Imported Inflation: How Food Prices Shape the Cost of Living in Timor-Leste

An IMF study finds that inflation in Timor-Leste is driven mainly by global food, especially rice, prices rather than domestic demand, reflecting the country’s heavy reliance on imported food and use of the US dollar. After years of volatility, inflation has been relatively stable in the past decade, with recent spikes largely explained by global shocks and temporary tax changes.

Timor-Leste does not print its own money. For more than two decades, it has used the US dollar as its official currency, giving up monetary policy in exchange for stability. Yet inflation, rising prices that shape everyday life, has remained a central economic challenge. A new study by economists Kohei Asao and Raju Huidrom from the International Monetary Fund’s Asia and Pacific Department explains why inflation in Timor-Leste has behaved the way it has since independence, and what really drives prices in a small, fragile, import-dependent economy.

Published in early 2026, the IMF working paper pieces together more than 20 years of inflation data and applies standard economic tools to an economy where many usual policy levers are missing. The result is one of the most detailed portraits yet of how inflation works in Timor-Leste, and why it often comes from outside the country’s borders.

From post-conflict shocks to price swings

Inflation in Timor-Leste has never followed a smooth path. In the years after independence in 2002, prices gradually stabilized as the economy recovered. That progress was shattered in 2006 and 2007, when political unrest displaced communities, disrupted transport, and caused food shortages. Food prices surged, pushing inflation into double digits almost overnight.

The following years, from 2008 to 2013, were marked by extreme ups and downs. Inflation swung between deflation and peaks close to 18 percent. Global food prices were rising sharply at the time, but domestic factors also played a role. Oil revenues flowed into public spending, which expanded rapidly in a small economy with limited production capacity. That combination made inflation volatile and difficult to control.

Why food, and rice, matter more than anything else

One fact dominates inflation in Timor-Leste: food matters more here than almost anywhere else. Food makes up more than half of the country’s consumer price index, one of the highest shares in the world. Rice alone accounts for 17 percent. Most of this food is imported.

This means global prices quickly become local prices. When international rice prices rise, households in Timor-Leste feel it almost immediately. When food prices fall, inflation eases just as fast. The IMF study shows that global food and rice prices are the single most important drivers of inflation, far outweighing domestic demand or exchange rate effects.

This explains why inflation fell sharply between 2014 and 2019. Global food prices were relatively stable, and Timor-Leste experienced an unusually calm period of low inflation, averaging less than 1 percent. Even droughts and political uncertainty failed to push prices up for long.

Pandemic pressures and policy choices

That calm ended with the pandemic. Like many countries, Timor-Leste saw inflation rise sharply from 2020 as supply chains broke down and global food prices jumped. But domestic policy choices added fuel to the fire. In 2022 and 2023, the government sharply increased taxes on tobacco, sugary drinks, and imports, items with a large weight in the price basket.

Inflation peaked in early 2023, nearing 10 percent. When a new government later reversed many of those tax increases, inflation fell rapidly in 2024. The study shows that these tax changes had a powerful, immediate effect on prices, highlighting how fiscal decisions can strongly shape inflation in a small economy.

What the research means for the future

Using a standard inflation model adapted to Timor-Leste’s realities, the IMF economists show that inflation is persistent but mainly driven by global food prices and policy shocks, not by rising domestic demand. Public spending, despite its large size, has had only a limited impact on inflation in recent years.

The model also works well for forecasting. Based on expected declines in global food prices, inflation is projected to remain very low in 2025 and 2026. But the authors caution that risks remain. Climate shocks, new taxes, or strong growth in tourism and remittances could all change the outlook.

The lesson is simple but important. In Timor-Leste, inflation is largely imported. Dollarization and fiscal rules have helped stabilize prices, but they cannot shield households from global food markets. Managing inflation will depend less on monetary tools and more on careful fiscal policy, smart tax design, and constant attention to the global forces that ultimately determine the price of food on the table.