By Remigio Laka Viera
The conclusion of the Millennium Challenge Account (MCA) program in Timor-Leste marks a critical turning point in the development relationship between Timor-Leste and the United States. At the same time, Timor-Leste enters 2026 with a national budget of US$2.29 billion — one of the largest in its history — designed to drive structural transformation through infrastructure development, improvements in human capital, and strengthened governance systems.
But is Timor-Leste prepared to absorb a budget of this scale? Will the end of the MCA program weaken bilateral relations, or could it open new pathways for cooperation with the United States? And what lessons can Timor-Leste learn from other small states that have cooperated with the Millennium Challenge Corporation (MCC), such as Cabo Verde, Lesotho, or emerging Pacific candidates like Fiji and Samoa?
This article provides a strategic assessment of Timor-Leste’s position as the MCA era comes to a close.
1. Timor-Leste in 2026: Great Opportunities, Great Risks
With its 2026 national budget exceeding US$2.29 billion, the government has allocated major investments for essential infrastructure (roads, water, telecommunications), improvements in education and health, governance reforms, and economic and private sector development. These priorities aim to establish 2026 as a “year of national transformation,” including preparations for ASEAN integration and strengthened domestic capacity.
Strengths in 2026 include:
- a strong fiscal position driven by the Petroleum Fund
- clear development priorities
- projected non-oil economic growth of around 4.5%
- a strategic geopolitical location in the Indo-Pacific
Key weaknesses include:
- low implementation capacity
- weak tendering, auditing, and project execution systems
- reliance on large-scale infrastructure without long-term O&M planning
- persistent center–periphery development imbalance
As the MCA program ends, its strengthened technical capacities should serve as a foundation. But the risk of stagnation remains significant if internal reforms are not sustained.
2. Strategic Meaning of the MCA’s Conclusion for Timor-Leste
The MCA program focused on two core sectors: secondary education and urban sanitation (particularly the Dili Wastewater Treatment Plant). These address binding constraints in Timor-Leste’s long-term development.
The end of the program carries several strategic implications:
2.1 Loss of High-Level Technical Support
MCC is known for rigorous, data-driven planning and strict monitoring. Without MCC involvement, the quality of infrastructure planning, procurement, and performance evaluation may weaken.
2.2 Sustainability and O&M Challenges
All MCC compacts require long-term operation and maintenance planning. If Timor-Leste fails to internalize this, facilities such as the Dili WWTP or improved education systems risk losing functionality within 2–5 years.
2.3 Implications for Bilateral Relations
MCC is a key U.S. development diplomacy instrument. The end of the compact does not signal a decline in relations — provided Timor-Leste demonstrates strong governance and performance. This could open doors to:
- a second compact
- expanded USAID programming
- increased technical support in priority sectors
- broader Indo-Pacific cooperation
- However, these outcomes depend heavily on domestic reforms.
- 3. Lessons from Small States: Cabo Verde, Lesotho, Fiji, and Samoa
Understanding what happens “after MCA” requires examining other small states that have completed or are preparing for MCC compacts.
3.1 Cabo Verde — The Best Performer Among Small States
Cabo Verde received two compacts (2005–2010 and 2012–2017).
Key lessons for Timor-Leste:
- Target real economic bottlenecks.
- Plan sustainability from day one, especially tariffs and O&M.
- Maintain strong documentation and transparent reporting.
- Focus on local capacity development, not just foreign contractors.
Implications for Timor-Leste:
O&M for Dili WWTP and education systems must be fully funded in the 2026 budget.
Quarterly public monitoring dashboards should be created.
Independent audits must close cleanly and without major findings.
3.2 Lesotho — A Small, Poor Country That Secured a Second Compact
Lesotho completed its first compact (2008–2013) and is implementing a second (approved 2022).
Why Lesotho succeeded:
Rebuilt donor confidence through governance reforms.
Maintained consistent sectoral reforms.
Produced high-quality data for audits and evaluations.
Implications for Timor-Leste:
A second compact is possible if:
MCA audits close properly,
sustainability plans are credible,
procurement reforms are taken seriously.
3.3 Fiji & Samoa — Emerging Pacific Candidates
Fiji and Samoa are increasingly considered for MCC engagement.
Key lessons:
- The Indo-Pacific geopolitical environment makes MCC more active in the region.
- Governance and rule of law are decisive criteria.
- Stability and transparency increase a country’s attractiveness.
Implications for Timor-Leste:
Timor-Leste, located at an even more strategic crossroads, stands to gain significantly from U.S. engagement if it strengthens governance.
4. Core Analysis: What Does All This Mean for Timor-Leste in 2026?
Three major dimensions determine Timor-Leste’s trajectory.
4.1 Domestic Dimension: Can Timor-Leste Absorb the 2026 Budget?
Timor-Leste must demonstrate:
- 80–90% physical project execution in priority sectors
- full O&M plans for MCA-related facilities
- quarterly performance reporting
- digitalized procurement (e-procurement)
- Without these, the 2026 budget risks being a consumption budget, not a transformational one.
4.2 International Relations: Will Relations with the U.S. Strengthen or Weaken?
MCC behavior is predictable:
- Good governance → strong chance of second compact
- Stagnation → disengagement
Post-MCA relations depend on transparency, effective O&M, bureaucratic reform, and performance reporting. Maintaining MCC standards independently will be viewed positively by the U.S.
4.3 Global Geopolitics: Indo-Pacific Challenges and Opportunities
Small states face climate change vulnerabilities, technological and energy dependence, debt risks, and major-power competition. In this context, the end of MCA can become an opportunity if Timor-Leste:
- positions itself as a stable Indo-Pacific partner
- strengthens procurement transparency
- develops digital and technical human capital
5. Integrated Conclusions
5.1 The end of MCA is not the end of the relationship — it is a test.
Timor-Leste can follow Cabo Verde (successful closure) or Lesotho (second compact). The determining factor is domestic performance.
5.2 As Cabo Verde shows, documentation and sustainability are essential.
Strong public reporting and credible O&M plans will sustain U.S. confidence.
5.3 As Lesotho shows, a second compact is possible — but requires proof.
Procurement reforms and clean audits are key.
5.4 As Fiji and Samoa show, geopolitics offers new opportunities.
Governance improvements will enhance Timor-Leste’s strategic value in the Indo-Pacific.
5.5 The 2026 budget delivers results only if implementation improves.
Poor execution weakens international credibility; strong execution could position Timor-Leste as the “Cabo Verde of Southeast Asia.”
Closing Note
By integrating lessons from other small states, analyzing Timor-Leste’s fiscal position in 2026, and assessing the strategic implications of the MCA’s conclusion, it becomes clear that the future of Timor-Leste–United States relations is not determined by the end of the MCA, but by Timor-Leste’s ability to demonstrate stronger governance, greater transparency, and long-term development commitment. If these steps are taken, opportunities for a second compact, expanded U.S. technical assistance, and deeper Indo-Pacific partnerships remain wide open
TATOLI
