Harnessing Youth and Infrastructure for Timor-Leste’s Sustainable Future

Timor-Leste presents a unique mix of strengths and weaknesses that shape its development trajectory.

Youth and labor supply. The country’s youthful population is part of its strength, with a median age of 20.7 years and 64.6% of its citizens under 30. By 2037, the labor forces is expected to grow by 34.8% compared to the 2022 population. Depending on various population growth scenarios, the labor force will increase by at least 26% to 27% over the next 15 years based on the latest population census (Figure 1). This increase in the working-age labor force presents a significant opportunity to boost employment prospects and sustain higher economic growth.

Figure 1: Supply of Labor Force

Source: The National Institute of Statistics (INETL). 2023. Timor-Leste Population and Housing Census 2022; Author's estimate.

Strategic location and vibrant democracy. Geographically situated in Southeast Asia, Timor-Leste holds a strategic position at the intersection of key sea lines in the Indo-Pacific region—giving it an advantage in terms of regional investments, maritime trade, and security. Benefitted from a robust electoral process, pluralism, and civil liberties, Timor-Leste is ranked 45th out of 167 countries in the 2023 Democracy Index, surpassing the average indices of the Association of Southeast Asian Nations (ASEAN), Asia and the Pacific, and the world (Figure 2).

Figure 2: Democracy Index

Source: The Economist Intelligence Unit (EIU). 2024. Democracy Index 2023-Age of Conflict.

Resource endowment and savings. The country boasts significant oil and gas reserves in the Timor Sea, especially in the Greater Sunrise gas and condensate field. In 2005, it established a petroleum fund as a sovereign wealth fund, primarily sourced from petroleum revenues from the Bayu-Undan field and investment income from the petroleum fund. By the end of 2024, the petroleum fund’s balance has reached nearly $18.3 billion, exceeding the non-petroleum gross domestic product (GDP) by more than tenfold (Figure 3).

Figure 3: The Petroleum Fund

Source: The Central Bank of Timor-Leste (BCTL). 2024. The Petroleum Fund Reports; Author's estimate.

High poverty and food and nutrition insecurity. Despite its strengths, Timor-Leste faces significant challenges with poverty and food insecurity. Issues—such as poverty rate standing at 41.8% based on the national poverty line and 48.3% when measured using the multidimensional poverty, over 62.5% of the population experiencing food insecurity, 42% of households dealing with acute food insecurity, and half of the children under five years old are stunted—represent major barriers to development. Malnutrition, reduced cognitive development, impaired learning ability, and low productivity have limited human capital development.

Narrow economic base and high dependence on the petroleum fund. The economy remains undiversified and highly susceptible to domestic and external shocks, including disasters from natural hazards and trade fluctuations. GDP growth has been low and volatile, heavily reliant on public expenditures and the petroleum fund, projected to be depleted by 2035 based on current spending. From 2009 to 2023, the average annual real GDP growth was 2.9%, but it decelerated to just 1% over the past decade, highly correlated with the growth in budget expenditure and withdrawals from the petroleum fund (Figure 4).^[1]

Figure 4: GDP Growth and Public Spending

Source: Ministry of Finance of Timor-Leste. 2009-2024. Budget Transparency Portal; Author's estimate.

Lack of competitiveness and budget deficit. The high cost of doing business stems from challenges related to connectivity, land title issues, limited electricity and clean water supply, and low labor productivity—contributing to lack of competitiveness. The underdeveloped private sector contributes to a low domestic revenue base, averaging only 12.3% over the past 15 years. In contrast, total spending has been exceedingly high, averaging 90.5% of GDP. This imbalance has resulted in a significant government budget deficit, averaging 35.4% of GDP over the same period, primarily financed through persistent and excessive withdrawals from the petroleum fund (Figure 5).^[2] As of 2023, GDP per capita and gross national income per capita remained low at $1,324 and $1,294 respectively. This current economic structure underscores the urgent need for economic diversification and development of a robust private sector to ensure sustainable growth and resilience against economic shocks.

Figure 5: Government Budget

ESI = estimated sustainable income, GDP = gross domestic product, PF = petroleum fund.
Source: Ministry of Finance of Timor-Leste. 2009-2024. Budget Transparency Portal; Author's estimate.

Infrastructure gaps and limited basic services. In addition to underdeveloped human, institutional, and private sector capacities, Timor-Leste faces significant gaps and challenges in infrastructure development and provision of basic services. The country was ranked 46th out of 50 in terms of facilities supporting regulatory compliance and institutions and infrastructure enabling business activities. Due to inadequate infrastructure connectivity, access to markets and essential services—such as healthcare, education, and clean water—is limited, particularly in rural areas where 71.4% of the population resides. Significant investment in human capital, institutional strengthening, and infrastructure and logistics is crucial to support development and improve living standards.

Lack of policy continuity. New administrations often bring changes in policies and program orientations, along with high staff turnover in the public sector. To advance ongoing priority initiatives and achieve development goals, it is crucial to strengthen institutions and ensure policy continuity and certainty.

Suboptimal allocation of government resources to social sectors. Over the past 15 years, the compound annual growth rate of current budget expenditures in Timor-Leste was 8.9%, significantly outpacing the 4.2% compound annual growth rate of capital expenditures. Consequently, the share of current spending in the total budget has risen to 79% in 2024 from 65% in 2009. Despite the increase, there remains a persistent misallocation of resources, particularly in health and education. This misallocation leads to intergenerational human capital issues and economic disparity. Notably, the planned spending from the veterans’ fund for 2025 is nearly double the annual healthcare budget. Education spending has remained low at 7.6% of total government expenditure, significantly below the ASEAN historical average of 13.8%. Similarly, healthcare expenditure per capita in Timor-Leste is only $59, starkly contrasted with the ASEAN average of $630.

Despite these challenges, Timor-Leste has significant opportunities to explore to drive its national progress and foster sustainable development.

Youthful demographic. Timor-Leste can leverage the energy and creativity of its youth for national development through targeted support initiatives. This includes investing in educational infrastructure and vocational training to equip young people with essential skills, enhancing their employability and workforce readiness. By improving healthcare facilities and promoting health education, Timor-Leste can ensure its youth are healthy and able to pursue educational and employment opportunities. Additionally, providing capacity-building programs and financial resources for young entrepreneurs can stimulate economic growth, create jobs, and empower individuals to contribute to their communities.

Development finance. A fundamental policy shift is essential to expand the country's economic absorptive capacity, improve medium-to-long-term GDP growth, and sustain the petroleum fund. This shift should avoid excessive withdrawals from the petroleum fund and better leverage development finance opportunities since government debt is only 14.4% of GDP compared to 64.1% in ASEAN. By effectively using development finance, the country can attract foreign direct investment, increase domestic productivity, and promote private sector development and economic diversification. Utilizing long-term development finance for strategic priority investments is significantly more advantageous than excessive withdrawals from the petroleum fund (Figure 6).

Figure 6: Cumulative Cash Flow: Concessional Lending versus the Petroleum Fund

Source: Author's estimate.

While government debt remains considerably lower than the region, Timor-Leste’s GDP growth has been muted and economic activity has stagnated since 2017 (Figure 7). Leveraging long-term development finance will be crucial in establishing the prerequisite conditions to foster a conducive environment for private sector-led sustainable growth.

Figure 7: Government Debt and GDP Growth

Source: Asian Development Bank. 2024. Key Indicators Database; IMF. 2024. Government Debt Statistics; The Central Bank of Timor-Leste (BCTL). 2024. External Debt Statistics; Author's estimate.

Regional economic integration. Timor-Leste's potential ASEAN membership offers significant economic benefits, including increased trade, investment, and participation in free trade agreements, which can boost various non-petroleum sectors such as agriculture and tourism. Greater private investment inflow will enhance productivity, promote innovation and technology know-how, and create jobs to absorb the youth labor force. ASEAN membership also provides development and capacity-building opportunities through technical assistance programs and human resource development, enhancing regional stability and international recognition. Cultural and social collaboration and opportunities in IT services further highlight the advantages of joining ASEAN. These benefits can be fully realized through meticulous planning, effective implementation, and robust capacity building.

Timor-Leste faces several significant threats that could undermine its development prospects.

Climate-related disasters. Timor-Leste is prone to climate disaster risks, which can damage infrastructure, deteriorate livelihoods of rural communities, and disrupt basic services. The extreme weather conditions associated with El Niño have persistently been a major downside risk to the economic outlook.

Long-term budgetary gap and financing and economic dependence on oil revenues. The government budget deficit is expected to persist due to a limited revenue base and increase in expenditure needs. According to the IMF, the petroleum fund balance is projected to decrease by 25.7%, reaching $13.6 billion within five years. Without a swift resolution on the Greater Sunrise gas and condensate field development and significant reforms in public financial management—particularly in domestic resource mobilization, expenditure efficiency, rebalancing, and overall fiscal consolidation—the fund risks full depletion by 2035.^[3]

Political instability. Since gaining independence, Timor-Leste has faced significant political instability, especially since 2017, with three different governments formed in just three years. Although there has been political stability in recent years, the situation could become precarious without a clear political succession plan, accessible basic services such as health and education, and employment opportunities for the youth.

The SWOT analysis underscores the critical need for strategic investments in human capital, infrastructure, and the private sector to drive sustainable development in Timor-Leste. Policymakers should prioritize the following key actions:

• Increase public investments and mobilize resources in health, education, and skills development to foster human capital development and sustainable economic growth.
• Expand investments in infrastructure development, basic services, and logistics by leveraging development finance to improve livelihood conditions, create a business-enabling environment, and promote economic diversification.
• Accelerate public financial management reforms and regional economic integration efforts to encourage private sector development, enhance domestic productivity, and promote private sector investments and trade.

^[1] Real GDP increases by 0.22% for every 1% rise in total budget expenditure. The correlation between real GDP growth and total budget expenditures is notably high at 0.66 for 2009–2023.

^[2] Fiscal deficit is the gap between domestic revenues (including the estimated sustainable income from the petroleum fund) and total expenditures, encompassing both current and capital budget spending.

^[3] The Ministry of Finance has projected the year of depletion in 2035, assuming all factors are constant.

Asian Development Bank. 2024. Asian Development Outlook. April.

ADB. 2024. Key Indicators Database.

Central Bank of Timor-Leste. 2024. Statistical Database.

IMF. 2024. 2024 Article IV Consultation–Staff Report.

Ministry of Finance of Timor-Leste. 2024. Budget Book and General State Budget Report for 2025.

National Institute of Statistics of Timor-Leste. 2024. Statistical Database.

World Food Program. 2024. Food Security Assessment: Timor-Leste 2023.