Spending and increasing domestic revenue is crucial to promote inclusive and sustainable economic growth in Timor-Leste, according to a newly released World Bank report.
Better spending in health and education is key, as these sectors play an essential role in the country’s long-term development and the fight against poverty, the World Bank’s Timor-Leste Public Expenditure Review 2021 points out.
While economic growth has slowed over the past decade, the country now has some of the highest rates of public expenditure in the world – nearly 90 per cent of gross domestic product (GDP).
Domestic revenue collection is low at 8 per cent of GDP compared to a 15 per cent average for the region. This imbalance in income and expenditure has resulted in a large budget deficit which threatens fiscal sustainability.
“This report comes at a time when the Ministry of Finance is working on public finance management reform, which is a key priority of the program of [Timor-Leste’s] 8th constitutional government. Indeed, this exercise gives us clear warnings that the distance to a fiscal cliff will become shorter if Timor-Leste’s public expenditure continues to grow at the current pace [28 per cent per year], [then] we will continue to live with large budget deficits, threatening fiscal sustainability. A reality that requires significant deceleration in current expenditure today rather than having to reverse it later when the petroleum wealth becomes scarce,” the World Bank quoted Finance Minister Rui Augusto Gomes as saying.
The report highlights the need to improve the quality of public spending, especially in areas related to human capital. Increases to health and education spending over the years has enabled critical investments but has not translated into markedly better service delivery.
Timor-Leste lags behind the region with high child stunting rates and poor-quality education infrastructure, despite relatively high budget outlays of 7-8 per cent of GDP. Better budgeting and resource mobilisation can improve outcomes in these areas, according to the report.
“Timor-Leste has been very successful in creating a Petroleum Wealth Fund from oil and gas revenues. However, our review shows that under current spending, the petroleum fund could be depleted by the end of the decade. Therefore, it is important that the country uses its reserves wisely to support and diversify its economy and it uses its revenues more efficiently and effectively,” the report quoted Bernard Harborne, World Bank country representative for Timor-Leste, as saying.
The report outlines policy options to help Timor-Leste increase revenue collection and improve efficiency of spending to maintain more sustainable economic growth.