East Timor's strong economic growth is at risk from high inflation fueled by government spending, the International Monetary Fund warned Wednesday.

The oil-rich but impoverished island state, which a decade ago achieved independence after a long struggle, has made "substantial progress toward restoring stability and rebuilding the country," the IMF said in a statement.

"Rising government spending has supported strong economic growth, but inflation has jumped to double digits," it said in a review of the economy.

The government has used its petroleum wealth to step up development by scaling up investment in infrastructure.

"Given development needs, investment in infrastructure is welcome, but the planned increase of spending over the next few years needs to be slowed to better align with the absorptive capacity of the economy and administrative constraints," the IMF said.

Rising spending and a rebound in agriculture had supported strong non-oil economic activity, the Washington-based institution said. It projected non-oil gross domestic product growth would "remain strong" at about 10 percent in 2012 and over the medium term.

But key risks included oil price volatility and a surge in inflation on the back of strong government spending. "High inflation will impose significant costs on the poor," it said.

The IMF also highlighted the East Timor government's "solid" progress in improving public financial management, including a well-managed Petroleum Fund.

The IMF report came the same day as East Timor President Jose Ramos-Horta announced he would seek reelection in March 17 polls.

East Timor, a half-island nation with a population of 1.1 million, broke away from Indonesia and won formal independence in 2002. The country is banking on vast offshore oil and gas fields in the Timor Sea to build up the economy.

The IMF calls East Timor the "most oil-dependent economy in the world," with petroleum income accounting for around 90 percent of government revenue.