Gross domestic product (GDP)1 growth isexpected to have fallen sharply in 2017 to a projected -1.8percent from 5.3 percent the year before. This contractionis driven by a reversal of trend in government spending. Inthe last six months, the political impasse has worsened,with the President declaring a ‘serious institutionalcrisis’ and dissolving Parliament in January 2018. Thecurrent government has not been able to pass itsrectification budget for 2017 nor a budget for 2018 to date.The resulting tight budget envelope has led to a sharpreduction in government expenditure of some 24 percentyear-on-year, especially felt in the last three months ofthe year. With government expenditure making up about 75percent of GDP, weakening expenditure has had a significantdownwards impact on growth in 2017. Offshore petroleumproduction has continued to gradually decline over 2017 asexisting fields are steadily depleted, while coffee exportswere lower in 2017 due to poor weather conditions.International arrivals by air continued to grow, suggestingthat the international visitor market has held up. Privateconsumption has been more robust in 2017, but investment,both public and private, has declined and foreign directinvestment (FDI) has dried up. There remains an urgentlong-term agenda of development in Timor-Leste which a newgovernment program could focus on. Key priority reform areasinclude addressing the multi-sectoral challenge of severemalnutrition, improving systems of public service delivery,supporting a broadening and diversification of the economy,and putting environmental and fiscal management back on asustainable path. Existing fiscal reserves provide a goldenopportunity to achieve these reforms, but only if they areutilized to support a transition to a long-term sustainableeconomic and fiscal model.
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