Timor-Leste is approaching a turning point in its history as an independent, democratic republic, as it is set to become the newest member of the World Trade Organization (WTO). Since wrapping up its troubled journey to independence in 2002, the island nation has heavily relied on the petrodollars generated by the Bayu-Undan offshore gas field to fill the public coffers and fund public spending to improve the livelihood of its 1.4 million inhabitants. However, the field is now depleted and expected to cease revenue generation next year.

The government is now betting on a WTO membership, which is expected to come through in 2023, to breathe new life into the domestic economy and link the country to global value chains. 

“A WTO accession is transformational in terms of policy reform (policies and processes) and institution building,” Joaquim Amaral, the country’s coordinating minister of economic affairs and official in charge of leading the negotiations, tells fDi. 

Timor-Leste, which extends for more than 15,000 square kilometres across the eastern part of the Timor island, is a slender piece of tropical land located between Australia and Indonesia. The Oecusse exclave, a municipality in West Timor surrounded by Indonesian territory, is also part of Timor-Leste. The country became a minor Portuguese trading post in the 18th century, and remained so until 1975. As soon as the last Portuguese boat set sail, the Indonesian army invaded from the western part of the island. The UN never recognised Indonesian rule over Timor-Leste and, eventually, Indonesia gave in to international pressure and withdrew from the country in 1999, leaving the UN in charge of a three-year transition, when a new constitution declaring the republic came into force and the UN recognised Timor-Leste as a sovereign country. 

Not without hiccups, the country has come a long way since taking charge of its own destiny. 

“Timor-Leste has made impressive strides in economic development and institution building,” reads an IMF Article IV assessment published in September. “Yet, it is a low-income and fragile country with pressing development needs. A large fraction of the population faces chronic food insecurity, and significant gaps exist in health, education and infrastructure. With active oil fields nearly depleted, little progress has been made in diversification while fiscal sustainability is at high risk.”

In absolute terms, Timor-Leste’s gross domestic product has grown four-fold to $1.8bn between independence in 2002 and 2021, according to World Bank data. However, Timor-Leste continues to feature in the UN list of the least developed countries (LDCs), defining them as low-income countries confronting issues such as severe structural impediments to sustainable development. Currently, there are 46 LDCs on the list, 35 of which already are WTO members; a further eight are negotiating to join the institution — Timor-Leste, Bhutan, Comoros, Ethiopia, São Tomé and Príncipe, Somalia, South Sudan and Sudan. 

After producing and exporting natural gas via a subsea pipeline connected to the Darwin liquified natural gas terminal in northern Australia since 2006, the Bayu-Undan is approaching decommissioning. Its operator, Australian company Santos, has announced plans to turn the gas field into a carbon capture and storage (CSS) project that “could potentially safely and permanently store up to 10 million tonnes of carbon dioxide per annum, equivalent to about 1.5% of Australia’s carbon emissions each year”, the company said in a statement in March.

The CSS project could extend a financial lifeline to the government in the form of a storage fee that could amount to up to $7bn, the president of the country’s national petroleum and minerals authority, Florentino Soares Ferreira, told local news agency Tatoli in June. The development of another offshore gas field, the Greater Sunrise gas field straddling Timorese and Australian waters, may generate another major stream of revenues for the country, although its development has stalled for years because of technical issues and a maritime boundary dispute between the two countries.  

However, the road towards the diversification of Timor-Leste’s economy must inevitably pass through a reform process that looks beyond oil and gas, and gives a chance for sectors such as agriculture and tourism to grow and prosper. 

“A significant number of structural barriers need to be lifted to facilitate diversification and generate inclusive and resilient growth,” the IMF assessment reads. “These include transforming the predominantly subsistence-oriented agricultural sector into a commercially viable sector, raising productivity, and enhancing food security.

“Improving the business environment and strengthening anti-money laundering/combating the financing of terrorism and anti-corruption effectiveness will foster private investment. So far, progress in private sector development and job creation has been tepid, as reforms have been slow and limited. Investing in climate-resilient infrastructure is key to building resilience to natural disasters; however, adaptation plans have not been integrated into the budgetary planning, and coordination among various public stakeholders and capacity constraints to accessing external grant-financing remain key challenges.”

The government is addressing some of these issues as part of its journey to join the WTO. It also has ambitions to join the Association of Southeast Asian Nations, and hopes it will be an outcome of the WTO membership. Neither will transform Timor-Leste’s economy overnight; however, they will project the country onto new multilateral economic platforms to leverage its growth story and take it to its next chapter.  

This article first appeared in the October/November 2022 print edition of fDi Intelligence.