Writer João da Cruz Cardoso
Over the last thirteen years, development in Timor-Leste has been guided by its Strategic Development Plan (SDP) 2011-2030, which aims to make it an upper middle income country by 2030. The implementation of the SDP is made possible by the money generated from its petroleum resources. Fiscal analysis conducted by the Government of Timor-Leste indicates persistent high fiscal deficit, 42% in 2023 and 58% in 2024, and over the past decade, this deficit has been financed mainly by the excess withdrawal of the Petroleum Fund (accounts for over 70 per cent) along with cash balances, loans, and direct budgetary support from donors. Based on the Central Bank of Timor-Leste Annual Report 2023, receipts from oil and gas since the country’s inception total US$25.365 billion, of which US$16.113 billion or 64 per cent has been transferred to the State Budget. This makes Timor-Leste a petroleum-dependent country and creates a unique situation where its economy is largely driven by the government’s expenditure.
Timor-Leste, since restoration of its independence in 2002, has made tremendous progress. Besides a brief internal friction from 2006 to 2008, Timor-Leste has enjoyed consistent peace and stability and considered to be a remarkable democratic success story. In 2022, Timor-Leste was ranked 54 from 157 countries globally, seventh in the Asia-Pacific region, and first in the Southeast Asia region by the International IDEA in terms of democratic performance measured against representation, rights, rule of law, and participation. The country has managed to establish a vibrant democracy because there is no hegemonic political faction to establish authoritarian systems, dominant political parties are led by figures of independence movements who are highly committed to democracy, and bitter collective experience of brutal oppression under authoritarian regime during Indonesian occupation.
Despite this progress, Timor-Leste has fallen short in achieving economic development envisioned in the SDP. Poverty continues to be prevalent in the country as indicated by 46.9 per cent of Multidimensional Poverty Index (MPI) 2023 and it was ranked 112th out of 125 countries worldwide by the 2023 Global Hunger Index. Dependency on the oil sector continues given that oil revenue accounts for about 80 per cent of the country’s total revenues. Unemployment rate, particularly among the youth, remains high – 9.6 per cent according to Timor-Leste Labour Force Survey 2021. Agriculture produce remains inadequate considering that significant proportion of food consumed in the country is imported. These are some of the symptoms of the resource curse or the paradox of plenty.
Analysis of political economy indicates Timor-Leste as a rentier state given that the petroleum sector has taken over non-oil in terms of GDP’s proportion, the revenues received from the oil sector is independent from the domestic economy, the booming resource sector has made investment in the productive sectors less attractive, and revenues generated from external sources have demotivated the state to extract tax from the domestic economy – minimizing people’s proactive participation to hold the government accountable. Empirical evidence also shows common symptoms of rentier states and rent seeking behavior due to generous allocation of revenues towards public consumption (in the forms of transfers and wages) and subsidies as well as lack of contribution from the manufacturing and productive sector to the economy– an indicator of the Dutch disease phenomenon.
The main factors contributing to this shortfall include lack of courage and willingness from the political leaders to make unpopular decisions. It is well known that the country must improve its productive sectors to diversify the economy, but this has not been reflected in the level of investments made. For example, only small proportion of the state budget is allocated for the agriculture sector, 1.9 per cent of the 2024 state budget, which does not reflect the sector as priority.
The country, at this moment, appears to lack strong leadership to change the mindset and instill a sense of collective responsibility for the development of the country. Timor-Leste can no longer afford to go on based on the business-as-usual scenario but must take drastic action towards a more sustainable direction. This means that the country must change the view of its economy at the political level and make necessary structural adjustment including trimming down the state bureaucracy and formulating exit strategy for subsidies that create dependency. Analysis of the 2025 state budget shows that subsidy for veterans accounts for 9.5 per cent of the state budget, which is more than the budget for the education sector 9.2 per cent, budget for health 6.2 per cent and budget for water & sanitation 1.2 per cent.
Furthermore, development is constrained due lack of continuity in the implementation of development programs upon changes in the government administration. For example, the previous government implemented Uma Naroman ba Povu, a program aims to construct houses for the most vulnerable populations across the countries, but the program is discontinued under the current government. Similarly, the investment in the Tasi Mane project starts to pick up again under the current government while only small amount was allocated for the project under the previous government (US$3 million in 2021 and US$2 million in 2020). The inconsistency does not only create unstable condition for investment, but also reveals disagreement between major political parties on the national programs for development.
Besides discontinuity, lack of harmonization between policies and concrete implementation strategies also hinders the country from achieving growth. For instance, Timor-Leste’s agriculture policy seeks to increase agriculture production to meet domestic demands, but there is no clear identification and prioritization of the domestic demands to be met, allowing the government to make a focused investment. Timor-Leste must be highly selective in making investment decision based on the analysis of its competitive and comparative advantage. This will not only help the country to ensure the value for the investment, but also shape its policies in terms of balancing export oriented and import substitution approach, a task that is now more complex with Timor-Leste’s membership of the World Trade Organization (WTO).
Development, moreover, has been limited due to the negligence of quality of education, particularly public education system in the country. Survey results reveal that demanded skills in the local labour market are not available and there is a concern about university graduates lack the necessary skills to compete in the job market. The country must realize that poor education exacerbates underdevelopment, and failure to improve the quality of education within the country will surely set up the country to fail.
Timor-Leste is at a critical juncture. The founding fathers are in their twilight years, but the next-in-line leaders have not stepped up to the plate. The oil money diminishes rapidly, but the non-oil sectors are far from ready to sustain the economy. While Timor-Leste urgently needs strong leadership to direct the country towards the sustainable path, it is the responsibility of the current generation to prepare better conditions for the generations to come.