Timor-Leste Economic Report: Leveraging WTO Accession for Economic Transformation

Preliminary estimates from INETL, the Timor-Leste National Statistics Office, suggest that the economy grew by 2.3 percent in 2023, following growth of 2.9 percent in 2021 and 4.0 percent in 2022. The subdued economic growth in 2023 reflects the fiscal drag and low budget execution rates resulting from the Parliamentary Election and subsequent change in government. Private consumption increased by 3.2 percent, potentially fueled by substantial remittance inflows. The reliance on public sector-driven economic activity over the past decades has exerted a substantial influence on Timor-Leste's labor market dynamics. In particular, the decline in non-oil per capita GDP since the political impasse in 2017 has been reflected in a decrease in labor productivity. Accordingly, wage levels have significantly decreased, with those possessing higher levels of education experiencing a steeper decline. Persistent slow budget execution continues to hinder economic performance. By May 2024, approximately 25 percent of the total Central Government budget and 6 percent of the Capital and Development budget had been expended. These figures align with historical average execution rates of 25 percent and below 11 percent for the respective categories between 2015 and 2024. Substantially higher execution rates are necessary, though not necessarily sufficient, to achieve the desired higher levels of economic growth. The strengthening of the US dollar has contributed to an easing of price pressures, yet food inflation remains persistently elevated. In the first quarter of 2024, the Nominal Effective Exchange Rates appreciated by 1.0 percentage points due to the global strength of the US dollar. This partly helped ease inflation in tradable goods, which decreased to 4.7 percent in the first four months of this year from an average of 11.9 percent year-on-year during the same period last year. Nevertheless, despite stable or slightly increasing prices in most consumption categories, rice prices have risen substantially, driven by reduced international supply and slower domestic harvests due to unpredictable rainfall. The balance of the Petroleum Fund (PF) remained relatively stable. As of the end of March 2024, the PF's capital was valued at USD 18.45 billion, representing 11 times of the 2023 GDP, and reflecting a modest increase of 3.4 percent from USD 17.83 billion at the same time last year. This growth was driven by higher than-expected oil and gas prices in 2023, the payment of petroleum revenues from FY 2022 transferred to the Fund in FY 2023, and reduced withdrawals due to low budget execution amid the political transition.