Economic growth in Timor-Leste remained high in 2012, buoyed by a large increase in government spending. Double-digit growth is expected to continue in 2013 and 2014 with modest declines due to planned fiscal tightening. Inflation moderated from 2011 but remained above 10%, prompting the government to postpone some infrastructure initiatives. The biggest challenge facing leaders is to effectively channel petroleum revenues into ambitious plans to build infrastructure and human resources while sustaining the Petroleum Fund.

Economic performance

Strong economic growth continued in 2012, with non-oil gross domestic product (GDP) expanding by 10.6%. Government spending, particularly on public infrastructure, continued to drive the economy. This spending propelled growth both directly and indirectly through spillover effects on non-oil business investment and demand for the goods and services provided by private businesses. Government expenditure totaled $1.8 billion, up by 64.8% from 2011. The United Nations Mission in Timor-Leste departed at the end of 2012, but this appears to be having little impact on economic activity, as only 1% of GDP was linked to it and government spending has continued to rise.

Inflation in 2012 remained high at 10.9% (annual average basis) but moderated from 13.1% in 2011. This reflected easing world food prices and lower import costs with the strengthening of the US dollar, which Timor-Leste uses as its official currency, against the currencies of some of Timor-Leste’s important trade partners. Government spending in the face of persisting bottlenecks and spending linked to the midyear elections countered some of the deflationary impact of these external developments.

Source: ADB estimates.

Economic prospects

Strong economic growth is expected to continue in 2013 and 2014, driven largely by government expenditures and more modest rises in investment outside the petroleum sector. Total budgeted expenditures of $1.6 billion make the government’s 2013 budget 8.8% lower than in 2012. However, economic growth is projected to continue at about the rate observed in 2012, as the budget, if fully executed, would push actual expenditure up 38% from 2012 actual expenditures. Actual government expenditures have been consistently below budgeted levels in recent years.

High inflation is consistent with the economy’s high rate of growth. Inflation is projected to remain high at 9.0% in 2013, but this is lower than in 2012, reflecting some success in the government’s efforts to stem inflation. These efforts include postponing planned expenditures on the Tasi Mane project and a new national development bank in 2012. Another factor seen to moderate inflation is the dissipation of inflationary pressures from one-time events that raised prices in 2012, including election-related spending and increased congestion at Dili’s international port. Inflation is projected to continue to moderate to 7.7% in 2014, despite planned increases in government spending, as more public infrastructure comes online, supply chain bottlenecks are addressed, and the entry of new businesses increases competition in wholesale and retail markets.

Source: ADB. 2013. Asian Development Outlook 2013. Manila.

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