Unlocking Growth in Timor-Leste: Land Reform and Fiscal Discipline as Game Changers

Timor-Leste’s latest economic report, produced by the World Bank offices in Jakarta and Dili with contributions from the National Institute of Statistics Timor-Leste (INETL), the Ministry of Finance, and the Central Bank of Timor-Leste, portrays a country at a decisive turning point. The Timor-Leste Economic Report: Land of Opportunities warns that while short-term growth has returned, long-term prospects are fragile, still anchored to oil wealth that is running out and to public spending that far exceeds domestic capacity. The Petroleum Fund, now worth over $18 billion, could vanish by 2038 if withdrawals continue at their current pace.

The question confronting the country is stark: can it use today’s breathing space to build a more resilient and inclusive economy, or will it drift into crisis when oil money runs dry?

Growth Driven by Tourism and Public Spending

In recent years, Timor-Leste has enjoyed the fastest non-oil GDP growth in a decade. In 2024, output expanded by 4.1 percent, lifted by a 48 percent surge in public capital spending and a rebound in tourism, which grew by 30 percent year-on-year. Service exports jumped 43 percent, boosted by new flight connections and nearly doubled foreign arrivals in early 2025. Roads, bridges, energy systems, and water projects once stuck in limbo are finally being built. Yet the base of recovery remains dangerously narrow. Agriculture and industry, although employing a significant portion of the population, contributed barely half a percent to the growth. Imports of food, fuel, and construction materials soared, dragging the trade deficit to nearly half of non-oil GDP. Coffee exports, long a source of pride for Timor-Leste, fell despite high global prices, underscoring the country's vulnerability when it relies on just one crop.

Inflation, once a chronic worry, fell to near zero in 2025 as global energy and food prices softened. For households, however, the story is more complicated: vegetable prices rose by more than 7 percent, and rice remained scarce and costly, reflecting low domestic productivity. Dollarization provides a stable anchor but strips the country of the ability to adjust its exchange rate, eroding competitiveness as the strong U.S. dollar makes Timorese goods and services relatively expensive.

Migration: Lifeline and Dilemma

In this fragile setting, labor migration has emerged as both a blessing and a challenge. More than 20,000 Timorese now work abroad, including nearly 5,000 through formal programs such as Australia’s Pacific Australia Labor Mobility scheme. Remittances have already reached over 11 percent of non-oil GDP, giving families crucial income for food, education, and housing. Migration is also reshaping communities, providing an outlet for unemployed youth in a country where joblessness exceeds 40 percent. Yet the benefits are uneven. High upfront costs, restrictive eligibility rules, and limited outreach mean poorer rural families and women are often excluded. The steady outflow of young workers also risks leaving gaps at home, particularly if returning migrants are not reintegrated effectively into the domestic economy. Policymakers are working to expand skills training, negotiate new bilateral labor agreements, and lower barriers to participation, but turning migration into a sustainable development strategy will require more inclusive reforms.

Fiscal Fragility and Reform Pressure

The country’s fiscal situation is described as unsustainable. The 2025 budget ballooned to $2.1 billion, yet only 10 percent of that came from domestic revenues. More than 85 percent is being financed by Petroleum Fund withdrawals, far above sustainable levels. While domestic tax collection has improved, rising 22 percent in the first half of 2025, it remains among the lowest in East Asia. The report calls for urgent reforms: introducing a value-added tax, strengthening income tax enforcement, reducing untargeted social transfers, and prioritizing productive investments over consumption. Although reforms are underway, including a new budget law, audit decree, and adoption of International Public Sector Accounting Standards, the clock is ticking. The Petroleum Fund may still look large, but its erosion is certain if fiscal behavior does not change.

Land: From Missed Opportunity to Catalyst

The special focus of this report is land, which the World Bank frames as both the country’s greatest missed opportunity and its clearest path to transformation. Centuries of overlapping Portuguese, Indonesian, and customary systems have left tenure insecure. Of roughly one million parcels, fewer than 200 have legal titles. This insecurity has profound costs: households cannot use land as collateral, businesses hesitate to invest, and government projects are delayed by disputes. Property transfers can take more than 180 days, while environmental permits can stretch beyond 250 days. Without zoning laws, hazard maps, or reliable cadastres, urban planning remains ad hoc, housing markets remain distorted, and infrastructure projects face costly delays. Women, who head 16 percent of rural households, are particularly vulnerable under customary systems that limit their ability to secure land despite legal protections.

International examples offer a roadmap. Indonesia’s recognition of customary land rights boosted productivity by 25 percent in reformed areas, while Rwanda’s sweeping reforms led to the registration of 11 million parcels and a 30 percent rise in land-related investment. For Timor-Leste, the World Bank recommends a “7 Ps” strategy: finalize pending land laws, protect customary rights, launch systematic registration, audit existing cadastral records, expand training for land professionals, simplify procedures through one-stop service centers, and build a modern digital land information system accessible to all. With strong political will, these reforms could be rolled out in three to five years, unlocking growth across agriculture, tourism, housing, and services.

In sum, the report tells a story of promise weighed down by urgency. Timor-Leste is running on borrowed time, its economy propped up by oil savings that are steadily shrinking. Yet by reforming its fiscal systems, investing in human capital, and, above all, unlocking the potential of its land, the country could turn fragility into opportunity. The stakes, as the World Bank and Timorese institutions warn, could not be higher: squander the window, and fiscal collapse looms; seize it, and Timor-Leste could become a model of sustainable, inclusive growth in Southeast Asia.