The Australian Government significantly increased its aid to Timor-Leste in 2020, despite an overall drop in the official development assistance budget and significant cuts in the amounts of aid given to other countries. The increase in aid, identified as a post-COVID-19 recovery fund, can be seen as an extension of the “Pacific Step-up” foreign policy. While Timor-Leste does not fall under the Pacific Islands grouping, its significance to Australia is similar to that of the broader Pacific, if not greater. With that significance in mind, this paper will look at the primary challenges that Timor-Leste faces on both the economic and political fronts.

Key points:

• While its domestic economy was hard hit, Timor-Leste fared relatively well during the COVID-19 pandemic, largely due to its sovereign Petroleum Fund.
• The longevity of the Petroleum Fund is now in question as the feasibility of a key infrastructure project that would give access to new oil fields is being re-evaluated.
• Political instability within the government has had significant economic consequences in recent years.
• A restructuring of the government spurred on by COVID-19 has brought some respite to that instability, but will likely only offer temporary relief.
• Australia has a strong interest in a prosperous and stable Timor-Leste, which is underpinned by security concerns.