However, GDP is still projected to grow by 1.8 percent in 2021, underpinned by stronger public spending.
The Report, Timor-Leste Economic Report: Charting a New Path, looks at recent developments in the country and finds that covid-19 is spreading rapidly, despite early successes in containing the virus.
Adding to these challenges is the aftermath of Cyclone Seroja, which brought flooding, landslides, considerable human loss, and economic damage to Timor-Leste in April 2021.
Together, these health and humanitarian emergencies are undermining the country’s economic recovery in 2021, although the recent approval of a revised budget may provide some relief, says the report.
"Covid-19 has considerably disrupted economic activity in 2020 and 2021, which has been further compounded by the recent flash floods," said Pedro Martins, the World Bank’s Senior Country Economist for Timor-Leste, in a press release on Thursday.
"The economy is expected to recover in the medium-term, but covid-19 remains the key risk to the economic outlook, as it may require prolonged containment measures to avoid large human losses. A swift vaccination rollout is now more critical than ever,: Martins stated.
The economy is estimated to have contracted by about 7 percent in 2020, with public expenditure dropping by 9 percent.
Capital spending nearly halved, but public transfers increased to support households.
The report also notes that domestic revenues suffered from lower economic activity, while the fiscal deficit eased to 26 percent of GDP – mostly due to lower spending. Imports declined by 19 percent, particularly due to a slowdown in construction and travel services.
Exports nearly halved, owing to limited travel services and lower coffee earnings.
"The first half of 2021 brought devastating floods and an outbreak of COVID-19 – which, until recently, the country had been so successful in suppressing. These twin disasters threaten to set back hard-won gains in poverty reduction and economic stability," said Bernard Harborne, Country Representative for Timor-Leste.
"As a long-term partner, the World Bank stands with the people of Timor-Leste. We are ready to provide short-term support and develop long-term solutions to protect and invest in people during and after the pandemic. This report provides a useful snapshot of the current economic situation and key insights into building a stronger health system," he stated.