Timor-Leste

Key development challenges

Timor-Leste is a lower-income country and the smallest economy in Southeast Asia. In 2021, Timor-Leste’s GDP was $3.6 billion, representing 0.11% of Southeast Asia’s regional GDP. With a population of 1.3 million, Timor-Leste’s per capita GDP of $2,700 is the third-lowest in Southeast Asia.

Timor-Leste faced decades of civil war before achieving independence in 2002. From 2007 to 2016, the country experienced high levels of economic growth, driven by a dramatic scaling up of government expenditures financed by drawdowns from the Petroleum Fund, the country’s sovereign wealth fund. This was, however, punctuated by back-to-back recessions in 2017–18 and again in 2020 with the pandemic. Nonetheless, non-oil GDP, the Timorese government’s preferred measure, grew by 1.5% in 2021, supported by public spending and rebounding private consumption. The country faces a critical economic transition as new revenues from active oil and gas fields dry up, leaving the government and non-oil economy dependent on unsustainable drawdowns from the Petroleum Fund.

The Timorese government’s development agenda is focused on combating malnutrition and extreme poverty, and expanding social services to the country’s large non-urban population. In 2021, 41.8% of Timor-Leste’s population fell below the national poverty line, with 8% of Timorese earning less than the World Bank’s extreme poverty benchmark of $2.15 per day. Timor-Leste’s Human Development Index ranking is 140th out of 191 countries. Its urbanisation rate — the proportion of people living in towns and cities — is 31.2% and one of the lowest globally.

Development finance continues to play a significant role in Timor-Leste’s progress. In 2021, official development finance (ODF) accounted for 7.1% of Timor-Leste’s GDP, the third-highest ratio in Southeast Asia, behind only Laos (7.4%) and Cambodia (10.7%). Over the 2015–21 period, more than 4,608 projects were implemented by 45 development partners in Timor-Leste, collectively representing $1.8 billion in ODF or about $265 million on average per year.

Overview of development finance trends

From 2015 to 2021, ODF disbursements to Timor-Leste — including grants, loans, and other forms of assistance — averaged $265 million annually (in constant 2021 US$). ODF flows to Timor-Leste remained largely consistent between 2015 and 2021, increasing by a modest 2%.

Australia remained Timor-Leste’s major provider of ODF throughout this period, disbursing close to one-third of the country’s incoming ODF. Between 2015 and 2019, Australia’s ODF disbursements to Timor-Leste declined in successive years to a low of $56 million, before doubling in response to the Covid-19 pandemic.

Australia’s increased ODF spending during 2020 and 2021 helped counter a shortfall of flows from Timor-Leste’s other major development partners. Notably, these two years saw ODF flows from Japan and the Asian Development Bank (ADB) decline by 57%.

ODF flows to Timor-Leste were just 1% of the regional total between 2015 and 2021, the smallest share in the region. However, in per capita terms, Timor-Leste is the region’s second-highest ODF recipient. Over the seven-year period, Timor-Leste received $201 in ODF per person on average per year, marginally behind Laos ($212) but significantly higher than the regional average of $83 per person.

Between 2015 and 2021, the role and significance of ODF in Timor-Leste’s general output declined by over half, falling from 14.4% of GDP in 2015 to 7.3% in 2021. Most of the decline occurred between 2018 and 2021 and was caused by substantial GDP growth in 2021 alongside stable incoming ODF flows, rather than a decline in ODF support.

Timor-Leste is somewhat of an outlier in Southeast Asia in that it did not receive ODF for major energy or railway projects. The lack of such large-scale projects common throughout the rest of the region means that Timor-Leste’s commitment-spending gap was narrower than its regional peers. Nonetheless, the expansion of the Presidente Nicolau Lobato International Airport, committed in 2021 by the ADB (XM-DAC-46004-52320-002-LN4104 and XM-DAC-46004-52320-002-LN4105), saw a large increase in the gap between project commitments and disbursements in 2021.

Main development partners

Australia’s contribution to the country’s total ODF doubled between 2019 and 2021, jumping from $56 million to $104 million. Timor-Leste’s second tier of major partners — Japan, the United States, and the ADB — averaged annual ODF disbursements of around $28 million over the period, with Japan and the ADB reducing their ODF support in 2020 and 2021.

Australia’s ODF disbursements in Timor-Leste focused on the governance and civil society sector, which accounted for one-third of its ODF flows. The largest Australian project in this sector was the $30 million Governance for Development Program INL073, which began in 2012–13. Australia’s other significant governance and civil society project was the Ending Violence Against Women in Timor-Leste program INK815, which has seen $21 million disbursed since 2016. Australia’s largest non-governance sector project was the Timor-Leste Human Development Program 2021000840 - INL910, a wide-ranging health sector initiative.

The ADB, Timor-Leste’s major provider of development loans, almost exclusively focused on transport projects. These projects — notably the Road Network Development Sector Project XM-DAC-46004-43322-012-GRNT0180 and the Dili to Baucau Highway Project XM-DAC-46004-50211-001-LN3456 — accounted for over 90% of the ADB’s total support to Timor-Leste. Remaining ADB support was split between the Mid-Level Skills Training Project XM-DAC-46004-45139-001-GRNT0274 and two water and sanitation projects: the District Capitals Water Supply Project XM-DAC-46004-44130-022-GRNT0258 and the Dili Urban Water Supply Sector Project XM-DAC-46004-38189-022-GRNT0100.

ODF to Timor-Leste was largely made up of grants, reflecting the country’s significant development challenges. Timor-Leste’s only sources of ODF loans were the ADB, the World Bank, and Japan, with the loans exclusively financing road-building projects. It is also notable that a portion of these ODA-loan transport projects were categorised as climate resilience financing, such as the World Bank-funded Timor-Leste Road Climate Resilience Project 2011017260 - P125032.IDA53030.crs2.

Timor-Leste’s two largest implementation partners were the central government and its infrastructure fund. Projects targeting governance, health, and public infrastructure, as well as budget support measures, were typically implemented through state systems. Examples of this were the Timor-Leste Human Development Program 2021000840 - INL910 and the Covid-19 budget support Australia provided in 2021 2021003204 - INN629. The International Labour Organization’s involvement in Timor-Leste stemmed from a pair of major roads projects funded by Australia and EU institutions that had heavy engagement with local Timorese labour forces.

Sectors

The sectoral distribution of ODF spending in Timor-Leste was quite distinct from Southeast Asian regional averages. The variation reflects Timor-Leste’s particular development challenges, notably the legacy of past conflict, its impact on public infrastructure, and the limited capacity of the Timorese government to deliver social services.

Timor-Leste faces extreme human capital challenges. Close to half the country’s children under the age of five suffer from stunting, with Timor-Leste ranked as the third-worst country globally for child malnutrition. While health, education, and clean-water access are cited as the government’s top priorities, budget allocations for these critical development sectors fall below international benchmarks for developing countries. The sectoral distribution of ODF to Timor-Leste partly reflects attempts to close this gap, with ODF flows for health and education more than double the regional average. Two of Australia’s largest official development assistance (ODA) programs in the country — the Timor-Leste Human Development Program 2021000840 - INL910 and the Maternal and Child Health Program (INK433) — target these issues.

Comparing sectoral spending between 2015 and 2021 shows a clear shift away from infrastructure towards human development. Infrastructure — specifically road projects — was the major focus of ODF in the country after it gained independence in 2002. The implementation of these projects prior to 2018 allowed the government and its ODF partners to concentrate on human development initiatives, which have seen increased spending in consecutive years since 2017.

Climate

The Southeast Asia Aid Map uses an adapted version of the Organisation for Economic Co-operation and Development’s (OECD’s) climate marking system to sort projects into three distinct categories: principal, where climate change mitigation or adaptation is explicitly stated as fundamental to the project; significant, where climate change mitigation or adaptation is explicitly stated but not fundamental; and not climate-related, where climate change is not targeted in any significant way.

Due to Timor-Leste’s fossil fuel endowments and limited grid infrastructure, there has been little demand for large-scale renewable energy projects in the country. The vast majority of its climate development finance has been in the form of climate-resilient infrastructure projects, such as the Timor-Leste Road Climate Resilience Project funded by the World Bank 2011017260 - P125032.IDA53030.crs2 and the Australian Roads for Development — R4D 2019001318 - INK211 project. Outside of infrastructure, principal climate projects in Timor-Leste have focused on sustainable agriculture and fishing practices.

Most projects implemented by the two largest multilateral development banks include a focus on climate: 78% for the World Bank, and 95% for the ADB.

Timor-Leste as an ODF provider

Despite being the smallest Southeast Asian economy by a significant margin, Timor-Leste has provided some ODF for humanitarian aid to other countries in the region. For instance, in 2015 the Timorese government provided a $1 million support package to Malaysia following Cyclone Ian (2015000003-1). It also provided two $750,000 grant packages to Indonesia and Laos following natural disasters in 2018 and 2019 (Inter-SEA023, Inter-SEA032).

Overall, the contribution of Timor-Leste to the region was $3.7 million during the 2015–21 period, which was just below 1% of total intraregional ODF.