At this month’s Timor-Leste–Australia Economic and Business Conference in Dili, Prime Minister Kay Rala Xanana Gusmão delivered a clear message: the country needs an ambitious yet achievable vision for private sector growth. His remarks captured the central theme of the event—organized by Australia’s Department of Foreign Affairs and Trade (DFAT)—that Timor-Leste’s economic future hinges on bold, coordinated action to unlock private investment and drive sustainable development.

This call to action raises an important question: what does genuine private sector–led reform look like in a market like Timor-Leste? The challenges are undeniable, but so is the potential. With World Trade Organization membership secured and ASEAN accession expected in 2025, the country is entering a new phase of opportunity.

Despite two decades of peace, Timor-Leste remains economically fragile. One of the smallest countries globally, more than 42% of the population lives below the poverty line and nearly 80% are reliant on agriculture. The petroleum fund, which finances 85% of public spending, is projected to become unsustainable by 2035, and the private sector employs only 13% of the workforce. These challenges are not just statistical; they reflect deep structural realities that demand urgent, coordinated action to build a vibrant private sector.

Developing a robust private sector is not merely a technical exercise; it requires political will, strategic investment, and a nuanced understanding of local contexts. The notion that economies like Timor-Leste are too complex or too dependent on foreign aid to transform ignores the evidence.
DFAT’s Market Systems Development (MSD) programs like Australia’s PRISMA in eastern Indonesia and Market Development Facility (MDF) in Timor-Leste, both implemented by DFAT’s partner Palladium, have shown that the right facilitation and politically smart interventions can deliver resilient, scalable, and inclusive economic development.

Strengthening Market Systems Matters for Smallholders

When it comes to rural development – a sector where most of Australia’s MSD aid programs sit – true economic transformation begins with smallholders.
Take, for example, Eastern Indonesia – a region facing similar challenges to Timor-Leste. Before it wrapped up in December 2024, PRISMA assisted private companies with business analysis and risk-sharing to invest in inclusive agribusinesses, enabling smallholder Eastern Indonesian farmers to access high-yielding inputs and services. Over time, the program partnered with 199 businesses and reached over 1.48 million smallholder farming households, who benefited from increased agricultural productivity and income increases.

Due to PRISMA’s facilitation, private companies, their agents, and farmers have invested AU$311 million in the agriculture sector. As a result, the ecosystem surrounding Eastern Indonesian farmers has evolved, with 15,000 agri-retailers now providing goods and advisory services to farmers and overall private sector partners generating close to AU$150 million in revenue. In total 273 partnerships have been forged, and more than 105 businesses have copied the inclusive business models and expanding impact.

In Timor-Leste, Australia’s MDF has also gradually been building government confidence in private sector–led solutions, starting with support for smallholder farmers. MDF provided catalytic financial and technical support to the private sector to invest in agriculture and export commodities, which helped farmers achieve higher incomes. Over time, the program has also leveraged over AU$9 million in private investment and effectively benefited over 86,000 households. These private sector companies generated AU$13 million in revenue, showing that robust private sector-led economic development can—and is—happening in Timor-Leste.

Policy Change That Scales and Safeguards Long Term Impact

Once smallholder farmers start seeing impact, the next step on the road to economic transformation is real and lasting policy change. So, how do we get there? What else is needed in fragile markets? This was certainly on the minds of many in Dili.

In the case of PRISMA, the program’s experience working with the private sector and provincial governments was extremely useful for supporting government policy changes. Through advocacy and evidence-based policy advice, the program prompted the Indonesian government to revise standards for cattle feed, making high-quality feed more accessible and affordable for smallholder farmers.

PRISMA’s work also influenced Indonesian provincial governments to improve their seed subsidy distribution mechanism, enabling smallholder farmers to access high-yielding varieties for the first time. And, at the national level, on-field program insights and evidence contributed to the Ministry of National Planning & Development’s long- and medium-term development strategy. All of this helped pave the way for a conducive business enabling environment for the private sector.

In Timor-Leste, MDF interventions have begun to lay the foundation for future policy changes. For instance, the program worked closely with the national government and Timor-Leste’s Coffee Association (Asosiasaun Café Timor) to develop a white paper on coffee rehabilitation, which was featured during the Government’s launch of its national rehabilitation program in 2022. Its implementation is expected to significantly increase coffee productivity across the country.

Clearly, targeted, politically smart interventions can foster resilient economic growth and continue benefitting smallholders at scale beyond just aid support.

Shaping Private Sector Development in Timor-Leste

The private sector remains an engine for growth in Timor-Leste. However, for growth to be inclusive, climate-smart, and locally owned, any future private sector development must align donor ambitions and government priorities. To seize this moment, interventions need to work at the system level, unlock private investment, and apply an adaptive facilitation approach.

Building genuine local ownership will be critical to sustaining gains beyond donor program cycles. At the same time, climate resilience and food systems transformation must be embedded in every strategy, helping Timor-Leste shift from subsistence farming to a diversified, market-oriented economy capable of withstanding future shocks.

Economic transformation in Timor-Leste will not happen overnight, but the foundations are being laid. If stakeholders commit to systemic change, climate-smart strategies, and genuine local ownership, Timor-Leste can become a model for how small nations turn challenges into engines of growth.