Andrew Hewett – Governments from around the world gathered in East Timor recently to hear news of a looming economic crisis facing the world's newest nation.

This crisis is triggered by declining foreign aid and uncertainty about future revenue flows to East Timor from the oil and gas fields of the Timor Sea.

When East Timor celebrated independence in May 2002, the huge challenge of economic and social development lay ahead.

East Timor is the poorest country in East Asia. Only 60 per cent of its people can read and write, life expectancy is just 57 years and more than one-in-10 East Timorese children born today are likely to die before the age of five.

To confront these challenges, East Timor's paltry annual budget of $119 million relies heavily on foreign aid.

Most of this is set to decline rapidly over the next three years, leaving the country with an expected budget deficit of more than $195 million by 2007. While donor support for reconstruction has been generous since 1999, many donors are now scaling back support to help other countries such as Afghanistan, Iraq and Liberia.

Fortunately for East Timor there is a window of opportunity for financing its development needs over the coming decades – lucrative undersea oil and gas reserves.

In the Timor Sea between Australia and East Timor lie vast reserves over which political tensions between Canberra and Dili are heating up.

Central to the tensions are the tens of billions of dollars worth of energy from an area of the Timor Sea that is subject to overlapping maritime boundary claims by the two countries.

With this sort of money at stake, the Australian Government claims that our maritime boundary extends to the edge of the Australian continental shelf – 400km off our northern coast – and, unsurprisingly, far closer to East Timor than Australia.

Such an outcome to boundary negotiations would bring the bulk of revenue from the deposits into Canberra's rather than Dili's coffers.

East Timor claims that the maritime boundary should be drawn along a middle line between our coast lines.

Since the early 1980s, such median lines have been the preferred method for determining maritime boundaries between countries less than 400 nautical miles apart.

Normally, when a maritime boundary cannot be agreed by two countries, the matter would go to the International Court of Justice.

But when East Timor suggested having the matter adjudicated that way, the Australian Government withdrew from this dispute settlement procedure. This tactical manoeuvre, perceived by the East Timorese Government as an unfriendly act, has effectively removed any opportunity East Timor might have had for seeking an independent, third-party resolution.

So it is left with no legal mechanism to establish its boundaries in the absence of timely and co-operative negotiations with Australia.

Australia needs to assist this small nation to achieve financial independence.

We should commit to achieving a permanent agreed maritime boundary in no more than five years – or otherwise refer the issue to the International Court. The unfolding tensions over the Timor Sea risk undermining Australia's relations with our closest neighbour and tarnish the Howard Government's strongest foreign policy achievement in supporting the fledgling country over the past four years. The people of East Timor deserve a fair go.

[Andrew Hewett is executive director of Oxfam Community Aid Abroad.]