Damien Kingsbury – There appeared to be a moment of clarity in 2023 when the government of Timor-Leste recognised that it was facing a looming financial disaster and started to make preparations – however belated – to address it. But by 2024, that task appears to have been abandoned after Timor-Leste passed a budget that accelerated, rather than starting to arrest, the country's headlong rush towards a fiscal cliff.

Timor-Leste relies overwhelmingly on withdrawals from the country's sovereign wealth Petroleum Fund for its government budget, which in 2023 equalled 88 per cent of the country's GDP. These withdrawals were projected to decrease only slightly over the next five years. Since 2008-09, the government has exceeded sustainable withdrawals from the Petroleum Fund almost every year.

With the Timor Sea oil fields no longer producing an income, the Petroleum Fund was expected to be fully depleted by the second half of the next decade if spending remained consistent. To counter this outcome, more than a decade after the issue was first flagged, the Timor-Leste government finally started to rein in spending by 18 per cent to a little over US$1.6 billion dollars in 2023.

With an economy largely stagnant but for government spending, this was supposed to have been the first budget of year-on-year cuts to slow down – if not avoid – the country completely running out of money. But for 2025, the government has passed a budget totalling around US$2.6 billion dollars – over double the sustainable withdrawal level from the US$18 billion-dollar Petroleum Fund.

While defence spending was cut by 29 per cent, there was a large and probably necessary increase in spending on environmental protection from 0.4 per cent of the budget to 6.8 per cent. Yet spending on less-compelling recreation, culture and religion leapt from 9.4 per cent to 31 per cent of the budget.

It was not clear whether the proposed budget cuts had been abandoned, but while encouraging a 10-year fiscal reform plan, the International Monetary Fund (IMF) noted that fiscal deficits were expected to remain high for the foreseeable future. The IMF was notably critical of the Timor-Leste government's 'excessive increase' in recurrent expenditure.

Timor-Leste's governments have largely looked to the development of the Greater Sunrise liquefied natural gas field – estimated to have over US$33 billion worth of gas – as the country's economic saviour. But development of the field, which the government has a 56.6 per cent stake in, remained stalled at the end of 2024.

The Timor-Leste government continues to insist on the gas being processed at a yet-to-be constructed plant on the country's south coast. The field operator, Woodside Petroleum, had proposed back-filling oil pipelines for processing near Darwin in Australia's Northern Territory or, alternatively, offshore processing. If the gas is processed in Australia, Timor-Leste will receive 80 per cent of the upstream revenue. That falls to 70 per cent if it is processed in Timor-Leste.

The Timor-Leste government claims that onshore processing would power the industrialisation and diversification of the country's economy. But with a limited skills base, a lack of related infrastructure and the economy effectively stagnant at a low level of development, it is unclear whether such a project would be successful, or if so, whether it could form the core of an industrialised state.

To progress development of the stalled Greater Sunrise project, in April 2024, Woodside Petroleum commissioned the engineering firm Wood to undertake a concept study for the development of the gas field. The concept study considered engineering, technology, financing, commercial structures, fiscal, environmental, health and safety and socioeconomic issues, including possible local content.

Woodside confirmed receipt of the concept paper, which outlined four options, and is considering them. Woodside has said that its preferred option will include significant concessions to directly benefit the people of Timor-Leste.

In September 2024, President Jose Ramos-Horta said that if Woodside did not progress with the project, Kuwaiti or Chinese companies wanted to develop the condensate field and an onshore processing plant. But Ramos-Horta's claims were not matched by public expressions of interest by either Chinese or Kuwaiti parties.

In late 2024, Australia offered to increase Timor-Leste's share of the receipts from Greater Sunrise to 90 per cent, while using its own share to establish a dedicated development fund for the country.

While these big picture events were unfolding, living standards of ordinary Timorese continued to slowly improve. But more than a quarter of Timor-Leste's population still live in absolute poverty and almost half in multi-dimensional poverty, with a similar proportion facing acute food insecurity. Almost half of all children under five are stunted.

Timor-Leste restored independence more than two decades ago with a commitment to sustainable development, but 2025 offers little reassurance that it is steering away from its fiscal and economic challenges. Without urgent action, the country risks eroding the progress achieved since independence and deepening the hardships faced by its people.

[Damien Kingsbury is Emeritus Professor of the School of Humanities and Social Sciences at Deakin University.]

Source: https://eastasiaforum.org/2025/01/27/timor-lestes-financial-cliff-draws-closer-in-2025