Timor-Leste's Economic Transition: Ending the Resource Curse Through New Oil and Gas Development, Strengthening the Non-Oil Sector, And Extensive Tax Reform

Abstract

With the official cessation of production at the Bayu-Undan oil and gas field on 31 July 2026, the Democratic Republic of Timor-Leste now stands at a historic economic crossroads and faces its most critical fiscal challenge since the restoration of independence. For more than two decades, the country's public financial management system has relied almost entirely on the Petroleum Fund (PF), which various international institutions project could decline rapidly and be fully depleted by 2034 if the current expansionary pattern of public spending is not strategically adjusted or rationalized. This article employs a Systematic Literature Review (SLR) to examine in depth the economic-transition strategies that the government must pursue to avoid the structural trap of the resource curse and the effects of Dutch Disease. Recognizing the fundamental fact that oil and natural gas are non-renewable resources, this study highlights the urgency of extensive tax reform - including the implementation of Value-Added Tax (VAT), expansion of excise taxation, and digitalization of tax administration - as a sustainable pillar of sovereign domestic revenue. It also critically evaluates medium-term bridge strategies involving the development of new hydrocarbon reserves (the Greater Sunrise megaproject, PSC 19-11 fields, and Chuditch), the conversion of legacy infrastructure into Carbon Capture and Storage (CCS) facilities, and long-term diversification into real-economy sectors, including commercial agriculture, sustainable tourism, and non-oil mineral mining. The analysis indicates that successful transition depends on policy synchronization among the optimization of remaining hydrocarbon assets as transitional capital.