Timor - Economy

Timor-Leste ranks among the least developed economies in the world. Non-oil per capita gross domestic product of $350 places it toward the bottom of the rankings of low income countries. The economy is split into two very unequal parts -- the 85 percent of the work force devoted to subsistence agriculture (cooking with firewood and fetching water), alongside a services sector (60 percent of the economy by value, an extremely high level for an LDC) driven by the needs of the large international presence in the country as well as spiraling government spending. Approximately 40 percent of the Timorese population lives under the poverty line. Most of the Timorese people are highly vulnerable to food loss.

The development of the economy of Timor-Leste presents a clear duality, with a petroleum sector and a non-petroleum sector clearly demarcated and unbalanced in terms of their contribution to economic growth and the structure of national employment. According to official analyses presented in the General State Budget 2004-05 Document 10, the petroleum sector is solely responsible for strong growth in GDP, since in 2004-05 real petroleum GDP grew by 991%, contrasting with a growth in real non-petroleum GDP of only 1%. Inversely, the proportion of Timorese employed in the petroleum sector is minute (0.07%), according to the data in the Population Census 2004.

The World Development Report (2011) suggested that post-conflict countries take between 15 to 30 years to build resilience and transition out of fragility. Timor-Leste has made steady progress in nation building and economic development. However, adjusting from high oil dependency, large social and infrastructure development needs, and weak institutional capacity poses considerable challenges. Non-oil real GDP growth is estimated to have declined to 4.3 percent in 2015 from 5.5 percent in 2014, due to weaker government spending. Both headline and core inflation eased to below 1 percent in 2014 and 2015, reflecting lower commodity prices, a stronger U.S. dollar against Timor-Leste’s trading partners’ currencies, and some improvement in supply bottlenecks. The fiscal position weakened in 2015 due largely to lower petroleum revenue. Petroleum revenue fell by 40 percent in 2015 mainly on account of the slump in global oil prices.

The medium-term growth outlook depends critically on economic diversification and ensuring a sustainable fiscal position. Average non-oil real GDP growth in the medium-term is projected at 5.5 percent, supported by increasing public spending and foreign direct investment. This hinges on successful prioritization of government expenditures to facilitate high-return infrastructure investments in tandem with structural reforms that catalyze non-oil private sector growth.

According to industry estimates, unless new oil reserves are developed, oil production is expected to decline further and cease by 2023. The impact of persistently low oil prices on fiscal spending is limited in the short run due to the buffer provided by the Petroleum Fund (PF), as about 80-90 percent of the oil reserves has been extracted and transformed into financial assets of the PF. However, over the long run, low oil prices would delay potential investment in new oil fields and weaken the prospects for developing the petroleum sector. Fiscal revenues will be highly dependent on the investment returns of the PF. The deterioration in the global outlook and lower oil prices weigh on growth prospects and add strain to the fiscal position.

Under the Strategic Development Plan (SDP) introduced in 2011, Timor-Leste aims to achieve upper-middle income status by 2030, by targeting infrastructure and human capital development, promoting economic diversification, and reducing poverty. Infrastructure development needs remain critical and past expenditure results have been mixed, due largely to low implementation capacity affecting effectiveness.

Remittance outflows from Timor-Leste have increased since 2006, reflecting the reliance on foreign workers for high-skill managerial jobs. The 2014 Enterprise and Skills Survey shows that the number of foreign workers is relatively high in managerial and professional positions, especially in oil and gas sector. This suggests the existence of a skill gap, with the demand for workers with specific qualifications and skills not being met by the supply from local workers. According to the 2013 Labor Force Survey, a small percentage of the labor force has either a vocational/polytechnic diploma (5.3 percent) or a university degree (8.9 percent). More generally, human resource constraints remain severe as 40 percent of the population over 15 years old has not had any education.

Also, remittance inflows have increasingly become an important income source for households, albeit from a low base. Outward labor flows provide employment opportunity, while the private sector in Timor-Leste is developing. According to the UN statistics, migrants from Timor-Leste were estimated in 2016 at around 33,000 (3 percent of the population).

The official currency of Timor-Leste is the US dollar. This is the only currency accepted as legal tender. Do not expect that establishments will accept credit cards (including hotels, shops and restaurants). Timor-Leste is one of the least developed countries in the world, with basic income, health, and literacy levels similar to those of countries in sub-Saharan Africa. Infrastructure is inadequate in urban and rural areas. Unemployment and underemployment combined are estimated to be as high as 70%. Official statistics indicate that around 40% of the country's population lives below the poverty line.

The country faces many challenges. One of the biggest inhibitors to improved economic performance is the lack of educated or skilled personnel. Weak public institutions also hinder government efforts to tackle problems. Inadequate infrastructure compounds these difficulties and political instability has been an additional obstacle to progress. Unemployment and population growth are both high. East Timor’s abundant petroleum reserves are the potential key to the country’s prosperity. The government has established a trust fund to manage its petroleum revenues sustainably.

Timor-Leste has received oil and gas revenues since 2005 as major projects in the Joint Petroleum Development Area that Timor-Leste shares with Australia have come online. The government set up a special Petroleum Fund in 2005 to ensure the sustainable use of its revenues over the long term. Petroleum Fund assets reached $8.3 billion in 2011.

The economy is dependent on government spending (financed by petroleum revenues) and assistance from international donors. Private sector development has lagged due to human capital shortages, infrastructure weakness, an incomplete legal system, and an inefficient regulatory environment.

In 2011, the National Strategic Development Plan was approved unanimously by the National Parliament. The plan focuses on using petroleum revenues to support non-petroleum economic development and become a middle-income country by 2030. A peaceful government transition in February 2015 marks political maturity in the country and its readiness to focus on economic development issues. In early 2016, Timor-Leste successfully hosted its first business forum of members of the Community of Portuguese Speaking Countries (CPLP), where about 500 business people were given the opportunity to establish business networks and explore business and investment opportunities. The government used the opportunity to reiterate its interest in and openness to foreign investors.

The government, through its autonomous agency, the National Petroleum and Minerals Authority (ANPM), has contracted with foreign firms to explore and develop offshore oil and gas deposits. Taxes and royalties collected by the government and its agency are deposited in a sovereign petroleum fund, which held about USD 16.2 billion in December 2015. Government expenditures are mostly dependent on this fund. Besides the oil and gas sector, government spending, small-scale retail activities, and subsistence agriculture are the primary sources of employment and contributors to Gross Domestic Product.