More than two decades ago, the then soon to be independent country of Timor-Leste planned to embark on a future marked by sustainability, avoiding the economic traps that befall many other newly independent countries. Former resistance leader, future president, later prime minister, Xanana Gusmao extolled the virtues of using local materials for housing while there was consensus that the government would only use sustainable withdrawals from its then fledgling Petroleum Fund to finance the state budget.

A little over five years later, all that had been cast aside for modernist visions of sky-scrapers and a home-grown petrochemical industry. Despite many development planners suggesting a lack of realism, Gusmao was adamant that Timor-Leste would achieve its new modernist development goals.

Since 2007 withdrawals from the Petroleum Fund have exceeded sustainable withdrawals and the existing Timor Sea oil fields are now depleted. At current rates of expenditure, the country will run out of money in a decade or so. And the hoped for petrochemical industry has not materialised, with negotiations over processing LNG from the as yet untapped Greater Sunrise field deadlocked.

Timor-Leste relies overwhelmingly for its government budget on withdrawals from the country’s Petroleum Fund, which in 2024 comprised 88% of the country’s gross domestic product. These withdrawals were projected to decrease only slightly over the next five years.

The unsustainability of the withdrawals has been discussed for more than a decade, but it was only in late 2023 that the Timor-Leste Government finally started to rein in spending, intended to be cut by 18% year on year, starting at a little over US$1.6 billion. A year later, however, that task appeared to have been abandoned after Timor-Leste passed a budget of $2.6 billion dollars. This was more than double sustainable withdrawals and that accelerated, rather than starting to arrest, the country’s headlong rush towards the fiscal cliff.

Positively, the budget for 2025 cut defence spending by 29%, although there was a large and probably necessary increase in spending on environmental protection, from 0.4% of the budget to 6.8%. However, spending on less compelling recreation, culture and religion leapt from 9.4% to 31% of the budget.

Critical of the Timor-Leste government’s “excessive increase” in recurrent expenditure, the IMF noted that Timor-Leste’s fiscal deficits were expected to remain high for the foreseeable future.

Timor-Leste’s governments have looked to the development of the more than US$33 billion Greater Sunrise liquid natural gas field, in which it has a 56.6% stake, as the country’s economic saviour. However, development of the field, which straddles Timor-Leste and Australian waters, has remained stalled, as it has been since 2007.

Timor-Leste insists on the Greater Sunrise gas being processed at a yet to be constructed plant on the country’s south coast. Greater Sunrise operator, Woodside Petroleum, proposed back-filling oil pipelines for processing near Darwin or, alternatively, off-shore processing. If the gas is processed in Australia, Timor-Leste will receive 80% of the upstream revenue. If the LNG is processed in Timor-Leste it will receive 70%.

The Timor-Leste Government claims on-shore processing would drive 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 was unclear whether such a project could be successful or, if so, whether it could form the core of an industrialised state.

Timor-Leste’s president, Jose Ramos-Horta said that if Woodside did not progress with the project, Kuwaiti or Chinese interests wanted to develop the condensate field and an onshore processing plant. However, these claims have not been matched by public expressions of interest by either Chinese or Kuwaiti parties.

To try to take some of the angst out of this impasse, Australia has offered to increase Timor-Leste’s share of the receipts from Greater Sunrise to 90%, while using its own share to establish a dedicated development fund for the country, to date to no avail.

Set against these events, living standards of ordinary Timorese have improved only slowly. More than a quarter of Timor-Leste’s population still live in absolute poverty and around half in multi-dimensional poverty, with a similar proportion facing acute food insecurity. Almost half of all children under five are malnourished.

Timor-Leste approached independence more than two decades ago with a commitment to sustainable development, which then looked viable. But, based on its fiscal position set against its recent budget, it is fair to say that Timor-Leste has followed a more common post-independence path.