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Quick Facts
- Population:
- GDP (PPP):
- $5.0 billion
- 4.3% growth
- 4.8% 5-year compound annual growth
- $4,187 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
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Timor-Leste’s economic freedom score is 48.1, making its economy the 167th freest in the 2018 Index. Its overall score has increased by 1.8 points, with significantly higher scores for the tax burden and property rights indicators outweighing an equally steep decline in the score for government spending. Timor-Leste is ranked 41st among 43 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.
The government has expended vast sums to build basic infrastructure, including electricity and roads, but its limited experience in procurement and public works has hampered these projects. Timor-Leste has achieved some macroeconomic stability, but structural and institutional deficiencies such as a burdensome regulatory environment and an underdeveloped financial sector still constrain economic freedom. Political instability is the biggest single obstacle to greater economic development. Widespread corruption unchecked by a weak judicial system remains a considerable drag on economic activity.
Background
The Democratic Republic of Timor-Leste gained independence from Indonesia in 2002 and struggled to achieve political stability. Revolutionary leader Xanana Gusmão, its first president, stepped down in 2015 and appointed opposition leader Rui Araújo as his successor. In 2017, when elections were held for the first time since the departure of U.N. peacekeepers in 2012, Francisco Guterres was elected as the fourth president. Timor-Leste remains one of East Asia’s poorest countries and is heavily dependent on foreign aid. Economic liberalization has mostly stalled. Oil and gas account for more than 95 percent of government revenue, which is consigned to a Petroleum Fund with assets of $16 billion as of mid-2016. The technology-intensive oil industry has done little to create jobs.
Rival property claims and overlapping titles dating from the Portuguese, Indonesian, and post-independence eras have complicated the contentious issue of land reform. The same conflicts are reflected in Timor-Leste’s convoluted legal regime. The judicial system lacks independence and suffers from a severe shortage of qualified personnel. Corruption and nepotism continue to pervade the country.
The top personal income and corporate tax rates are 10 percent. Most government revenue comes from offshore petroleum projects in the Timor Sea. The overall tax burden equals 8.0 percent of total domestic income. Over the past three years, government spending has amounted to 48.0 percent of total output (GDP), and budget deficits have averaged 58.1 percent of GDP. Timor-Leste has no public debt.
Challenges to starting and running a business include incomplete and unclear legislation, inefficient regulatory mechanisms, and deficient infrastructure. There is a shortage of skilled labor, and well over half of the working population is employed in the informal sector. The government maintains large subsidy programs for food, power, and fuel.
Trade is extremely important to Timor-Leste’s economy; the combined value of exports and imports equals 101 percent of GDP. The average applied tariff rate is 2.5 percent. Nontariff barriers impede trade. Government openness to foreign investment is below average. The small financial sector is underdeveloped, and less than 5 percent of the population has access to financial services.