remain concentrated in a small number of products and at a limited scale,” the report said, citing persistent challenges in competitiveness and diversification.
Structural bottlenecks, weak absorption capacity and a narrow export base continue to channel rising demand into imports, resulting in sustained trade and current account deficits, it added.
Inflation fell sharply in 2025 to an average of 0.5%, reflecting lower global commodity prices, easing food costs and favorable exchange rate movements. However, the central bank said subdued inflation also points to weak domestic supply responses and continued dependence on imports in the fully dollarized economy.
While lower inflation has supported purchasing power, the country remains exposed to external shocks.
Fiscal policy stayed expansionary in 2025, with a larger approved budget and some improvement in execution. Public investment remained focused on infrastructure, though its impact on domestic growth was limited by the high import content of projects.
Non-oil revenue collection has improved, but the budget continues to rely heavily on transfers from the Petroleum Fund. The report warned that sustained withdrawals pose risks to long-term fiscal sustainability and intergenerational equity.
Financial conditions were broadly stable, but credit to the private sector remained concentrated in construction and trade. Lending to productive sectors such as agriculture, manufacturing and tourism was weak or declining, while high interest rates continued to constrain investment.
Money supply contracted in 2025 due to slower deposit growth and tighter fiscal liquidity, rather than monetary policy changes. A strong U.S. dollar helped contain imported inflation but weighed on export competitiveness, reinforcing reliance on imports.
While near-term prospects remain favorable, BCTL warned that the current growth model faces increasing risks to fiscal sustainability, external resilience and job creation.
“A gradual but decisive shift toward a private sector-led, investment-driven growth model is needed,” the report said, urging for faster structural reforms to boost productivity and diversify the economy.
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