Publication: Timor-Leste: Pathways to Economic Diversification - Country Economic Memorandum 2023
Date
2023-05-03
ISSN
Published
2023-05-03
Author(s)
World Bank
Abstract
Timor-Leste has made important
development gains since independence in 2002 but is now at a
critical juncture. The government has successfully rebuilt
public infrastructure, reduced poverty, and quickly built
from scratch a network of functional public institutions.
Despite these achievements, there is an urgent need for
private sector-centered development that is not dependent on
the oil sector. Receipts from sales of hydrocarbons have
been the main source of government revenues, but their
contribution to the economy is decreasing, raising the
urgency for economic diversification. High public spending
has not translated into strong and sustained economic
growth. Furthermore, depleting oil reserves signal an
urgency to reduce economic dependence on oil. The public
sector-driven growth model has run its course and is
fiscally unsustainable. The excessive public spending level
led to an astronomical fiscal deficit of 45.3 percent of
non-oil gross domestic product (GDP) in 2021. This fiscal
stance entails significant risks that bring the country
toward a damaging fiscal cliff in 2035. Albeit narrowing,
there is a window of opportunity for the government to
urgently implement the much-needed reforms in the next five
years. There are several potential drivers for increased
regional integration. These include the operationalization
of the Tibar Bay port, the modernization of the Dili
airport, the internet submarine cable installation, and the
World Trade Organization (WTO) accession progress. Success
requires a concerted and persistent government effort to
address supply-side constraints, kick-start economic
diversification, and boost export. This report provides an
in-depth analysis of Timor-Leste’s economic performance in
recent decades and proposes policies to enhance growth. It
highlights two key interrelated constraints to sustained and
inclusive growth: the ‘missing’ private sector and the need
to tap into the growth-enhancing benefits of international
trade. Given the diminishing returns of public investments,
pursuing a sustainable development path will require a shift
toward a more dynamic, private sector-driven growth model.
Furthermore, with the right combination of a supportive
enabling environment and trade policies, Timor-Leste could
capitalize on incipient and established comparative
advantages for its exports. Accordingly, the reforms to
support private sector development and expand exports have
the potential to boost Timor-Leste’s international
competitiveness and improve economic diversification.
Link to Data Set
Citation
“World Bank. 2023. Timor-Leste: Pathways to Economic Diversification - Country Economic Memorandum 2023. © Washington DC. http://hdl.handle.net/10986/39780 License: CC BY-NC 3.0 IGO.”