Timor-Leste (Democratic Republic of)

Public spending remains the main growth driver

Growth was driven by expansionary fiscal policy in 2025 – increased public investment in climate resilience, road and electricity infrastructure, and higher transfers to veterans and pensioners – as well as credit growth. The slowdown in inflation, supported by falling global food prices (especially rice) and fuel prices, along with robust remittance inflows, boosted private consumption.

This momentum is set to continue in 2026 but is expected to slightly weaken due to a reduction in recurrent public spending, particularly transfers to state-owned enterprises as part of an initial fiscal consolidation effort. The expansion of the national airport, with works starting in early 2026 and scheduled for completion in 2028, will be financed by the Asian Development Bank, Japan, Australia, and government funds. The withdrawal of USAID (of which Timor-Leste was one of the main beneficiaries in Asia-Pacific, with the aid package amounting to about 1.2% of GDP) will have limited impact, as US aid was primarily directed to NGOs, while the government has its own budget for national development. Additionally, a national development bank was established in mid-2025.

Exports will remain weak due to the depletion of hydrocarbons which accounted for about 95% of the country’s exports until June 2025, when the country’s sole operational gas field, Bayu-Undan, was closed. Henceforth, exports will consist mainly of high-priced, quality coffee beans. Net exports will continue to contribute very negatively to growth. The impact of US tariffs (10%) will remain limited, as sales to the US represented only 6.7% of total exports in 2024.

Massive twin deficits financed by the Petroleum Fund

The rapid decline in gas production — followed by its complete halt upon the closure of the Bayu-Undan field — significantly widened the fiscal deficit. Given the possibility of increasing withdrawals from the substantial sovereign fund, the authorities chose to maintain public spending, the consequence of which was a ballooning budget deficit. The economy’s small size and limited diversification restrict financing sources. The lack of economic diversification also reduces employment opportunities and increases household dependence on public spending.

In 2026, the deficit will decrease slightly thanks to a contraction in spending (-12.5% compared to the 2025 budget), mainly through reduced transfers to state-owned enterprises and the implementation, starting in January, of mandatory retirement at age 65 for civil servants to contain the wage bill. Resources will be primarily allocated to health, education, social protection (accounting for 16.3% of expenditures) and essential infrastructure (roads, bridges, electrification, sanitation and telecommunications). The budget is largely financed by the Petroleum Fund (about 86% of revenue). Including withdrawals from the Fund, the fiscal deficit is expected to fall to around 11% of GDP in 2026. Additional resources come from domestic revenues and international aid (Asian Development Bank, World Bank, JICA). Although withdrawals from the Fund are normally capped at 3% of assets — the expected return level — excess withdrawals are permitted and exercised. The Fund’s balance stood at 939% of non-oil GDP in 2024, which was the equivalent of 183 months of imports. However, the halt in oil and gas production, combined with massive withdrawals to finance deficits, could bring about its depletion by the late 2030s. Added to this is the decline in customs duties associated with ASEAN integration which further erodes revenue. That said, the IMF assesses the risk of over-indebtedness as moderate.

In 2025 and 2026, the current account will remain deeply in deficit due to a substantial trade deficit (over 40% of GDP). The trade balance, which benefited from gas exports until 2022, now shows a massive shortfall following the depletion of reserves and the closure of the Bayu-Undan field in 2025; meanwhile, imports remain high on back of infrastructure projects and gas field decommissioning operations spanning these two years. The increase in coffee exports will not be sufficient to offset this trend. The slow development of tourism will sustain the services balance deficit. However, the secondary income account will remain strong despite the withdrawal of USAID thanks to expatriate remittance inflows. The current account deficit is primarily financed through withdrawals from the Petroleum Fund.

Political stability and growing regional integration

Timor-Leste is considered one of the most democratic states in Southeast Asia and enjoys political stability. José Ramos-Horta, who previously served as President from 2007 to 2012, returned to power in 2022 after winning 62.1% of the vote in the second round against the FRETILIN candidate. In the May 2023 general elections, his party, the National Congress for Timorese Reconstruction (CNRT), secured 31 seats compared to 19 for FRETILIN, the other party born from the struggle for independence. The result enabled CNRT to form a coalition with the Democratic Party (PD), which holds six seats. The alliance, which has already been tested in the past, is expected to endure. Moreover, Mariano Sabino Lopes, leader of the PD, serves as Deputy Prime Minister and Minister of Rural Development under Prime Minister Xanana Gusmão. With a solid parliamentary majority and political alignment between the presidency and the government, the executive arm of government faces no serious opposition. Occasional tensions may arise such as the September 2025 protests against the planned purchase of vehicles for parliamentarians which was eventually scrapped, but the government remains responsive to popular demands.

Timor-Leste will continue to maintain close bilateral relations with its neighbours. Indonesia, its former occupier, is still its largest supplier and third-largest customer. Relations with Australia have been strained due to disagreements with Woodside Energy and Osaka Gas over the Greater Sunrise project. Timor-Leste wants the processing plant located on its territory to develop a downstream chemical industry, while Woodside favours Darwin for cost and infrastructure reasons. The signing in November 2025 of an agreement for an LNG project in Timor boasting annual capacity of 5 million tonnes which includes a gas facility and a helium extraction unit is a sign of progress, but production is not expected to start until the 2030s. Australia remains the country’s main bilateral donor.

Regionally, after joining the WTO in early 2024, Timor-Leste took a major step by becoming the 11th member of ASEAN in October 2025, thereby strengthening its trade and financial integration. The country aims to host its first ASEAN summit in 2029. At the same time, it is seeking to diversify its international partnerships, notably through a comprehensive strategic partnership signed with China in 2023.

Last updated: December 2025