Source: Asia Development Bank
Timor-Leste presents a unique mix of strengths and weaknesses that shape its development trajectory.
Youth and labor supply. The country’s youthful population is part of its strength, with a median age of 20.7 years and 64.6% of its citizens under 30. By 2037, the labor forces is expected to grow by 34.8% compared to the 2022 population. Depending on various population growth scenarios, the labor force will increase by at least 26% to 27% over the next 15 years based on the latest population census (Figure 1). This increase in the working-age labor force presents a significant opportunity to boost employment prospects and sustain higher economic growth.
Figure 1: Supply of Labor Force
Strategic location and vibrant democracy. Geographically situated in Southeast Asia, Timor-Leste holds a strategic position at the intersection of key sea lines in the Indo-Pacific region—giving it an advantage in terms of regional investments, maritime trade, and security. Benefitted from a robust electoral process, pluralism, and civil liberties, Timor-Leste is ranked 45th out of 167 countries in the 2023 Democracy Index, surpassing the average indices of the Association of Southeast Asian Nations (ASEAN), Asia and the Pacific, and the world (Figure 2).
Figure 2: Democracy Index
Resource endowment and savings. The country boasts significant oil and gas reserves in the Timor Sea, especially in the Greater Sunrise gas and condensate field. In 2005, it established a petroleum fund as a sovereign wealth fund, primarily sourced from petroleum revenues from the Bayu-Undan field and investment income from the petroleum fund. By the end of 2024, the petroleum fund’s balance has reached nearly $18.3 billion, exceeding the non-petroleum gross domestic product (GDP) by more than tenfold (Figure 3).
Figure 3: The Petroleum Fund
High poverty and food and nutrition insecurity. Despite its strengths, Timor-Leste faces significant challenges with poverty and food insecurity. Issues—such as poverty rate standing at 41.8% based on the national poverty line and 48.3% when measured using the multidimensional poverty, over 62.5% of the population experiencing food insecurity, 42% of households dealing with acute food insecurity, and half of the children under five years old are stunted—represent major barriers to development. Malnutrition, reduced cognitive development, impaired learning ability, and low productivity have limited human capital development.
Narrow economic base and high dependence on the petroleum fund. The economy remains undiversified and highly susceptible to domestic and external shocks, including disasters from natural hazards and trade fluctuations. GDP growth has been low and volatile, heavily reliant on public expenditures and the petroleum fund, projected to be depleted by 2035 based on current spending. From 2009 to 2023, the average annual real GDP growth was 2.9%, but it decelerated to just 1% over the past decade, highly correlated with the growth in budget expenditure and withdrawals from the petroleum fund (Figure 4).[1]
Figure 4: GDP Growth and Public Spending
Lack of competitiveness and budget deficit. The high cost of doing business stems from challenges related to connectivity, land title issues, limited electricity and clean water supply, and low labor productivity—contributing to lack of competitiveness. The underdeveloped private sector contributes to a low domestic revenue base, averaging only 12.3% over the past 15 years. In contrast, total spending has been exceedingly high, averaging 90.5% of GDP. This imbalance has resulted in a significant government budget deficit, averaging 35.4% of GDP over the same period, primarily financed through persistent and excessive withdrawals from the petroleum fund (Figure 5).[2] As of 2023, GDP per capita and gross national income per capita remained low at $1,324 and $1,294 respectively. This current economic structure underscores the urgent need for economic diversification and development of a robust private sector to ensure sustainable growth and resilience against economic shocks.
Figure 5: Government Budget
Infrastructure gaps and limited basic services. In addition to underdeveloped human, institutional, and private sector capacities, Timor-Leste faces significant gaps and challenges in infrastructure development and provision of basic services. The country was ranked 46th out of 50 in terms of facilities supporting regulatory compliance and institutions and infrastructure enabling business activities. Due to inadequate infrastructure connectivity, access to markets and essential services—such as healthcare, education, and clean water—is limited, particularly in rural areas where 71.4% of the population resides. Significant investment in human capital, institutional strengthening, and infrastructure and logistics is crucial to support development and improve living standards.
Lack of policy continuity. New administrations often bring changes in policies and program orientations, along with high staff turnover in the public sector. To advance ongoing priority initiatives and achieve development goals, it is crucial to strengthen institutions and ensure policy continuity and certainty.
Suboptimal allocation of government resources to social sectors. Over the past 15 years, the compound annual growth rate of current budget expenditures in Timor-Leste was 8.9%, significantly outpacing the 4.2% compound annual growth rate of capital expenditures. Consequently, the share of current spending in the total budget has risen to 79% in 2024 from 65% in 2009. Despite the increase, there remains a persistent misallocation of resources, particularly in health and education. This misallocation leads to intergenerational human capital issues and economic disparity. Notably, the planned spending from the veterans’ fund for 2025 is nearly double the annual healthcare budget. Education spending has remained low at 7.6% of total government expenditure, significantly below the ASEAN historical average of 13.8%. Similarly, healthcare expenditure per capita in Timor-Leste is only $59, starkly contrasted with the ASEAN average of $630.