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Democratic Republic of Timor-Leste: Staff Report for the 2017 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
December 2017
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Fund Relations

(As of October 20, 2017)

Membership Status

Joined: July 23, 2002; Article VIII

General Resources Account
SDR MillionPercent Quota
Quota25.60100.00
Fund holdings of currency21.2583.01
Reserve position in Fund4.3517.00
SDR Department
SDR MillionPercent Allocation
Net cumulative allocation7.73100.00
Holdings3.4043.98

Outstanding Purchases and Loans: None

Latest Financial Arrangements: None

Projected payments to Fund:

(SDR Million; based on existing use of resources and present holdings of SDRs)

Forthcoming
20172018201920202021
Principal
Charges/Interest0.010.020.020.020.02
Total0.010.020.020.020.02

Exchange Rate Arrangements

The exchange rate arrangement (de jure and de facto) is an exchange arrangement with no separate legal tender. On January 24, 2000, the U.S. dollar was adopted as the official currency of then East Timor by the United Nations Transitional Administration in East Timor (UNTAET). This arrangement has been maintained after Timor-Leste’s independence on May 20, 2002. At present, the monetary authority does not undertake foreign exchange transactions; they are handled by commercial banks on the basis of rates quoted in the international markets. Timor-Leste has accepted the obligations under Article VIII, Sections 2(a), 3 and 4, and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

Article IV Consultations

Timor-Leste is on a 12-month consultation cycle. The last Article IV consultation was concluded on May 11, 2016. The press release and staff report may be found at http://www.imf.org/en/Publications/CR/Issues/2016/12/31/Republic-of-Timor-Leste-2016-Article-IV-Consultation-Press-Release-Staff-Report-and-44006.

Technical Assistance (TA) and Training

TA has been provided by HQ based staff and experts in collaboration with the Pacific Financial Technical Assistance Centre (PFTAC), in close collaboration with development partners. Significant TA has been provided in areas of public financial management, including on critical calculations for Estimated Sustainable Income (ESI). TA on statistics is continuing including on the Government Financial Accounts and external sector statistics. Current and planned technical assistance is described in more detail below:

Fiscal Affairs Department(FAD)/PFTAC: Significant TA has been provided to the Ministry of Finance on treasury and expenditure management, developing non-oil revenues, and the ESI calculation. The ESI is a key input to the budget and IMF assistance in this area has played an important role in maintaining the credibility of the fiscal rules-based approach. In collaboration with PFTAC, a Public Investment Management Assessment was conducted in Dili in July, 2016 and a Public Financial Management scoping mission conducted in October 2017.

FAD/Institute for Capacity Development (ICD)/PFTAC: Representatives from Timor-Leste participated in a high-level dialogue in June 2015 that was co-hosted by the IMF and the Government of Fiji in Nadi, Fiji, which focused on strategies and policies to make Pacific Island economies more resilient to natural disasters. It was preceded by a three-day workshop on fiscal framework organized by the IMF and PFTAC with funding from the Australian Government. The workshop was designed to give mid-level officials responsible for fiscal planning an overview of key elements of the fiscal planning process, with a focus on strengthening the linkages between policy formulation, planning and execution. Timor-Leste officials also participated in the High-Level Pacific Island Dialogue and Workshop on Building Resilience to Natural Disasters and Climate Change, co-hosted by the Fund and the Government of Fiji, with funding support from AsDB, JICA, and the IMF, in April 2017.

Monetary and Capital Markets Department (MCM): Recent TA has focused on the financial sector and on the Petroleum Fund as it develops its investment strategy to encompass a wider range of investments. In November 2013, an MCM TA mission to the Central Bank of Timor-Leste (BCTL) assessed gaps in institutional capacity in key areas—banking supervision, crisis management, payments system, and research and analysis. This laid the basis for a multi-year TA work program on financial sector issues that is currently being discussed with the authorities and development partners. There is also scope for follow up work on enhancing the Petroleum Fund’s investment strategy.

MCM/PFTAC: Two missions to Timor-Leste were conducted by PFTAC’s Financial Supervision Sector during the first half of 2014, aimed at reviewing the status of the country’s non-bank sector. This was followed in 2015 with the drafting of a Credit Union Act, with the assistance of the IMF Legal Department An on-site examination program was initiated in mid 2015 with the support of a short-term expert who provided training with on-site examination preparedness and provided support with the execution of the on-site examination of a commercial bank. In consultation with the BCTL, PFTAC continued to provide technical support to the Supervision Department by implementing a banking supervision training program in 2016, aimed at providing the staff with the tools required to adequately perform the examination of a financial institution. The credit union program resumed in 2016 with the staging of a workshop on credit union financial reporting. This also included a training component for the staff of the BCTL on how to adequately perform the oversight of the credit union sector.

Statistics Department (STA)/PFTAC: Recent missions have focused on: (i) government finance statistics as part of an ongoing project regarding the compilation of fiscal data for operational and statistical purposes and publishing Timorese data in the International Financial Statistics; and (ii) balance of payments including on ensuring compliance with the Balance of Payments and International Investment Position Manual (BPM6). The latest GFS/PFTAC mission was in February 2017 and focused on improving the compilation and dissemination of annual and quarterly government financial statistics in line with the GFSM2014. The national accounts statistics have been supported in the last few years by donor-funded experts and the Australian Bureau of Statistics and PFTAC has had reduced involvement other than having staff attend training workshops. Officials from BCTL, Ministry of Finance and Genera Directorate of Statistics participated in the PFTAC Regional Workshop on Compiling and Forecasting GDP in Fiji in October 2017.

Singapore Training Institute (STI): Government officials from Timor-Leste attend IMF training courses on macroeconomic and financial policies offered by the STI, both in Singapore and in the region.

Summary of Recent Technical Assistance:

  • High-Level Pacific Island Dialogue and Workshop on Building Resilience to Natural Disasters and Climate Change (IMF/AsDB/JICA)—2017

  • Government Finance Statistics (STA)—2013, 2017

  • Public Investment Management Assessment (FAD)—2016

  • Peer review of draft Value Added Tax Law (FAD, LEG)—2016

  • Banking Supervision and Regulation (PFTAC)—2015; Draft Credit Union Act (LEG)—2015

  • High-Level Dialogue on Building Resilience to Natural Disasters and Workshop on Strengthening Fiscal Frameworks (APD/FAD/ICD/PFTAC)—2015

  • Estimated Sustainable Income (FAD)—2014, 2015

  • Balance of Payments Statistics (STA)—2013, 2015

Resident Representative

The resident representative office in Dili, established in August 2000, closed at end-June 2009.

World Bank—IMF Collaboration

The World Bank Group assistance to Timor-Leste is guided by the Country Partnership Strategy (CPS) that was approved by the Executive Board in February 2013. The CPS outlines a program that supports Timor-Leste by utilizing financing available from IBRD and IDA and trust fund resources to support investments in critical infrastructure that reduces poverty and boosts shared prosperity, improve service delivery and effective macroeconomic, social and fiscal management

The Bank and Fund country teams for Timor-Leste, led by Mr. Macmillan Anyanwu (World Bank Country Representative) and Ms. Yu Ching Wong (IMF mission chief), are cooperating closely on macroeconomic and macro-critical structural reform issues. The Bank’s country economist, Mr. David Knight, participated in the 2017 Article IV consultation mission.

Timor-Leste’s main macroeconomic challenges lie in developing a stronger non-oil economy that creates employment, reduces poverty and safeguards long-term fiscal sustainability. Both teams agreed that to meet these challenges, Timor-Leste needs to shift to a sustainable and poverty reducing growth path while ensuring macroeconomic stability. Achieving fiscal sustainability will require prioritization of public investments through rigorous investment appraisal and further strengthening of public financial management, mobilizing non-oil revenues, and adhering to a medium-term fiscal consolidation plan. An acceleration of reforms to promote productivity and competitiveness is also important.

The two teams have worked closely on the following:

  • Macroeconomic developments and economic updates: There has been close dialogue throughout the year on macro policies and economic developments. There is regular sharing of information and development of common policy recommendations.

  • Growth prospects and economic diversification: The teams exchanged views on potential areas of structural reforms and key policies to support economic diversification away from the oil sector. The Bank’s forthcoming Timor-Leste Systematic Country Diagnostic will outline key priorities to support growth and economic diversification.

  • Fiscal sustainability and investment management: Both teams highlighted long term fiscal sustainability as a major challenge facing Timor-Leste, particularly in light of the recent large withdrawals in excess of the estimated sustainable income from the Petroleum Fund. Following the Infrastructure Public Expenditure Review published in March 2015, the World Bank is working with the authorities on a macro-fiscal public expenditure analysis note. The Public Investment Management Assessment was conducted jointly in July 2016 and advised on public investment institutions and practices, especially related to planning, appraisal, selection and implementation of investments. The Fund and the Bank stand ready to provide further support on fiscal policy and public expenditure analysis.

  • Domestic revenue mobilization: Both teams have discussed domestic revenue mobilization potential and policy reforms underway. The Fund and the World Bank, respectively, peer reviewed the draft VAT Law during which the draft was circulated for consultation with stakeholders in 2016. The Bank is providing technical assistance to the authorities on domestic revenue mobilization reform. Both institutions stand ready to provide further assistance to support the implementation of key aspects of the government’s fiscal reform program.

  • Debt management: The teams have continued to engage closely on the Timor-Leste government’s strategy to more effectively utilize external concessional financing and jointly recommend the need to strengthen debt management systems and strategy. The Bank has provided a debt management technical assistance mission in June 2017. The Bank and the Fund stand ready to further provide complementary technical assistance upon government’s request.

  • Debt Sustainability Analysis. A DSA was collaboratively updated and was jointly presented during the Article IV consultation mission in October 2017. The Fund has recently completed the Review of the joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC DSF). In preparation for the revised framework to become operational on July 1, 2018, [the Fund/Bank] will deliver training for officials.

The teams agreed to continue the close cooperation going forward. The Table below details the specific activities planned by the two country teams in 2017-18 period.

TitleProductsProvisional TimingExpected Delivery of Output
1. Bank Work ProgramSupport to Living Standards Measure Survey and Poverty Profile

Support to Poverty Analysis

Macro-fiscal public expenditure analysis

Systematic Country Diagnostic

Timor-Leste half-yearly economic report
Completed

Ongoing

Ongoing

Ongoing

Planned
June 2018

November 2017

December 2017

December 2017
2. Fund Work Program2018 Article IV Consultations

Financial institutions supervision enhancement TA

PFM reform TA

Government Finance Statistics TA

External Sector Statistics TA
Staff visit in April 2018 and Article IV mission in September 2018

Planned

Ongoing

Ongoing

Ongoing
December 2018
3. Joint Work ProgramDSA update

Domestic revenue reform TA

Debt management TA
September 2018

Ongoing

Ongoing
December 2018

Relations with the Asian Development Bank

(As of October 2017)

Timor-Leste joined the Asian Development Bank (AsDB) in 2002. The relationship has evolved from an initial focus on rehabilitation and reconstruction to development of the infrastructure and institutional capacity needed for growth and poverty reduction. AsDB is supporting the implementation of Timor-Leste’s Strategic Development Plan 2011–2030 (SDP). AsDB’s support to Timor-Leste is guided by a country partnership strategy guided for the period 2016–2020. The strategy aims to support the growth of a sustainable non-oil economy through carefully targeted investments in the infrastructure, human resources, and institutions to support inclusive private sector led growth.

Timor-Leste first accessed the Asian Development Fund (ADF) in 2005. The ADF has provided grants for road rehabilitation, water supply and technical and vocational education and training projects. AsDB has also worked closely with the government to build capacity for infrastructure management and is currently helping the government to develop prioritized plans to improve transport connectivity, expand access to clean drinking water, and increase the efficiency of the electricity sector. AsDB is also providing a range of technical assistance to support growth and economic diversification. This includes helping Timor-Leste to prepare for membership of the Association of Southeast Asian Nations, develop a competitive financial sector, and develop the coffee and forestry sub-sectors.

The AsDB helped establish the Institute of Microfinance in Timor-Leste, which, in July 2011, became the country’s first locally owned commercial bank, the Banco Nacional Comércio de Timor-Leste (BNCTL). AsDB continues to support the growth and commercialization of BNCTL and is also helping the government to establish a legal framework for bankruptcy and secured transactions. The AsDB provided technical support for the establishment of the Petroleum Fund and other core elements of public sector management. Recent support for public financial management has focused on fiscal reforms and has included fiscal policy analysis, assessment of the governance frameworks for autonomous public agencies, and the design of a new value added tax. As part of its support to the energy and water sector reforms, AsDB is also assisting the Government in reviewing the performance of basic services, namely water and electricity, and exploring institutional options to build capacity for efficient and sustainable service delivery, thereby reducing the burden on the Government’s budget.

The availability of AsDB resources increased following Timor-Leste’s reclassification as a group B member country in 2011. This change enabled Timor-Leste to access AsDB’s market based lending resources while retaining access to the concessional lending window. There has been a further increase in resource availability following the merger of the balance sheets for AsDB’s OCR and ADF lending operations in 2016. Since 2011, Timor-Leste has borrowed US$91.86 million on concessional terms and a further US$135.63 million on market-based terms to finance upgrading of national roads. Further lending for investment in roads, urban water supply and electricity services is planned for 2017–2019. AsDB continues to promote the provision of a range of infrastructure services, by the private sector and will help the government to leverage private sector expertise.

The indicative concessional lending allocation for 2018–2020 is US$74.28million and the indicative OCR allocation for 2016–2018 is US$218.00 million. Actual allocations will depend on demand and on portfolio performance.

Statistical Issues

(As of October 2017)

I. Assessment of Data Adequacy for Surveillance
General: Data provision to the Fund has serious shortcomings that significantly hamper surveillance. The main data weaknesses are in national accounts and there is a need to improve the periodicity and timeliness of GDP data. The enhancement of the General Directorate of Statistics within the Ministry of Planning and Finance is an ongoing priority.
National Accounts: GDP is compiled using a contemporary base period (2015), however estimates are not timely. Net exports in the Balance of Payments and national accounts diverge due to an inconsistent classification of petroleum production undertaken in the Joint Petroleum Development Area.
Price Statistics: The monthly, national CPI uses expenditure weights derived from the 2011 Household Income and Expenditure Survey. Data are also released monthly for Dili, and regions other than Dili.
Government Finance Statistics: Annual and quarterly GFS is compiled and disseminated: annual data for 2010–2015 are reported for Government Finance Statistics Yearbook, and quarterly data are disseminated in the quarterly fiscal bulletin. PFTAC is currently providing capacity development support through a GFS resident advisor.
Monetary and Financial Statistics:

The Banco Central de Timor-Leste (BCTL) compiles monetary statistics generally following the methodology of the Monetary and Financial Statistics Manual. However, data are incomplete because of the absence of official data on public currency holdings—which are difficult to compile under the current currency regime—and of banks’ positions with public nonfinancial corporations.

The BCTL reports detailed monthly monetary data for the central bank and other depository corporations using the standardized report forms (SRFs). Data for other financial corporations, mainly insurance companies, are not compiled. An integrated monetary database meeting the monetary data needs of the BCTL, APD, and STA is in operation.
Financial Sector Surveillance: Only basic market based indicators are available, and their coverage, valuation and timeliness vary across such indicators. Data are not sufficiently available to conduct stress tests of the banking system or Balance Sheet Approach analysis. Cross border exposure data for financial corporations are not available. Financial soundness indicators are not reported to STA.
External Sector Statistics (ESS): While progress has been made, measuring non-Petroleum Fund-related current account transactions accurately remains a work in progress. Monthly merchandise trade data are now published regularly but there are significant gaps in the series for 2006 and 2007. Data on monthly merchandise exports and imports are based on the Automated System for Customs Data (ASYCUDA). Service transactions are largely estimated with data collection largely limited to the official and tourism sectors. Interest revenue from oil/gas is recorded as primary income.

Quarterly balance of payments and international investment position (IIP) data are available for 2006–Q1/2017. While methodology to produce basic annual estimates of the balance of payments statistics are in place, further development is needed to address limitations of existing data sources, in particular, merchandise trade statistics and service transactions. This includes work to ensure consistency between current account data and the new National Accounts Statistics, particularly related to the exports of commodities and imports of services.

There is limited information on remittances from Timorese working abroad and improvement in the estimation and compilation procedures of such remittances should be pursued.

The October 2015 External Sector Statistics (ESS) Technical Assistance (TA) Mission assessed the progress made in the improvement of Timor-Leste’s ESS during the JSA ESS Project and found that important progress regarding coverage, periodicity, timeliness, and methodology of ESS have been made. However, there are still important recommendations pending implementation. Important improvements have been made on the integrated international investment position (IIP); the treatment of the Petroleum Fund’s positions; and IMF-related accounts (reserve position in the IMF, SDR allocations, and SDR holdings). Progress was also verified on actions toward Timor-Leste’s participation in IMF’s Coordinated Direct Investment (CDIS). However, the recommendation on improving the coverage of the direct investment survey to include Joint Petroleum Development Area (JPDA) companies’ equity valued at own funds at book value was not implemented. Also, the treatment in ESS of the JPDA companies’ activities consistent with national accounts, is still pending. According to the BCTL officials, this is due to the difficulty of obtaining source data from the National Petroleum Authority (NPA).
II. Data Standards and Quality
Timor-Leste began participating in the IMF’s General Data Dissemination System (now the enhanced GDDS) in 2012, marking a major step forward in the development of its statistical system.No data ROSC is available.
III. Reporting to STA
Data on government finance statistics is available in the GFS Yearbook for the 2015. Timor-Leste do not report to the Quarterly Public Sector Debt database (QPSD), jointly developed by the World Bank and IMF. Beginning in February 2008, monetary data have been reported to the IMF for publication in the IFS. Quarterly balance of payments and IIP data are reported timely to STA for publication in the IFS.
Table of Common Indicators Required for Surveillance(As of October 31, 2017)
Date of latest observationDate receivedFrequency of Data6Frequency of Reporting6Frequency of Publication6
Exchange Rates10/201710/2017DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities109/201710/2017MMM
Reserve/Base Money09/201710/2017MMM
Broad Money09/201710/2017MMM
Central Bank Balance Sheet09/201710/2017MMM
Consolidated Balance Sheet of the Banking System09/201710/2017MMM
Interest Rates209/201710/2017MMM
Consumer Price Index08/201710/2017MMM
Revenue, Expenditure, Balance and Composition of Financing3 – General Government4201610/2017AAA
Revenue, Expenditure, Balance and Composition of Financing3– Central Government201610/2017AAA
Central Government and Central Government-Guaranteed Debt201610/2017AAA
External Current Account BalanceQ2/20178/2017QQQ
Exports and Imports of Goods and ServicesQ2/20168/2016MMM
GDP/GNP201504/2017AAA
Gross External Debt12/20163/2017QQQ
International Investment Position5Q2/20178/2017QQQ

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Market-based rates, including lending and deposit rates.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and st and local governments.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); NA: Not Available.

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Market-based rates, including lending and deposit rates.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and st and local governments.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); NA: Not Available.

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