May 2021 Timor-Leste Economic Report: Charting a New Path

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Key findings:

• COVID-19 is spreading quickly throughout the country, despite early successes in containing the virus. Meanwhile, flooding and landslides have caused considerable human loss and economic damage. These compounding health and humanitarian emergencies are undermining the economic recovery in 2021, but the recent approval of a revised budget can alleviate the negative impacts.
• Estimates suggest that the economy contracted by about 7 percent in 2020, the largest decline since independence. Public health measures and lower consumer confidence weakened private consumption, while political uncertainty in early 2020 undermined public spending – by delaying the approval of the 2020 budget. Moreover, international travel restrictions hampered exports of services.
• Public expenditure declined by 9 percent in 2020. Capital spending nearly halved, but public transfers increased to support households. Domestic revenues suffered from lower economic activity. The fiscal deficit eased to 26 percent of GDP – mostly due to lower spending – but remains very large. The deficit was largely financed by withdrawals from the Petroleum Fund.
• Exports nearly halved, owing to limited travel services but also lower coffee earnings.
• GDP is forecast to grow by 1.8 percent in 2021, which is lower than the 3.1 projected in October 2020. The economy is expected to recover in the medium-term, but structural constraints will remain an impediment to faster growth. Reforms to boost productivity and competitiveness are critical.
• COVID-19 remains the key risk to the outlook, as it may require prolonged containment measures to avoid large human losses. A swift vaccination rollout is more critical than ever. 
• COVID-19 and recent floods have highlighted and exacerbated underlying weaknesses in Timor-Leste’s health system. Disruptions to health and nutrition services arising from these crises may have a multiplier effect on access to care for routine and essential care, setting back the country’s progress on health outcomes and human capital development.
• Key interventions to improve health service delivery include increasing investments in primary health care and improving the skills-mix and competencies of health workers. Investing in emergency preparedness will also be key to effective management and response to future crises.