By: Dionísio Babo Soares*
The rise in tensions in the Middle East since late February 2026 should not be seen just as a distant event in global politics. For small, open economies that rely heavily on imports, this causes a serious, immediate, and spreading shock. Timor-Leste experiences these disruptions especially strongly because its economy still depends heavily on external sources, has a limited productive base, and faces high costs for energy, transportation, and imported food.
The Strait of Hormuz remains a vital point for global energy security. Any disruption, even a partial one, in the flow of oil and liquefied natural gas causes ripple effects on international prices, freight costs, insurance premiums, and market confidence. For countries like Timor-Leste, these impacts are not theoretical. They quickly lead to higher fuel costs, pressure on transportation, rising food prices, and increased expenses for basic goods. In such situations, inflation is no longer just a technical term but a real threat to families’ well-being.
Timor-Leste relies heavily on imports for nearly all of its refined fuels and a large part of its food and basic consumer goods. This structural situation makes the country’s economy vulnerable to external shocks outside its control. When international oil prices increase, the costs for diesel, road transportation, food distribution, and electricity generation also go up. The effects quickly spread and fall hardest on lower-income households, small traders, transporters, farmers, and urban and rural consumers who have the least ability to handle the increase.
That is why this moment calls for a clear, disciplined, and results-oriented response. It is not enough to acknowledge the existence of the shock; it is necessary to act on its transmission channels. The first priority must be protecting the most vulnerable groups. This involves strengthening well-targeted social support mechanisms and assessing temporary measures to reduce fuel costs for public transportation and essential services. In Timor-Leste, social policy must be selective because resources are limited, and effectiveness depends on reaching those who need it most.
At the same time, it is crucial to maintain macroeconomic stability. Dollarization continues to give Timor-Leste an anchor of confidence and exchange rate stability, but it also creates significant constraints. Without its own monetary policy, the country must depend even more on fiscal discipline, effective management of public spending, and the quality of structural reforms. In a scenario of rising external inflation pressures, potential international monetary tightening, and high import costs, the national response cannot rely on unsustainable short-term solutions. Instead, it requires discipline, selectivity, and strategic vision.
The Petroleum Fund must be managed with this specific vision in mind. It is a key instrument for national protection, but not a replacement for substantial reforms or an endless source of compensation. Its role is to maintain stability during shocks and to facilitate a smooth transition to a more diversified economy. Therefore, the use of the Fund must follow strict standards of sustainability, transparency, and intergenerational fairness. Instead of supporting long-term dependencies, it should help safeguard the economy while more solid alternatives are developed.
The situation in Timor-Leste demonstrates that resilience is not solely built on financial reserves. It also depends on productive capacity, efficient logistics, and advancing energy sovereignty. The near-total reliance on diesel for transportation and electricity remains a strategic vulnerability. The medium-term response should therefore focus on accelerating the growth of renewable energy, especially solar and hybrid solutions tailored for urban, rural, and island areas. Reducing dependence on imported fuel is crucial for lowering costs, enhancing energy security, and freeing up resources for social and economic priorities.
Similarly, Timor-Leste must invest more decisively in domestic food production. Relying on subsidies or temporary reserves alone won’t overcome vulnerability to international shocks; it requires increasing local production, improving irrigation, strengthening agricultural extension services, and enhancing access to inputs and rural infrastructure. When the country produces more locally, it reduces exposure to external fluctuations, boosts food security, and creates local jobs. This is an economic goal, but it is also a matter of dignity and sovereignty.
Logistics also requires strategic focus. Diversifying import routes and enhancing connections with ports and alternative paths—such as routes through Darwin, Kupang, and Surabaya—can lessen supply risks and boost national resilience. In small economies, logistics security is a key part of economic security. A country relying on few routes, suppliers, and alternatives becomes more vulnerable to international disruptions. Timor-Leste must reduce this vulnerability through careful planning, coordination, and investment.
In the short term, the priority should be to mitigate the shock; in the medium term, to reform the foundations of vulnerability. It is this balance that makes a policy both economically sound and politically credible. Emergency measures are necessary, but they must be temporary, targeted, and compatible with fiscal sustainability. Structural reforms take longer, but they are the only way to change the country’s risk profile. A responsible government must do both simultaneously: protect today and prepare for tomorrow.
What this crisis ultimately reveals is the need for an urgent paradigm shift. Timor-Leste cannot remain heavily dependent on costly imports, fossil fuels, and vulnerable logistics. The country must accelerate its transition to a more diversified economy, with increased domestic value added, a stronger connection between public investment and real production, and a greater ability to generate wealth outside the oil sector and external rents. National resilience will not be built by chance; it requires political resolve, institutional consistency, and a long-term commitment.
The current situation must be viewed with realism, but also with determination. Timor-Leste has reserves, it has room to maneuver, and, above all, it has the opportunity to use this moment to address weaknesses that have become all too evident. The challenge is great, but the response must be greater. Social protection must be more targeted. Fiscal policy must be more prudent. Domestic production must be stronger. Energy must be cleaner. The economy must be more diversified.
This is the course that reality requires and that national responsibility calls for.
* This article offers a personal reflection on public policy. The data referenced is based on publicly available information as of the writing date and may be updated by the relevant authorities.
