Reducing Trade Deficit Through Import Substitution Strategy in Timor-Leste

Timor-Leste’s trade balance has remained negative since its independence, with imports consistently exceeding exports. This research seeks to examine the underlying causes of the trade deficit, identify imported commodities that could potentially be produced locally, and provide insights to both government and the private sector on investment opportunities. It also aims to deliver policy recommendations to relevant government institutions to improve trade related activities. Using a qualitative approach, the research team conducted interviews with selected officials from government ministries and both local and foreign companies, as well as focus group discussions with farmer groups in four municipalities: Baucau, Aileu, Bobonaro, and Dili.

The results indicate that Timor-Leste’s trade deficit is primarily driven by four factors: the limited capacity to produce sufficient goods domestically, small domestic market high government spending and government policy. The study identified several agricultural products such as rice, tomatoes, and capsicum, along with livestock like pigs and chickens, as well as drinking water, as potential local products that could be developed to support import substitution in the future. Furthermore, the research highlights three key sectors: agriculture, livestock, and industry as priority areas for investment opportunities, by both for local and foreign companies.

This research proposed six recommendations for the consideration by the relevant institutions in Timor-Leste. This includes (1) Promote Agricultural Modernization, (2) Support Local Industries, (3) Capacity Building, (4) Improve Bureaucratic Procedure, (5) Encourage Public Private Partnerships and (6) Gradual Approach.