(Image/World Bank)

DILI, 18 May 2020 (TATOLI) – Disruptions to trade and travel caused by COVID-19 are expected to pull the Timor-Leste economy down sharply in 2020, with the World Bank predicting a five per cent contraction by year’s end.

In its bi-annual economic report A Nation Under Pressurethe bank predicts a 4.8 per cent contraction in 2020.

The prediction – which the bank cautions is “highly uncertain” – is sharply down from its March 31 forecast (a 2.8 per cent retraction), and compares with 3.4 per cent growth in 2019.

The report praises the country’s response to COVID-19, but notes that it will further tighten public spending, after the failure of parliament to pass the 2020 General State Budget (OJE).

Related news: Petroleum Fund Dips 10 per cent as Economic Downturn Bites 

“The COVID-19 pandemic, with its associated health and economic impacts, has created a ‘perfect storm’ that requires bold policy action and (importantly) a political consensus to avert the deepest economic shock in Timor-Leste’s history since independence,” the report notes.

Timor-Leste has adopted strict measures to contain the spread of the virus, enacting a state of emergency which suspends public gatherings, mass transit and closes the country’s borders to foreigners.

The government approved a USD $250 million withdrawal from the Petroleum Fund, 60 percent of which allocated to a “COVID-19 Fund” to tackle the pandemic.

The measures have ultimately been successful, with no reported deaths and all 24 patients with confirmed cases recovering.

But the World Bank warns that the public health measures “may also induce considerable human costs”.

Related news: Boosting the Private Sector key to Sustainable Growth: UNPAZ Rector 

“The Government of Timor-Leste is to be commended for its swift action in containing the health-related impacts of the COVID-19 pandemic,” said Macmillan Anyanwu, Country Representative for Timor-Leste.

“It is critical now to strengthen the capacity of the health system, protect vulnerable households, support affected businesses, and ensure the continuity of public services.”

A short-lived return to economic growth

According to the report, the key driver of economic activity in 2019 was ‘final consumption’. Economic growth recovered last year from a “self-inflicted recession” in 2017-18, with the recovery was largely driven a growth in by public expenditure (up five per cent, compared with 2018)

However, only 84 per cent of the 2019 budget was spent – the lowest level since 2013.

Related news: Government Spending Drives up TL’s Economic Growth: World Bank 

Some of the lowest execution rates, the bank notes, were found in ministries tasked with economic development: Ministry of Tourism, Commerce and Industry (69 percent), Ministry of Planning and Strategic Investment (73 percent), and Ministry of Transport and Communications (76 percent).

“Although these ministries have relatively small budgets, low execution rates may be indicative of inefficiencies and thus scope for performance improvement – to fulfil their mandates,” the authors write.

In 2020, the authors note, the failure to approve a 2020 state budget triggered “significant political uncertainty” – but data illustrating the exact impact this will have on the broader economy is yet to be available.

Looking to the future

The state of emergency decree expires on May 27, but President Francisco Guterres has the option to extend it for another month. However, some measures have already been loosened, such as allowing microlet buses and taxis back on the roads – with restrictions.

Related news: Microlets are Back on Timor’s Roads – but Without the Crush 

The World Bank concludes its report by recommending the government closely scrutinise each public health measure to ensure it’s having its intended impact, both in terms of controlling the spread of the virus and with an eye on the “collateral effects” to the economy.

“Poor people are likely to be the hardest hit by both the disease and the economic consequences – as they lack access to healthcare and social distancing is harder to implement in their context – which will reinforce existing inequalities,” the report notes.

To combat this, the authors call on the government to “anticipate and top up” existing cash transfers programs, defer tax obligations on some specific taxes, and a wage subsidy, possibly capped at the minimum wages ($115 per month).

Related news: Government Grants Subsidy to 30,000 Workers to Protect Jobs 

“It is crucial that both health and economic policy choices consider the emerging evidence and the specific circumstances of Timor-Leste” said Pedro Martins, Senior Country Economist for Timor-Leste.

“We believe that this report provides useful insights that can contribute to the design and implementation of timely and impactful economic measures in the coming months.”

Reporter: Robert Baird

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